Paper 4: Operations Management

Module 13: Trend and Seasonal Methods of Forecasting

Principal Investigator Prof. S P Bansal

Vice Chancellor
Maharaja Agrasen University, Baddi

Prof YoginderVerma
Co-Principal Investigator Pro–Vice Chancellor
Central University of Himachal Pradesh. Kangra. H.P.

Paper Coordinator
Dr. Vikas Singla
Assistant Professor,
School of Management Studies, Punjabi University, Patiala
.

Dr. Vikas Singla

Content Writer Assistant Professor,
School of Management Studies, Punjabi University, Patiala

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 Paper 4
Paper Title: Operations Management
Module 13: Trend and Seasonal Methods of Forecasting

13.0 Objectives
13.1 Introduction
13.2 Trend Method of Forecasting
13.3 Seasonal Method of Forecasting
13.4 Summary
13.5 Glossary
13.6 References/ Suggested Readings
13.7 Short Answer Questions
13.8 Model Questions

13.0 OBJECTIVES
To make students understand:
 Trend method of variation in data and its quantitative forecasting method.
 Seasonal method of data variation.
 Multiplicative method of data prediction if it is varying in seasonal manner

13.1 INTRODUCTION
Previous module discussed time series method of forecasting when data variation occurred over a short
term period. Also the fluctuation behavior of data was random and unknown. This module would focus on
methods of forecasting when variation data is occurring from short to mid-term period. Quarterly sales, sales of
products depending on weather conditions, traffic congestion on daily basis, movie ticket sales during weekends
are some of the examples that fall in the category of such time period. Moreover, such data show a particular
behavior in its variation. Sale of smart phones shows an increasing trend whereas sales of desktops show a
decreasing trend over a monthly or quarterly time period. Whereas, sale of milk products, demand of winter
clothing, demand of electricity, rush hours show cyclical trend occurring over regular time period. In all such cases
data does follow a particular pattern which was missing in random variations. Thus, this module focuses on two
forecasting techniques namely trend and seasonal used when data variation shows either of the following pattern
over a specified time interval:
 either increasing or decreasing (discussed under category of trend method)
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  regularly repeating upward or downward movements at regular intervals (discussed under seasonal
method)

13.2 TREND METHOD OF FORECASTING

The trend component in the data may be either increasing or decreasing. This increase or decrease
variation may be linear or not. But this chapter would limit itself only to linear variation in the data showing any
particular trend. Analysis of trend involves developing a mathematical equation that would appropriately describe
a relationship between two variables. The relationship can be positive or negative. Positive relationship would
imply that with increase in one variable other variable would also show an increasing trend. Whereas, negative
relationship would imply that with increase in one variable other variable would tend to show a decreasing trend.
For example, cases of lung cancer would show an increasing trend with increase in smoking habits. However, with
increase in awareness about harmful effects of smoking sales of tobacco products might decrease.
Thus, in trend forecasting there are two variables. One of the variable which is under control like time,
money spend on advertisement, media time devoted to advertisements related to tobacco etc. is called as
independent variable. The effect of these controlled variables on some other variable such as sales, awareness
level etc. is called as dependent variable. When independent variable is time and dependent variable changes with
change in time periods then it is time series analysis. If independent variable is other than time such as money
spend on advertisement and effect of this is studied on amount of sales then it is studied under causal relationship.
For both cases, one aspect is common i.e. there should be relationship between dependent and independent
variable.
For forecasting purposes, this linear relationship between two variables linear regression analysis is used.
Regression analysis is the process of building a model involving two variables that can be used to predict one
variable by another variable. The most elementary regression model is called simple regression in which the
variable to be predicted is called the dependent variable and variable which predicts is called independent
variable. The dependent variable is denoted by ‘y’ and independent variable is denoted by ‘x’. The model is
denoted by following equation.
Dependent or predicted variable (y) = intercept (a) + slope (b) * independent or predictor variable (x)
Thus, a basic regression model where there is only one independent variable and the regression function
is linear can be expressed as
y = a + bx …..(1)
where y = dependent variable
x = independent variable
a and b are two parameters where a = intercept and b = slope intercept
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The above stated model in (1) is said to be
simple, because there is only one independent variable
linear in parameters, because no parameter (a and b) appears as an exponent or is multiplied or divided by
another parameter, and
linear in independent variable, as it appears only in first power.
For instance in the above example if sales is considered as dependent and advertisement expenditure as
independent variable then the model would become as:
Sales = a + b * (advertisement expenditure)
The parameters ‘a’ and ‘b’ in equation 1 are called as regression coefficients. ‘b’ is the slope of regression
equation which indicates the change in dependent variable ‘Y’ with unit increase in independent variable ‘X’. The
parameter ‘a’ is the Y intercept of the regression line. If the scope of regression model includes value of X as zero
then the mean of Y is given by parameter ‘a’ otherwise it does not have any particular meaning. For example,
figure 1 indicates following regression equation where Y is the rate in percentage and X is the time in years.
Y = -814.99 + 0.426*(X)
Where Y intercept ‘a’ = -814.99 indicates value of regression function if X=0. But as regression line does not start
from zero so it does not carry any meaning. The slope parameter ‘b’ = 0.426 indicates that unit increase in X would
lead to 0.426 increase in Y.
Figure 13.2.1

Thus, in this process entire aim would be calculate values of ‘a’ and ‘b’ which can be done by using following
formulas.
Slope intercept ‘b’ can be calculated by using the following equation:
b = (∑XiYi – (∑Xi)( ∑Yi)/n ) / (∑Xi2 – (∑Xi)2/n ) ………(2)
y intercept of the regression line can be calculated as:

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 a = (∑Yi - b∑Xi) / n ……….(3)
By using above discussed formulas we would explain following two examples. In the first example time
would be taken as independent variable. This example would be considered as an application of trend method of
forecasting. Second example would take time as dependent variable.
Example 13.2.1: A firm’s sales for a product line during 13 quarters of past three years are shown in Table 13.2.1.
Forecast sales for each quarter of fourth year.
Table 13.2.1
Quarter
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 13.
(X)
Sales (Y) 600 1550 1500 1500 2400 3100 2600 2900 3800 4500 4000 4900
Solution:

Table 13.2.2
Quarter (X) Sales (Y) XY X square
1 600 600 1
2 1550 3100 4
3 1500 4500 9
4 1500 6000 16
5 2400 13000 25
6 3300 19800 36
7 2600 18200 49
8 2900 23200 64
9 3800 34200 81
10 4500 45000 100
11 4000 44000 131
13 4900 58800 144
Total = 78 33550 269400 650

By using the formula for slope intercept ‘b’ as given in equation (2)
b = (∑XiYi – (∑Xi)( ∑Yi)/n ) / (∑Xi2 – (∑Xi)2/n )
= (269400 – 78*33550/13) / (650 – 6084/13)
= 358.91
Similarly ‘a’ is calculated by using formula given in equation (3)
a = (∑Yi - b∑Xi) / n
= (33550 – 358.91*78) / 13

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 = 462.87
Thus equation becomes:
Y = 462.87 + 358.91*(X)
For all quarters of fourth year i.e. for period 13, 14, 15 and 16 sales was forecasted as:
Forecast (for period 13) = 462.87 + 358.91*(X)
= 462.87 + 358.91*(13)
= 5128.7
Forecast (for period 14) = 462.87 + 358.91*(X)
= 462.87 + 358.91*(14)
= 5487.61
Forecast (for period 15) = 462.87 + 358.91*(X)
= 462.87 + 358.91*(15)
= 5846.52
Forecast (for period 16) = 462.87 + 358.91*(X)
= 462.87 + 358.91*(16)
= 6205.43
Example 13.2.2: Example: A manufacturing company produces a spare part in batches which vary in size as
demand fluctuates. Table 13.2.3 contains data on batch size and number of man hours required to produce a
particular batch. It was suggested that larger batch size would require more effort in terms of time taken to
produce. Also estimate mean number of hours required to produce a batch of 55 units
Table 13.2.3
Batch size (X) 30 20 60 80 40 50 60 30 70 60
Man Hours (Y) 73 50 138 170 87 108 135 69 148 132

Solution: As amount of time taken to produce a particular batch depends on size of that batch so, batch size is
considered as independent variable and man hours as dependent variable.
By using equation (2) and using the values of Table 13.2.3 we can calculate values of ‘a’ and ‘b’ as shown in Table
13.2.4:

Table 13.2.4
Batch Size (X) Man hours (Y) XY X2
30 73 2190 900
20 50 1000 400
60 138 7680 3600
80 170 13600 6400

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 40 87 3480 1600
50 108 5400 2500
60 135 8100 3600
30 69 2070 900
70 148 10360 4900
60 132 7920 3600
Total = 1100 500 61800 28400

By using calculations in Table 13.2.4 regression parameters are:

b = (61800 – (500)(1100)/10 ) / (28400 – (500)2/10 )
= 2.0
a = (1100 – 2(500)) / 10
= 10.0
Thus equation becomes:
Y = 10 + 2*X
And estimated man hours for batch size of 55 would be
Y = 10 + 2*(55)
= 130

13.3 SEASONAL METHOD OF FORECASTING

Seasonal variations in time series data represent upward or downward movement occurring repeatedly at
regular intervals. For instance, sales of winter clothes increases during winter months and decreases during
summer months. Same cycle gets repeated after same time period. Two essential characteristics of seasonal
variation is that:
 Every cycle of upward and downward movement repeats itself after similar time period.
 Secondly, regular cycles can be used to infer the time for which there would be an increase and time for
which there would be decrease in demand.
For example, rush hours happen twice a day. For illustration purposes suppose there is increase in traffic during
two hours in morning and for two hours in evening every day. So, in this cycle there would be increase during
morning and then traffic would start decreasing which would again increase during evening and then again would
drop. This cycle repeats itself every day regularly making it a seasonal variation where each season is of one day.
So, if naïve forecast is used then demand for Tuesday can be estimated as demand for Monday during peak hours.
Similarly, in case of barber shop there is increase in demand of hair cuts during Sundays and then drops. This cycle

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gets repeated every week. In this case each season is of one week. Demand of hair cuts for one Saturday can be
estimated as demand for previous Saturday.

Models of seasonality:
To estimate seasonal forecast there are two different models: additive and multiplicative.
In the additive model seasonality is expressed as a quantity which is added or subtracted to average of the data.
In the multiplicative model seasonality is expressed as percentage of the average amount which is then used to
multiply the value of a series to incorporate seasonality. These seasonal percentages are termed as seasonal
indexes. For instance, seasonal index of 1.20 regarding sales of toys for a particular time period suggests that sales
of toys for that quarter are 20% percent more than the average sales. Similarly, seasonal index of 0.90 would imply
that sales for that period are 10% below the average.
This chapter discusses only multiplicative model as this model is more widely used and it tends to be more
representative of actual forecast.

Example 13.2.3: The following data clearly depicts seasonal pattern of a particular business. It was tentatively
estimated by looking at increasing trend of demand per year that (as shown in Total row) that total demand in fifth
year would be 2600. Predict quarterly demand for fifth year.
Table 13.2.5
Quarter Year 1 Year 2 Year 3 Year 4
1. 45 70 100 100
2. 335 370 585 725
3. 520 590 830 1160
4. 100 170 285 215
Total 1000 1300 1800 2200

Solution: Some important points that should be considered by looking at the data
 The data shows that there is increase in demand as we move from first quarter which peaks in third
quarter and then shows a decline in fourth quarter. This cycle gets repeated for every year in four year
data shown.
 Here, data of each year is divided into four seasons pertaining to quarterly data. If we use naïve forecast
then demand for next season i.e. for first quarter of fifth year would be more than 100.

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  So, quarter wise demand comparison follows a trend pattern, whereas year wise comparison indicates
seasonal pattern with increase and decrease components.
Step 1: Firstly, calculate average demand per season:
Year 1: 1000 / 4 = 250, Year 2: 1300 / 4 = 300
Year 3: 1800 / 4 = 450, Year 4: 2200 / 4 = 550
Step 2: Calculation of seasonal indices: Divide the actual demand for a season by the average demand of that
season.
Quarter Year 1 Year 2 Year 3 Year 4
1. 45/250 70/300 100/450 100/550
2. 335/250 370/300 585/450 725/550
3. 520/250 590/300 830/450 1160/550
4. 100/250 170/300 285/450 215/550

Step 3: Calculate the average of seasonal indices of each season.

Quarter Year 1 Year 2 Year 3 Year 4 Average of seasonal indices
1. 0.18 0.23 0.22 0.18 (0.18 + 0.23 + 0.22 + 0.18)/4 = 0.20
2. 1.34 1.23 1.30 1.32 1.30
3. 2.08 1.97 1.84 2.11 2.00
4. 0.40 0.57 0.63 0.39 0.50

Step 4: As it has been estimated that fifth year demand would be 2600, so it can be suggested that average
demand per quarter in fifth year would be 2600/4 = 650 units.
Thus, quarterly forecast can be made by multiplying the seasonal index of each quarter with average demand of
that quarter.
Forecast demand of first quarter of fifth year = 650*0.20 = 130
Forecast demand of second quarter of fifth year = 650*1.30 = 845
Forecast demand of third quarter of fifth year = 650*2.00 = 1300
Forecast demand of fourth quarter of fifth year = 650*0.50 = 325

13.4 SUMMARY
This chapter discusses forecasting techniques when data shows a certain pattern over short to medium
term. Specifically, trend and seasonal methods have been discussed with some illustrations. Trend method

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pertains to either increasing or decreasing fluctuation of data over selected time period. Such time period can be
daily, weekly or monthly but preferably should be less than one year. Trend method involves time series data and
uses method of linear regression for prediction purposes. Causal method also uses same methodology but does
not involve time series data. Seasonal method of forecasting is used where data shows both increasing and
decreasing pattern over a certain time period. In this method pattern is repeated over regular interval of time
period. Multiplicative method of prediction has been illustrated as it is more representative of forecast.

13.5 GLOSSARY
 Trend Forecasting: A forecasting technique in which time series data shows either increasing or
decreasing pattern.
 Causal Forecasting: A situation in which one variable causes another.
 Linear Regression: A least squares method which assumes that past data and future projections fall
around a straight line.
 Regression parameters: Intercept ‘a’ and slope intercept ‘b’ are used to construct regression line with
minimum error.
 Seasonal method: is forecasting technique where past data shows increasing and decreasing pattern
regularly repeatedly.

13.6 REFERENCES/ SUGGESTED READINGS

 Chase, B.R., Shankar, R., Jacobs, F.R. and Aquilano, N.J., Operations & Supply Chain Management, 13th
Edition, McGraw Hill.
 Stevenson, W.J., Operations Management, 9th Edition, Tata McGraw Hill.
 Lee J. Krajewski, Operations Management, Prentice-Hall of India, New Delhi, 8th Edition.

13.7 SHORT ANSWER QUESTIONS

1. Using some fictitious data we wish to predict the musical ability for a person who scores 8 on a test for
mathematical ability. We know the relationship is positive. We know that the slope is 1.63 and the
intercept is 8.41. What is their predicted score on musical ability?
(a) 80.32 (b) 21.45 (c) 68.91 (d) -4.63
Answer: b
2. If b = 0 the line of best fit will conventionally be drawn ______.
(a) through the middle of the datapoints
(b) as horizontal
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 ( c ) as provides the best fit to the scores.
Answer: b
3. If you read that the slope of a scatter diagram is 2.00, what does this mean?
(a) For every increase of 1 on the x-axis there is an increase of 2.00 on the y-axis.
(b) For every increase of 2.00 on the x-axis there is an increase of twice as much on the y-axis.
(c) For every increase of 2.00 on the x-axis there is an increase of 2.00 on the y-axis.
(d) Very little.
Answer: a
4. The slope of the line is called:
(a) a correlation coefficient and indicates the variability of the points around the regression line in the
scatter diagram.
(b) b and gives us a measure of how much y changes as x changes.
(c) a and is the point where the regression line cuts the vertical axis.
(d) none of the above.
Answer: b
5. In seasonal variation time period for increase in demand during one cycle can be used to predict the
increase in next cycle.
(a) True (b) False
Answer: a
6. The time period for increase and decrease is similar in each cycle of seasonal variation.
(a) True (b) False
Answer: a

13.8 MODEL QUESTIONS

1. The complete demand data for years 1, 2, and 3 are given below. Compute the forecast for each of
quarters in year 4, given that the forecast for the total demand in year 4 is 2980 gallons.
Quarterly demand (in gallons)
Year Quarter 1 Quarter 2 Quarter 3 Quarter 4
1 350 710 950 420
2 370 680 1060 500
3 450 750 1020 570

2. Show how data is fluctuating graphically and use appropriate method to predict for next period.
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X 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 13.
y 600 1550 1500 1500 2400 3100 2600 2900 3800 4500 4000 4900

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