OM Project

Topics: Regression analysis, Linear regression, Exponential smoothing Pages: 33 (1960 words) Published: October 30, 2014
Question: Forecasting problem 3.49, page 106 (Chapter 3) of Text Book Heizer,Render & Rajashekhar (a) Using exponential smoothing, with α = .6, then trend analysis, and finally linear regression discuss which forecasting model fits best for Salinas’s strategic plan. Justify the selection of one model over another.

Answer:
We have done forcasting using exponential smoothing and linear regression methods. Below are the forcast values:
Method
Exponential smoothing

MAD
3.5

Linear Regression

10.6

Year
1
1
2
3
4
5

Forecast value
86.22
54.72
56.36
58
59.63
61.27

Since the MAD for liner regression is large compared to MAD of Exponential smoothing. Therefore Exponential smoothing is better method in this case. Refer Sheets exp smoothing (a) and regression (a) for details of calculation

(b) Carefully examine the data. Can you make a case for excluding a portion of the information? Why? Would that change your choice of model?

Answer:
We have removed the data for the following periods year 1983, 1988, 1991 & 2001. We have removed this data as outliers because this data correspondes to ression period as given in the problem statement. Below are the new forcast values:

Method
Exponential smoothing

MAD
3.84

Linear Regression

11.74

Year
1
1
2
3
4
5

Forecast value
86.19
55.67
57.5
59.34
61.18
63.02

Choice of model does not changes because the MAD value again for Exponential smoothing remains lower than MAD of Li Refer Sheets exp smoothing (b) and regression (b) for details of calculation

Rajashekhar

on discuss which

en in the problem statement.

remains lower than MAD of Linear regression.

Year

1964

1965

1966

1967

1968

Deposits Actual

0.25

0.24

0.24

0.26

0.25

GSP

0.4

0.4

0.5

0.7

0.9

-

0.25
-0.01
0.01

0.24
0.00
0.00

0.24
0.02
0.02

0.25
0.00
0.00

Deposite Forcast ( alpha = 0.6)
Forcast Error
Absolute Forcast Error

180
160
140
120
100
80
60
40
20
0
1

2

3

4

5

6

7

8

9

10

11

Budget Forcast: Ft = Ft-1 + a(At-1 - Ft-1)
Year
1

Budget
86.22

12

13

14

15

MAD =
n

A
M AD =

t

t =1

n

- Ft

15

1969

1970

1971

1972

1973

1974

1975

1976

1977

0.3

0.31

0.32

0.24

0.26

0.25

0.33

0.5

0.95

1

1.4

1.7

1.3

1.2

1.1

0.9

12

1.2

0.25
0.05
0.05

0.28
0.03
0.03

0.30
0.02
0.02

0.31
-0.07
0.07

0.27
-0.01
0.01

0.26
-0.01
0.01

0.26
0.07
0.07

0.30
0.20
0.20

0.42
0.53
0.53

16

3.50
n

A
M AD =

t

t =1

n

- Ft

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

1978

1979

1980

1981
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