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Part 7-Forecasting PDF

Causal forecasting methods use historical data and mathematical relationships between variables to forecast future outcomes. Linear regression is a causal method where a dependent variable (like demand) is related to one or more independent variables through a linear equation. The equation takes the form of Y = a + bX, where a is the Y-intercept, b is the slope, and X and Y are the independent and dependent variables respectively. The values of a and b are estimated using the least squares method. Two problems demonstrate fitting linear regression lines to demand data and using the lines to forecast demand for future time periods.

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154 views14 pages

Part 7-Forecasting PDF

Causal forecasting methods use historical data and mathematical relationships between variables to forecast future outcomes. Linear regression is a causal method where a dependent variable (like demand) is related to one or more independent variables through a linear equation. The equation takes the form of Y = a + bX, where a is the Y-intercept, b is the slope, and X and Y are the independent and dependent variables respectively. The values of a and b are estimated using the least squares method. Two problems demonstrate fitting linear regression lines to demand data and using the lines to forecast demand for future time periods.

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John Tent
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FORECASTING

Part 7
Dr. A NOORUL HAQ
Contents:

Causal Methods:
• Linear Regression

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Causal Methods:
• Causal methods are most sophisticated forecasting tools.
• They are used when historical data are available and the
relationship between the factors to be forecasted from other
external or internal factors can be identified.
• These relationships are expressed in mathematical terms and can
be very complex.
• Linear regression is one of the causal methods.

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Linear Regression
• This is one of the best known causal methods of forecasting.
• In this approach, one variable called dependent variable is related
to one or more independent variable by a linear equation.
• Dependent variables such as demand or cost is the variable we
want to forecast.
• Independent variables are assumed to affect the dependent
variable

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• Thereby, caused (produced or induced or make) cause the results
observed in the past.
• Linear regression methods requires that a relationship between
the dependent variable and independent variable be built up first.
• Equation for regression line is Y = a + bX
where,Y is dependent variable and X is independent variable.

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Y = numerical value of a point on the line for any given value of X.
a = numerical value ofY intercept of the line.
b= numerical value of slope of the line.
• The values for ‘a’ and ‘b’ are estimated from the sample data.
• The estimated value of a and b are obtained from the technique
called least squares.
• The equations used to determine these values are,
σ 𝑋 2 σ 𝑌 − σ 𝑋 σ 𝑋𝑌
a= 2
𝑛 σ 𝑋 2 −(σ 𝑋)

𝑛 σ 𝑋𝑌 − σ 𝑋 σ 𝑌
b= 2
𝑛 σ 𝑋 2 −(σ 𝑋)
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• After calculating a and b, regression line can be plotted by
selecting 2 values of ‘X.’
• Calculating the value of ‘Y’ at these points and connecting the
points with a straight line.
• The two extreme values of ‘ X’ can be chosen for this purpose.
• The sample of data is limited to the two extreme values of ‘X’.
• There will not be any evidence to indicate the effects outside that
range.
• The relationship could even be non-linear.

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• Consequently, making estimates outside the range of the data
would be very rare.
• Regression analysis can provide useful guidance for important
production management decisions.
• However, considerable amount of data is needed in order to obtain
useful relationship from linear regression models.
• This approach is relatively costly because of the amount of data
gathering and analysis is required to arrive at proper model.

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Problem 1:
• Investigation of the demand of water coolers in 5 towns has
resulted in the following data.
Population of town (lakhs): 5 7 8 11 14
No. of coolers demanded: 45 65 55 75 95
• Fit a linear regression line and estimate the number of coolers
required for a town with a population of 12 lakhs.
X Y X2 XY
5 45 25 225
7 65 49 455
8 55 64 440
11 75 121 825
14 95 196 1330
45 335 455 3275 9
Solution 1:

σ 𝑋 2 σ 𝑌 − σ 𝑋 σ 𝑋𝑌 455∗335 −(45∗3275) 5050


a= 2 = = = 20.2
𝑛 σ 𝑋 2 −(σ 𝑋) 5∗455 −(45)2 250

𝑛 σ 𝑋𝑌 − σ 𝑋 σ 𝑌 5∗3275 −(45∗335)
b= 2 = = 5.20
𝑛 σ 𝑋 2 −(σ 𝑋) 5∗455 − (45)2

• Equation for the regression line is ,


Y= a + bX = 20.2 +5.2X.

• Therefore for a population of 12 lakhs, that is for X=12,


Y = 20.2 + (5.2*12)
= 20.2+62.4
= 82.6 = 83 10
Problem 2:
The monthly demands for no. of units manufactured by a company is given
below.
Month (X) No. of Units (Y)
May 100
June 80
July 110
August 115
September 105
October 110
November 125
December 120

• Use simple regression analysis to develop a forecasting model for


monthly demand.
• Use the model to forecast the demand for the next January, February,
and March. 11
Solution 2:
Month (X) No. of Units (Y) X2 XY
May 1 100 1 100
June 2 80 4 160
July 3 110 9 330
August 4 115 16 460
September 5 105 25 525
October 6 110 36 660
November 7 125 49 875
December 8 120 64 960
36 865 204 4070

σ 𝑋 2 σ 𝑌 − σ 𝑋 σ 𝑋𝑌 204∗865 −(36∗4070) 29940


a= 2 = = = 89.11
𝑛 σ 𝑋 2 −(σ 𝑋) 8∗204 −(36)2 336

𝑛 σ 𝑋𝑌 − σ 𝑋 σ 𝑌 8∗4070 −(36∗865) 12
b= 2 = = 4.23
𝑛 σ 𝑋 2 −(σ 𝑋) 8∗204 − (36)2
Solution 2:
• The equation for the regression line is Y = a + bX
= 89.11+4.23X
• Forecasted demand for January, that is for X=9
Y= 89.11+4.23*9 = 127.18
• Forecasted demand for February, that is for X=10
Y= 89.11+4.23*10 = 131.41
• Forecasted demand for March, that is for X=11
Y= 89.11+4.23*11 = 135.64

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END

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