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Exponential Smoothing

The document discusses exponential smoothing as a forecasting method and how to improve it to account for trends in data. It provides an example of using exponential smoothing to forecast bottled water sales, and shows that including a trend component improves the forecasts. Managers should evaluate multiple forecasting methods on their data and choose the one with the lowest error to best capture trends.

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suriani hamsah
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26 views13 pages

Exponential Smoothing

The document discusses exponential smoothing as a forecasting method and how to improve it to account for trends in data. It provides an example of using exponential smoothing to forecast bottled water sales, and shows that including a trend component improves the forecasts. Managers should evaluate multiple forecasting methods on their data and choose the one with the lowest error to best capture trends.

Uploaded by

suriani hamsah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Forecasting

“Prediction is very difficult,


especially if it's about the future.”
Nils Bohr
Exponential smoothing: the method

Assume that we are currently in period t. We calculated the


forecast for the last period (Ft-1) and we know the actual demand
last period (At-1) …

Ft  Ft1   ( At1  Ft1 )

The smoothing constant α expresses how much our forecast will


react to observed differences…
If α is low: there is little reaction to differences.
If α is high: there is a lot of reaction to differences.
Example: bottled water at Kroger

Month Actual Forecasted  = 0.2

Jan 1,325 1,370

Feb 1,353 1,361

Mar 1,305 1,359

Apr 1,275 1,349

May 1,210 1,334

Jun ? 1,309
Example: bottled water at Kroger

Month Actual Forecasted  = 0.8

Jan 1,325 1,370

Feb 1,353 1,334

Mar 1,305 1,349

Apr 1,275 1,314

May 1,210 1,283

Jun ? 1,225
Impact of the smoothing constant

1380
1360
1340
1320 Actual
1300
a = 0.2
1280
1260 a = 0.8
1240
1220
1200
0 1 2 3 4 5 6 7
Trend..

What do you think will happen to a moving


average or exponential smoothing model when
there is a trend in the data?
Impact of trend

Sales
Actual
Regular exponential
Data smoothing will always
Forecast lag behind the trend.
Can we include trend
analysis in exponential
smoothing?

Month
Exponential smoothing with trend
FIT: Forecast including trend
FITt  Ft  Tt δ: Trend smoothing constant

Ft  FITt 1  α(At 1  FITt 1 )

Tt  Tt 1  δ(Ft  FITt 1 )

The idea is that the two effects are decoupled,


(F is the forecast without trend and T is the trend component)
Example: bottled water at Kroger

At Ft Tt FITt α = 0.8

δ = 0.5
Jan 1325 1380 -10 1370
Feb 1353 1334 -28 1306
Mar 1305 1344 -9 1334
Apr 1275 1311 -21 1290
May 1210 1278 -27 1251
Jun 1218 -43 1175
Exponential Smoothing with Trend

1400

1350
Actual
1300
a = 0.2

1250 a = 0.8
a = 0.8, d = 0.5
1200

1150
0 1 2 3 4 5 6 7
Example: bottled water at Kroger

Month Actual Forecast Month Actual Forecast

Jan 1,325 1,370 Jan 1,325 1370

Feb 1,353 1,361 Feb 1,353 1306

Mar 1,305 1,359 Mar 1,305 1334

Apr 1,275 1,349 Apr 1,275 1290

May 1,210 1,334 May 1,210 1251

Jun 1,195 1,309 Jun 1,195 1175

Exponential Smoothing Forecasting with trend


( = 0.2) ( = 0.8)
( = 0.5)

Question: Which one is better?


Bottled water at Kroger: compare MAD and TS

MAD TS

Exponential
70 - 6.0
Smoothing

Forecast
33 - 2.0
Including Trend

We observe that FIT performs a lot better than ES

Conclusion: Probably there is trend in the data which


Exponential smoothing cannot capture
Which Forecasting Method Should
You Use
• Gather the historical data of what you want to
forecast
• Divide data into initiation set and evaluation set
• Use the first set to develop the models
• Use the second set to evaluate
• Compare the MADs and MFEs of each model

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