408 Part Four Quantane Modeler Service Management Development of a regression model requires an extensive data collection effort to meet, the needs of the individual organization, which often involves considerable time and expense. ‘The model also requires expertise in the selection of independent and dependent variables to ensure a relationship that has a logical and meaningful interpretation. For these reasons, regression models are appropriate for making medium- and long-term forecasts Econometric Models Econometric models are versions of regression models that involve a system of equations. ‘The equations are related to each other, and the coefficients are determined as in the simpler regression models. An econometric model consists of a set of simultaneous equa- tions expressing a dependent variable in terms of several different independent variables, Econometric models require extensive data collection and sophisticated analysis to create thus, they generally are used for long-range forecasts, Time Series Models TABLE 14.2 turday Occupancy atx 100-Room Hotel ‘Time series models are applicable for making shortterm forecasts when the values of observations occur in an identifiable pattern over time. These models range from the simple N'period moving average model to the more sophisticated and useful exponential smoothing models. Exponential smoothing models are particularly useful because they can be adapted to track the components of a forecast (ie. average, trend. and seasonality). The average is an ‘estimate of the underlying mean of a random variable (e.g., customer demand), trend is cither an increasing or decreasing increment in each period, and seasonality is a recurring cycle such as daily demand at a restaurant or annual demand at a tourist resort. Note that ‘each of these components is stochastic in nature and the underlying value can change over time (e.g. trend could switch from positive to negative). Using exponential smoothing. cach component is tracked and the results are combined to obtain a forecast. We begin our study of time series models with the simple N-period moving average. N-Period Moving Average Sometimes, observations that ate made over a period of time appear to have @ random pattern; consequently, we do not feel confident in basing forecasts on them, Consider the data in Table 14.2 for a 100-room hotel in a college town. We have decided to forecast ‘only Saturday occupancy because the demand for each day of the week is influenced by ifferent forces. For example, on weekdays, demand is generated by business travelers, but weekend guests often are people on vacation or visiting friends. Selection of the forecasting period is an important consideration and should be based ‘on the nature of the demand and the ability to use that information. For example, fast-food restaurants forecast demand by the hour of the day. The hotel owner has noted increased occupancy for the past two Saturdays and wishes to prepare for the coming weekend (i.c., September 12), pethaps by discontinuing the practice of offering discount rates. Do the higher occupancy figures indicate a change in Saturday Period ‘Occupancy Moving Average Forecast Aug 1 1 78 8 2 34 15 3 33 22 22 4 a1 33 82 29 5 98 87 33 Sept. 5 6 100 93 37 12 7 93Chapter 14 Farecaing Demand for Senices 409 the underlying average occupancy? To answer this question, we need a way of taking out the “noise” of occasional blips in the pattern so that we do not overreact to a change that is random rather than permanent and significant. ‘The N-period moving-average method can be used in this simple example to smooth out, random Variations and produce a reliable estimate of the underlying average occupancy. ‘The method calculates a moving average MA, for period f on the basis of selecting N of the ‘most recent actual observations 4,, as shown in equation (2) Art Apay + Apt Aywet N IC we select V equal to 3, then we cannot begin our calculation until period 3 (ie,, August 15), at which time we add the occupancy figures for the three most recent Saturdays ({e., August 1, 8, and 15) and divide the sum by 3 to arrive at a three-period ‘moving average of {(83 + 84 + 79)/3] = 82. We use this value to forecast occupancy for the following Saturday (ie., August 22). The moving-average forecast has smoothed out the random fluctuations to track better the average occupancy, which then is used to fore- ‘cast the next period. Each three-petiod moving-average forecast thus involves simply adding the three most recent occupancy values and dividing by 3. For example, to arrive at the ‘moving average for August 22, we drop the value for August 1, add the value for August 22, and recalculate the average, getting 83. Continuing this iterative process for the remaining ‘data, we see how the moving-average occupancy of approximately 82 percent for Saturdays in August has increased recently, reflecting the near-capacity occupancy of the past two ‘weekends. Ifthe local college football team, after playing two consecutive home games, is scheduled for an away game on September 12, how confident are you in forecasting next Saturday's occupancy at 93 percent? ‘Although our N:period moving average has identified a change in the underlying aver- age occupancy, this method is slow to react because old data are given the same weight (ie, JN) as new data in calculating the averages. More recent data might be better indicators of change; therefore, we might wish to assign more Weight to recent observations. Rather than arbitrarily assigning weights to our moving-average data to fx this shortcoming, we instead will use a more sophisticated forecasting method that systematically ages the data. Our next topic, exponential smoothing, also can accommodate trends and seasonality in the data MA, @ Simple Exponential Smoothing ‘Simple exponential smoothing is the time series method most frequently used for demand forecasting. Simple exponential smoothing also “smooths out” blips in the data, but its power over the N-period moving average is threefold: (1) old data never are dropped or lost, (2) older data are given progressively less weight, and (3) the calculation is simple and requires only the most recent data. Simple exponential smoothing is based on the concept of feeding back the forecast error to correct the previous smoothed value. In equation (3) below, S, is the smoothed value for period 1,4, is the actual observed value for period 1, and « is a smoothing constant that usually is assigned a value between 0.1 and 0.5. $= 5,14 ald, - 5.1) @ The term (4, ~ S,-.) represents the forecast error because itis the difference between the actual observation and the smoothed value that was calculated in the prior period, A fraction « ofthis forecast error is added to the previous smoothed value to obtain the new smoothed value S,, Note how selfcorrecting this method is when you consider that fore- cast errors can be either positive or negative. ‘Our movingaverage analysis of the occupancy data in Table 14.2 indicated an actual increase in average occupancy over the two most recent Saturdays. These same occu pancy data are repeated in Table 14.3, with the actual value for each period (4,) shown in the third column. Using simple exponential smoothing, we will demonstrate again that a significant change in the mean occupancy has occurred,410 Part Four Quantatne Modelo Service Managment TABLE 14.3. Simple Exponent Because we must start somewhere, let the first observed, or actual, value 4, in a series of data equal the first smoothed value 5, Therefore, as Table 14.3 shows, S; for August 1 ‘equals 4, for August 1, or 79.00, The smoothed value for August 8 (S;) then can be derived from the actual value for August 8 (4;) and the previous smoothed value for August I (Si) according to equation (3), We have selected an a equal to 0.5 because, as will be shown later, this results in a forecast that is similar to the one obtained using a threeperiod ‘moving average, For August 8 Se 1 + a(4: — $4) = 79.00 + 0.5(84 ~ 79.00) 1.50 Similar calculations then are made to determine the smoothed values (Sy, Ss, Ss, Ss) for successive periods. Simple exponential smoothing assumes that the pattern of data is distributed about a constant mean. Thus, the smoothed value calculated in period ris used as the forecast for period (+ 1) rounded to an integer, as shown below Fre S; @) Our best estimate for August 15 occupancy will be 81.50, the most recent smoothed value at the end of August 8, Note that the forecast error (84 — 79) was a positive 5 (e., we underestimated demand by 5), and that one-half of this error was added to the previous smoothed value to increase the new estimate of average occupancy. This concept of error feedback to correct an earlier estimate is an idea borrowed from control theory. ‘The smoothed values shown in Table 14.3 were calculated using an a value of 0.5. As noted, however, if we wish to make the smoothed values less responsive to the latest data, we ‘can assign a smaller value to o. Figure 14.1 demonstrates graphically how an « of 0.1 and of 0,5 smooth the curve of the actual values, We can see easily in this figure that the smoothed ‘curve, particularly with an « of 0.5, has reduced the extremes (i... the dips and peak) and responded to the increased occupancy in the last two Saturdays, Therefore, basing forecasts ‘on smoothed data helps to prevent overreacting to the extremes in the actual observed values, Equation (3) can be rewritten as follows: $= ala) +1 aS. 6) ‘The basis for the name “exponential smoothing” can be observed in the weights that are siven past data in equation (5), We see that 4, is given a weight «in determining 5, and we casily can show by substitution that 4, is given a weight a(1 — a). In general, actual value Aqcy is given a weight a(1 — a)°, as Figure 14,2 shows by graphing the exponential decay Soothing: Saturday Hotel Occupancy (c= 0.5) Saturday Aug. 1 15 22 29 Sept 5 Actual Smoothed Absolute Squared Period Occupancy -Value.-—Forecast_ = Error. «Error, Error t A Ss Fe AF [Arm Fl Arm Fa? 1 79 79.00 2 34 81.50 79 5 5 25 6 3 33 32.25 82 1 1 1 1 4 a 21.63 2 = 1 1 1 5 98 39.81 32 16 16 256 18 6 100 94.91 80 10 10 4100 10 Total 31 33 383 34 Forecast CFE = MAD MSE MAPE Ener 31 66 768 68FIGURE 14.1 ‘Simple Exponential ‘Smoothing: Saturday Hotel ‘Occupancy (a= 0.1 and @=05) FIGURE 14.2 Distribution of Weight ‘Given Past Datain Exponential Smoothing (a=02) Chapter 14 Freeing Demand for Services 411 Catlett Satine jailer ‘Age of observation Petog old) of weights given a series of observations over time, Note that older observations never disappear entirely from the calculation of S, as they would when the N-period moving average is used, but they do assume progressively decreasing importance, Forecast Error Although itis obvious in Figure 14.1 that the forecast curves have smoothed out the peaks and valleys of the actual data, albeit with some lag, how do we measure the accuracy of forecasts? First, we should expect an unbiased forecast with respect to its tracking of the actual mean for the data. Thus, the sum of the forecast errors should tend toward zero, taking into account both positive and negative differences. If it does, then we should look for underlying trends or seasonality and aecount for them explicitly. We use equation (6) and the results shown in Table 14.3 to calculate the cumulative forecast error (CFE) to be 31. Dita F) (6) ‘The most commonly used measure of forecast error is mean absolute deviation (MAD) calculated using equation (7). In Table 14.3, the mean absolute deviation is 6.6. We will continue to use MAD, which gives equal weight to each error, as our measure of forecast error throughout the remainder of the chapter. (Cumulative Foreast Error (CFE} ‘Mean Absolute Deviation (MAD) = — 7-14, ~ | ” If large errors are particularly serious, squaring the error will give them more weight. ‘The mean squared error (MSE) for the results in Table 14.3 is calculated using equation (8) and results in a value of 76.6, which reflects the large errors in periods 5 and 6. @) ‘Mean Square412 Port Four Quantatne Modelo Service Management ‘Mean absolute percentage error (MAPE) is used when etrors need to be put into perspective, For example, an absolute error of 2 in a forecast of 10 is huge relative to an absolute error of 2 for a forecast of 1,000, which is insignificant, For the data in Table 14.3, using equation (9) results in an acceptable MAPE of 6.8, ‘Mean Absolute Percentage Error (MAPE) (100) (9) ly, Al a Recall that the forecast values in tis example were derived from smoothed values ea culated with «= 0.5, because this method is similar to-a three period movingaverage method. For the thee period movingaverege forecast developed earl. the MAD value i$ 97 In this ease, simple exponential smoothing resulted in more accurate forecasts than the corresponding three period movingaverage method. If an w of 0.1 is used, howevel the MAD value i 88, reflecting the unresponsiveness to change of e small smoothing constant. Note tat selecting an «to minimize MAD fora set of data can be accomplished ting Fxeel Solver. This positive value of 31 for CFE suggests that an upwatd trend exists in the date and that our simple exponential smoothing forecasts are falling short of actual hotel occu- pancy. Thus, we must ineorporate a trend adjustment into our forecast. Fist however, ‘we will show the corresponding relationship between a (exponential smoothing constant) and N (oumber of periods in a moving average) Relationship Between a and N Selecting the value for « is a matter of judgment, often based on the pattern of histori- cal data, with large values giving much weight to recent data in anticipation of changes. To help select «, a relationship can be made between the number of periods Nin the ‘moving-average method and the exponential smoothing constant a. If we assume that the ‘two methods are similar when the average ages of past data are equal, then the following relationship results: Moving average: (+1424 N-) Average age Exponential smoothing: Average age = O(a) + M(ay( — a) + 2a) — a)? + a2) ‘The average age for exponential smoothing is a geometric series with the sum equal to a When the average ages for exponential smoothing and moving average are equated, the result is fora=a and p=l-a 2 ye tow wep z Using this relationship results in the following sample values for equating a and N: « 00s | 04 02 03 oa os 0.667 N 39 19 2 87 4 3 2Exponential Smoothing ith Trend Adjustment: ‘Commuter Airtne Load Chapter 14 Forecasting Demand for Serices 413, As shown, the usual assignment of a smoothing value between 0.1 and 0.5 is reason- able when compared with the number of periods in an equivalent movingaverage forecast ‘The particular value assigned to c is a trade-off between overreacting to random fluctus- tions about a constant mean and detecting a change in the mean value. Higher values of «are more responsive to change because of the greater Weight that is given to recent data, In practice, the value of « often is selected on the basis of minimizing the forecast error as ‘measured by the mean absolute deviation (MAD). Exponential Smoothing with Trend Adjustment ‘The trend in a set of data is the average rate at which the observed values change from one period to the next over time. The changes created by the trend can be treated using an extension of simple exponential smoothing. Table 14.4 follows the experience of a new commuter airline during its first eight weeks of business. The average weekly load factors (ie, percentages of seats sold) show a steady increase, from approximately 30 percent for week 1 to approximately 70 percent for week 8. In this example, the smoothed value 5, is calculated using equation (10), which is ‘equation (5) modified by the addition of a trend value 7, to the previous smoothed value ‘S,-; to account for the weekly rate of increase in the load factor. S,=a(A) + (1 @\(S,-1+T.-) (10) ‘To incorporate a trend adjustment in our calculation, we will use # as a smoothing ‘constant. This constant usually is assigned a value between 0.1 and 0.5 and can be the same as, or different from, a. The trend for a given period r is defined by (S;— S,-1), the rate of change in smoothed value [rom one period to the next (ie, the slope of the demand curve). The smoothed trend 7; then is calculated at period 1 using equation (11), ‘which is a modification of the basic exponential smoothing equation—equation (5)-with the observed trend (S,~ S;-,) used in place of 4, T, (S,- S40 - OT ay To anticipate cash flows during the business startup period, the commuter airline owners are interested in forecasting future weekly load factors. After observing the first ‘two weeks of activity, you are asked to provide a forecast for week 3. The smoothed values, ‘trend figures, and forecasts in Table 14.4 are calculated in a stepwise manner. For the first observation in a series, week | in this instance, the smoothed value S) is equal to the actual value 4,, and the trend 7; is set equal to 0.00. The forecast for week 2 is calculated using equation (12). In this case, Fy = 31 + 0.00 = 31 rounded to an integer. Fr sS4T (12) Actual Load Smoothed —--Smoothed Forecast Week Factor Value Trend Forecast Error t A s ™ F \ae- Fl 1 4 31.00 0.00 2 40. 3550 1.35 31 8 3 43 39.93 227 37 6 4 52 47.10 374 42 10 5 49 49.92 347 51 2 6 64 58.69 5.06 53 " 7 se soa 420 64 6 8 68 6654 463 65 3 MAD 6.7414 Port Four Quantatne Modelo Service Managment FIGURE 14.3 Exponential Smoothing vith Trend Adjustment: ‘Commuter Aitine Load Factors (a = 0.5, p=0a) ‘To compute the smoothed values for week 2 and a forecast for week 3, we will use a 0.5 and f = 0.3. First, the smoothed value 5; for week 2 is calculated using equation (6): Sy = (0.5)(40) + (1 — 0.5)(31 + 0.00) 5.50 Now, we caleulate the trend for week 2 with equation (7) T, = (0.3)(35.50 — 31.00) + (1 —0.3)0.00 = 135 ‘The final step is to make a forecast for week 3 according to equation (8): Fy = 35.5 + 1.35 = 36.85 = 37 ‘When the actual data forthe following weeks are received, similar calculations can be ‘made for the smoothed value, the trend, the forecast, and the forecast error. For all of the forecasts shown in Table 144, the MAD is 6.7. The sum of the forecast error values (both positive and negative) is a measure of fore- cast bias. For this example E(4,— F,) = 9 + 6 + 10-2 + 11-6 +3 = 31. The sum of the forecast errors for an unbiased forecast should approach zero (ic.. the positive and negative errors cancel out each other). In Figure 14.3, the actual load factors are plotted against the forecasts. Note, that even with trend adjustment the forecast has lagged actual except for weeks 5 and 7. Exponential Smoothing with Seasonal Adjustment ‘To account for seasonal effects on a set of data, we can use another extension of simple ‘exponential smoothing. In simplest terms, we first remove the seasonality from the data and then smooth those data as we already have learned; finally, we put the seasonality back in to determine a forecast, ‘We will apply this seasonal adjustment to the data in Table 14.5, which reports the number of passengers per month taking a ferry to a resort island in the Caribbean for the years 2019 and 2020. In general, we denote a cycle Z. as the length of one season. L ‘may be any length of time, even the 24 hours of a day, but frequently, asin this case, itis 12 months. Note that we must have actual data for at least one full season before we can begin smoothing and forecasting calculations. ‘A seasonality index I, is used to deseasonalize the data in a given cycle L. Initially, is estimated by calculating a ratio of the actual value for period 1, A, divided by the average value A for all periods in cycle Las shown in equation (13) A a I (13) where T= (A) +4, +.--AQIL _. In our passenger ferry example, A = 1,971.83 (average passengers per month for 2019), ‘and by substituting this value into equation (13), we can caleulate the index J, for each o 0 30 0TABLE 14.5 Exponential Smoothing with Seasonal Adjustment: Ferry Passengers Taken t0 Chapter 14 Forecasting Demand for Serces 415 Actual Smoothed Fore: Forecast Passengers Value. = Index. cast Error Period t A s. h Fe lA Fil 2019 January 1 1.651 = 0.837 = February 2 1,305, = 0.662 - March 3 1617 = 0.820 = April 4 aya = 0873 - May 5 2015 - 1.022 - June 6 2,297 = 4.165 = July 7 2,606 = 4.322 - August 8 2,687 - 1.363 = Seotember 9 2,292 = 4.162 - October 10 1981 - 1.008 - November 11 1,696 S 0.860 = December 12 1794 1,794.00 0910 2020 January 13 1,806, 186674 0876 = _ February 14 17 201635 0721 1,236 495 March 15 1733 203576 0.828 1,653 30 April 16 1,904 206481 0.888 1,777 127 May 7 2,036 205028 1013 2,110 74 June 18 2560 207971 1.185 2,389 m1 July 19 2679 206906 1314 «2,749 70 August 20 2821 2,068.19 1.363 2,820 1 September 21 2359 2.06138 1.157 2,404 45 October 22 2,160 207885 1015-2072 38 November 23 1,302 208223 0.862 1,788 1“ December 24 1,853 2,073.04 0.905 1,895 42 MAD 110 period in the first season of 12 periods. The resulting indices for the months of 2019, which are shown in column $ of Table 14.5, then are used to deseasonalize the data for the corresponding months in 2020 according to equation (14), which is a minor modification ‘of our basic exponential smoothing equation-equation (5)-with A, adjusted to account for seasonality using index J, 4, += aS, (14) For this example, data for the 12 months in 2019 are used to give initial estimates of the seasonality indices. Therefore, we cannot begin to calculate new smoothed data until period 13 (ie., January 2020). To begin the process, we assume that Sy: equals 4y:, ‘as shown in Table 14.5 with a value of 1,794.00, The smoothed value for January 2020 now ‘can be calculated using equation (14), with /,_z = 0.837 (ie., the index J, of 12 months ago for January 2019) and a = 0.2: ag + (1 = 0.2)1,794.00 = 1,866.74416 Port Four Quantatne Modelo Service Management ‘The forecast for February (period # + 1) then is made by seasonalizing the smoothed value for January according to the following formula Fis = (SMh-n4) (15) ‘Note that the seasonalizing factor J,_; in this case is the index J, for February 2019. ‘Therefore, our forecast for February 2020 is 1,866.74)(0.662) 235.78 = 1236 Fu Ifthe seasonality indices are stable, forecasts that are based on only one eyele, J, will be reliable. If, however, the indices are not stable, they can be adjusted, or smoothed, as new data become available. After calculating the smoothed value 5, for an actual value 4, at the most recent period 1, we can denote a new observation for a seasonality index at period fas, (AJS). To apply the concept of exponential smoothing to the index, we use a new constant y, Which usually is assigned a value between 0.1 and 0.5. The smoothed estimate of the seasonality index then is calculated from the following formula: A Gt Mae (16) ‘Now, we can continue the calculations for 2020 in Table 14.5 by using equation (16) to update the seasonality indices for each month for future use. Remember, however, that in actual practice, smoothed values, indices, and forecasts for each period (i.e., month) in this new season of L. periods would be calculated on a month-to-month basis as the ‘most recent actual values became available. Here, according to equation (16), the new smoothed seasonality index for January 2020, 13, using y = 0.3 is 1,806 1866.74 ‘The MAD for February through December 2020 is 110, which indicates a very good {it of forecasts to actual data that exhibit a definite seasonality Is it possible, however, (0 make even more accurate forecasts? Ty 3 + (1 = 0.3)0.867 = 0.876 Exponential Smoothing with Trend and Seasonal Adjustments ‘The answer to the earlier questionIs it possible to make even more accurate forecasts? is yes (sometimes). In some cases, adjusting only for trend or seasonality will provide the current best estimate of the average; in other cases, the forecast can be improved by ‘considering all factors together. We can include both trend and seasonal adjustments in exponential smoothing by weighting a base smoothed value with trend and seasonal indices to forecast the following period. The appropriate equations are Saf 6-96.44 72) “7 MS,— 5.1) +0 OT (3) fart sd- Phen (19) Fas = Ge Totes 20) The values in Table 14.6 shown in bold are the result of Excel formulas. Table 14.7 contains the formulas for February 2020 shown on line 20 of Table 14.6. These formulas are automatically repeated for lines 21 through 30 using the copy command in Excel. Note the use of SBS1, $BS2, and $BS3 to freeze the cell reference to the smoothing parameters (alpha, beta, gamma) when the formulas are copied. This feature allows one to change these parameters and recalculate the forecasts to find the values for a, f, and y that(Chapter 14 Fivcating Demand or Sees 417 TALE 14.6 Exponential Smoothing with Seasonal and Trend Adjustments: Excel Spreadsheet Iustraton Ferry Passengers Taken to. Resort Island (alpha = 0.2, beta = 0.2, gamma = 0:3) A 8 c > E F s H 1 ‘alpha 02 2 beta 02 3 gamma | 0.3 4 Actual | Smethed Trend | Index__|‘Forecast Error 5 Period t A s. t 4 Fi lA 6 2019-2020 7 January 1 | 1,651 0.837 a February 2 | 1,305 0.662 2 March 3 | 1617 0.820 10 April 4 | 1721 0.873 4 May 5 | 2015 1.022 2 June 6 | 2.297 1.165 1B Jay 7_| 2.606 1.322 14 August 8 | 2.687 1.363 15 | September | 9 | 2,292 4.162 16 October | 101,981 1.005 17 | November | 11_| 1,696 0.860 18 | December 121,794 41,794.00 0.00 | 0810 19 January | 13 | 1,806 1266.74 | 1455 | 0.876 20 February | 14 | 1,731 202799 | 43.89 | 0.719 | 1,245 486 24 March 151,733 2,080.19 | 4555 0.824 1,699 34 22 Apel 16 | 1,904 2,136.79 | 47.76 0878 | 1,856 48 23 May 17_| 2,036 2,146.07 | 40.07 | 1.000 | 2,233 197, 24 June 18 | 2,560 2tge39 | 4052 | 1166 | 2.547 3 25 July 19 | 2.679 2,198.42 | 32.42 1293 | 2.947 268 28 August | 20 | 2,821 219061 | 26.37 | 1340 | 3,027 206 27 | September 212,359 217961 | 1890 1.138 2.576 217 28 22 | 2.160 2,188.66 | 1693 | 1.000 | 2.210 50. 29 23 | 1,802 2.18354 1252 0.850 | 1,897 95 30 24 | 1.853 2,164.10 613 0894 | 1,998 145 3 32 MAD 160 TABLE 14.7 Febrary 2020 Excel cell Value Formula Excel Representation Formulas Found p20 2027.98 an =C20/F8 "$BS1+ (1 ~ $BS1)(019 + E19) In Table 14.6 £20 43.89 (13) =$8$2"(D20 - 019) + (1 $Bs2yE19 F20 0719 09) =$8$3°C20/020 + (1 - $B$1y FB. 620 1245 20) =(019 -E19yF H20 486 = =ABS(620 - C20)418 Port Four Quantatne Modelo Service Management FIGURE 14.4 Exponential Smoothing vith Seasonal Adjustment ‘Trendline seasonal adjustment (an 02,8 =02,y=03) ‘Seatonal adsimentoniy (@=02,7=03) ras 4s 67 8 9 WD san, Dee Monts ‘minimize MAD. The resulting MAD of 160 tells us that, in this case, we have not gained any improvement in our forecast by adding a trend adjustment to the seasonal adjustment used in Table 14.5, Figure 14.4 demonstrates graphically the results of treating the actual data with a seasonal adjustment only, and with both seasonal and trend adjustments, Summary of Exponential Smoothing Exponential smoothing is a relatively easy and straightforward way to make shortterm forecasts. This forecasting process has many attributes, including: © All past data are considered in the smoothing process. + Recent data are assigned more weight than older data + Only the most recent data are required to update a forecast + The model is easy to implement on a personal computer using spreadsheet software + Smoothing constants allow us to alter the rate at which the model responds to changes in the underlying pattern in the data Summary Decisions to embark on a new service concept often require subjective judgments about the future needs of customers. Subjective models like the Delphi method allow a panel of experts to defend their positions concerning the future and, through a number of itera- tions, these experts approach a consensus. Regression models have found application in service location analysis because of the need to account for several independent variables that contribute to demand generation. We ended our discussion of forecasting with an ‘examination of time series models. Although the movingaverage method is straightfor- ward, we discovered that exponential smoothing has many superior qualities and has found wide acceptance in practice. Accounting for trends and seasonality is an important feature in forecasting service demand and is accommodated easily by means of exponen- tial smoothing.