Deseasonalizing Forecasts

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Deseasonalizing Forecasts
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Agenda

• Seasonality defined seasonal adjustment methods
• Brainstorming Exercise
• Nuts and Bolts
• How It Works
• Seasonal adjustment example
• Exercise
• Summary
• Appendix A Solution to Exercise

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Seasonality

• A repeated pattern of spikes or drops in the
  variable of interest associated with a period of
  time
• Examples-
• Consumer buying habits
• Price of gasoline

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Seasonality

• Causes of seasonal movement by class
• 1. Weather (temperature, precipitation)
• 2. Calendar Events (religious or secular
  festivals)
• 3. Timing decisions (vacations, accounting
  periods)

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Seasonal Adjustment Methods

• Seasonal index

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Nuts and Bolts

• Why make seasonal adjustments?
• 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

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How It Works Deseasonalizing Forecasts

• Four-step procedure for seasonal adjustments
• 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

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Season Adjustment Example

• 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

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Seasonal Adjustments ExampleStep 1

• Calculate forecast for each demand values in the
  time series
• Use the unadjusted regression forecast model
• Y a bx

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Seasonal Adjustments Example Step 1

• Forecasted demand
• Y95.854.03period
• Year 1 Quarter 1
• Y95.854.03(1)
• 99.9

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Seasonal Adjustments Example Step 2

• For each demand value, calculate Demand/Forecast
• Year 1 Quarter 1
• 72/99.9 0.72

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Seasonal Adjustments Example - Step 3

• Average the Demand/Forecast for the quarters to
  get the seasonal index
• Quarterly Seasonal Index for Quarter 1
• (0.720.660.590.55)/4 0.63

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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)

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Seasonal Adjustments Example - Step 4
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Seasonal Adjustments Example
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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

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Exercise Table
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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

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Appendix A Solution to Exercise
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Appendix A Solution to Exercise