Method 5 : Exponential Smoothing

Smoothing constant

● Ft = Ft-1 + α(At-1 - Ft-1)= α(At-1 )+(1- α) Ft-1

Forecast= Previous forecast + α(previous actual sales- previous forecast )

▪ At-1 is the actual sales in the previous period
▪ Ft-1 is the forecast for the previous period
▪ α: ranges from 0 to 1 and is subjectively chosen.
 Method 5 : Exponential Smoothing (Cont’d)

Forecast of Period Demand Forecast α=.2

Demand in Period
2 (This forecast
made after seeing
1 130 -
Demand in Period
1) 2 F2=αA1 + (1- α)F1
F2=(0.2)130 + (1- 0.2)F1
Problem!
Didn’t have a forecast for period 1 so how can we start the
exponential smoothing method
Options
(1) Use Naïve Forecast for Period 2 and then do exponential smoothing for periods
3,4,5,6,……
(2) Choose an initial forecast for period 1 (in some manner) and thendo
exponential smoothing for periods 2,3,4,5,6,……
 Method 5 : Exponential Smoothing (Cont’d)
● Using Naïve Method for Period 2
Period Demand Forecast
α=.2
Forecast of
Demand in Period
1 130 -
2 (This forecast
made after seeing
Demand in Period
2 155 130 Using Naïve/Simple average

1)
3 145 135.00 0.2(155)+(1-0.2)(130)=135.00

4 160 137.00 0.2(145)+(1-0.2)(135)=137.00

Forecast of
Demand in Period 5 151 141.60 0.2(160)+(1-0.2)(137)=141.60
5 (This forecast
made after seeing
Demand in Period 6 143 143.48 0.2(151) + (1-0.2)(141.60) =143.48

4)

7 143.38 0.2(143) + (1-0.2)(143.48) = 143.38

Method 5 : Exponential Smoothing (Cont’d)
● Forecast effects of Smoothing Constant α
Ft = Ft-1 + α(At-1 - Ft-1) Ft = α At-1 + (1- α)Ft-1

Ft = α At - 1 + α(1- α )At - 2 +…+ α(1- α)t-2A1 + (1- α)t-1F1

Weights on Actual Sales

Prior Period 2 PeriodsAgo 3 PeriodsAgo

α α(1 − α) α(1 − α)2

α = 0.10

α = 0.90