Seasonal Variations in Data

• Seasonal variations in data are regular movements in a time series that relate to
recurring events such as weather or holidays.
• Seasonality may be applied to hourly, daily, weekly, monthly, or other recurring
patterns. Movie theaters see higher demand on Friday and Saturday evenings.
• Understanding seasonal variations is important for capacity planning in
organizations that handle peak loads. These include electric power companies
during extreme cold and warm periods, buses and subways during the morning
and evening rush hours.
• The presence of seasonality makes adjustments in trend-line forecasts necessary.
• Seasonality is expressed in terms of the amount that actual values differ from
average values in the time series.
• Analyzing data in monthly or quarterly terms usually makes it easy for a
statistician to spot seasonal patterns.
Steps for seasonal forecast for a company that has “seasons” of 1
month:
Step 1: Find the average historical demand each season (or month in this case) by
summing the demand for that month in each year and dividing by the number of years of
data available.

Step 2: Compute the average demand over all months by dividing the total average
annual demand by the number of seasons.

Step 3: Compute a seasonal index for each season by dividing that month’s historical
average demand (from Step 1) by the average demand over all months (from Step 2).

Step 4: Estimate next year’s total annual demand.

Step 5: Divide this estimate of total annual demand by the number of seasons, then
multiply it by the seasonal index for each month. This provides the seasonal forecast.
Determining Seasonal Indices and forecast
the monthly demand:

A Des Moines distributor of Sony laptop computers wants to develop monthly

indices for sales. Data from the past 3 years, by month, are available. If the annual
demand for computers to be 1,200 units next year, using seasonal indices find the
forecast of monthly demand.
A Des Moines distributor of Sony laptop computers wants to develop monthly indices for sales. Data from the
past 3 years, by month, are available. If the annual demand for computers to be 1,200 units next year, using
seasonal indices find the forecast of monthly demand.
A Des Moines distributor of Sony laptop computers wants to develop monthly indices for sales. Data from the
past 3 years, by month, are available. If the annual demand for computers to be 1,200 units next year, using
seasonal indices find the forecast of monthly demand.

Note: Think of these indices as percentages of average sales. The average sales (without
seasonality) would be 94, but with seasonality, sales fluctuate from 85% to 131% of average.
Cyclic Variations in Data
• Cycles are like seasonal variations in data but occur every several years, not
weeks, months, or quarters.

• Forecasting cyclical variations in a time series is difficult. This is because cycles

include a wide variety of factors that cause the economy to go from recession to
expansion to recession over a period of years.

• These factors include national or industrywide overexpansion in times of

euphoria and contraction in times of concern.

• Forecasting demand for individual products can also be driven by product life
cycles—the stages products go through from introduction through decline. Life
cycles exist for virtually all products; striking examples include floppy disks,
video recorders, etc.
Regression and Correlation Analysis

• Unlike time-series forecasting, associative forecasting models usually consider

Associative Forecasting Methods:

several variables that are related to the quantity being predicted.

• Once these related variables have been found, a statistical model is built and used
to forecast the item of interest.
• This approach is more powerful than the time-series methods that use only the
historical values for the forecast variable.
• Many factors can be considered in an associative analysis.
• For example, the sales of Dell PCs may be related to Dell’s advertising budget, the
company’s prices, competitors’ prices and promotional strategies, and even the
nation’s economy and unemployment rates.
• In this case, PC sales would be called the dependent variable, and the other
variables would be called independent variables.
• The manager’s job is to develop the best statistical relationship between PC sales
and the independent variables.
• The most common quantitative associative forecasting model is linear-regression
analysis.
Using Regression Analysis for Forecasting
• The same mathematical model that employed in the least-squares method of
trend projection to perform a linear-regression analysis.

• The dependent variables to forecast will still be . But now the independent
variable, x, need no longer be time.

Where,
computed value of the variable to be predicted (called the dependent variable,
example: sales).
a = y-axis intercept.
b = slope of the regression line (or the rate of change in y for given changes in x).
x = the independent variable.
Computing a Linear Regression Equation
Nodel Construction Company renovates old homes in West Bloomfield, Michigan.
Over time, the company has found that its dollar volume of renovation work is
dependent on the West Bloomfield area payroll. Management wants to establish a
mathematical relationship to help predict sales.

NODEL’S SALES (IN AREA PAYROLL

n
$ MILLIONS), y (IN $ BILLIONS), x

1 2 1
2 3 3
3 2.5 4
4 2 2
5 2 1
6 3.5 7
Computing a Linear Regression Equation
Nodel Construction Company renovates old homes in West Bloomfield, Michigan. Over time, the company has
found that its dollar volume of renovation work is dependent on the West Bloomfield area payroll. Management
wants to establish a mathematical relationship to help predict sales.

Area Payroll
Nodel’s Sales (In
n (In $ Billions),
$ Millions), y
x
1 2 1
2 3 3
3 2.5 4
4 2 2
5 2 1
6 3.5 7
Computing a Linear Regression Equation
• A mathematical equation by using the least-squares regression approach:

• The estimated regression equation, therefore, is:

Computing a Linear Regression Equation

• Sales = 1.75 + .25 (payroll)

• If the local chamber of commerce predicts that the West Bloomfield area payroll will
be $6 billion next year, we can estimate sales for Nodel with the regression equation:
• Sales (in $ millions) = 1.75 + .25(6) = 1.75 + 1.50 = 3.25

or: On average, sales increase at the rate of 1/4 million dollars for
every billion dollars in the local area payroll. This is because b
• Sales = $3,250,000 = .25, this shows a straight-line relationship between payroll
and sales.
Correlation Coefficients for Regression Lines
• The regression equation is one way of expressing the nature of the relationship
between two variables.
• Regression lines are not “cause-and-effect” relationships. They merely describe
the relationships among variables.
• The regression equation shows how one variable relates to the value and changes
in another variable.

• Another way to evaluate the relationship between two variables is to compute the
coefficient of correlation. This measure expresses the degree or strength of the
linear relationship (but note that correlation does not necessarily imply causality).
Usually identified as r, the coefficient of correlation can be any number between
+1 and -1 .
Correlation Coefficients for Regression Lines
• Coefficient of Determination (r²):The percentage of the variation in the
dependent variable that results from the independent variable.
Varies between 0 and 1

• Correlation Coefficient (r): A measure of the strength of the linear relationship

between independent and dependent variables. Varies between -1.00 and + 1.00
Five Values of the Correlation Coefficient
Determining the Coefficient of Correlation
• Nodel Construction Company renovates old homes in West Bloomfield, Michigan.
Over time, the company has found that its dollar volume of renovation work is
dependent on the West Bloomfield area payroll. Management wants to establish a
mathematical relationship to help predict sales. The VP now wants to know the
strength of the association between area payroll and sales.

NODEL’S SALES (IN AREA PAYROLL

n
$ MILLIONS), y (IN $ BILLIONS), x

1 2 1
2 3 3
3 2.5 4
4 2 2
5 2 1
6 3.5 7
Determining the Coefficient of Correlation

• This r of 0.901 appears to be a significant

correlation and helps confirm the closeness of
the relationship between the two variables.