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• Naïve Approach
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• Moving Averages s
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• Exponential Smoothing e-Se
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• Trend projection del
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• Linear Regression socia
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Exponential Smoothing Method
• Form of weighted moving average
– Weights decline exponentially
– Most recent data weighted most
• Requires smoothing constant ()
– Ranges from 0 to 1
– Subjectively chosen
• Involves little record keeping of past
data
Exponential Smoothing
New forecast =
previous forecast+ (previous actual -
previous)
Ft = Ft-1 + (At-1 - Ft-1)
or:
where Ft = new forecast
Ft-1 = previous forecast
= smoothing constant
At-1 = previous period actual
Exponential Smoothing
Equations
• Ft = At - 1 + (1-)At - 2 + (1- )2·At - 3
+ (1- )3At - 4 + ... + (1- )t-1·A0
– Ft = Forecast value
– At = Actual value
– = Smoothing constant
Forecast Effects of
Smoothing Constant
Ft = At - 1 + (1- ) At - 2 + (1- )2At - 3 + ...
Weights
= Prior Period 2 periods ago 3 periods ago
(1 - ) (1 - )2
= 0.10
10% 9% 8.1%
= 0.90
90% 9% 0.9%
Table 5.4
Exponential Smoothing with Trend Adjustment
Select to minimize:
Σ | forecast errors |
Mean Absolute Deviation = MAD
n
Σ(forecasterrors) 2
Mean Square Error = MSE
n
Ŷ a bX
where
Ŷ computed value
of the variable to
be predicted
(dependent variable)
a Y - axis intercept
XY - nXY
b
X 2 nX 2
Trend Projections
Graph: Actual vs Fitted Line
100
90
Trend Line 89
85
80 78
74
Yield (%)
70 70
66
61
60
54
51
50
45
Actual demand line
40
100 110 120 130 140 150 160 170 180 190
Tem p (Deg C)