Deseasonalizing Forecasts

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# Deseasonalizing Forecasts - PowerPoint PPT Presentation

Deseasonalizing Forecasts. Agenda:. Seasonality defined & seasonal adjustment methods Brainstorming Exercise Nuts and Bolts How It Works Seasonal adjustment example Exercise Summary Appendix A: Solution to Exercise. Seasonality.

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## Deseasonalizing Forecasts

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Presentation Transcript
Agenda:
• Seasonality defined & seasonal adjustment methods
• Brainstorming Exercise
• Nuts and Bolts
• How It Works
• Exercise
• Summary
• Appendix A: Solution to Exercise
Seasonality
• A repeated pattern of spikes or drops in the variable of interest associated with a period of time
• Examples-
• Price of gasoline
Seasonality
• Causes of seasonal movement by class:

1. Weather (temperature, precipitation)

2. Calendar Events (religious or secular festivals)

3. Timing decisions (vacations, accounting periods)

Nuts and Bolts

• Reduces errors in time-series forecasting
• Improves quality of judgmental forecasts
• Gives good insight into the factors influencing demand

The purpose of finding seasonal indexes is to remove the seasonal effects from the time series

How It Works: Deseasonalizing Forecasts

1. Calculate forecast for each demand values in the time series

2. For each demand value, calculate Demand/Forecast

3. Average the Demand/Forecast for months or quarters to get the seasonal index

4. Multiply the unadjusted forecast by the seasonal index to find adjusted forecast value

• Foster Company makes widgets. The quarterly demand for its widget is given in Exhibit 1
• Using linear regression forecasting, develop a seasonal index for each quarter and reforecast each quarter

Calculate forecast for each demand values in the time series

• Use the unadjusted regression forecast model

Y= a + bx

Seasonal Adjustments Example – Step 1
• Forecasted demand

Y=95.85+4.03*period

• Year 1 Quarter 1:

Y=95.85+4.03(1)

=99.9

Seasonal Adjustments Example – Step 2
• For each demand value, calculate Demand/Forecast
• Year 1 Quarter 1:

72/99.9= 0.72

Seasonal Adjustments Example - Step 3
• Average the Demand/Forecast for the quarters to get the seasonal index
• Quarterly Seasonal Index for Quarter 1:

(0.72+0.66+0.59+0.55)/4 = 0.63

Seasonal Adjustments Example - Step 4
• Multiply the unadjusted forecast by the seasonal index to find the adjusted forecast values
• Year 1 Quarter 1:

99.9 * 0.63 = 62.7 (adjusted forecast)

Exercise
• Smith Company makes widgets. The quarterly demand for its widget is given in Exhibit A
• You have been asked to develop a seasonal index for each quarter and reforecast each quarter
Summary
• Deseasonalizing forecasts is effective for
• Short-term forecasting
• Comparability
• Detecting trend changes early
• The Seasonal Index is the most simple method for making seasonal adjustments