Chapter 4
Class 2
Exponential Smoothing
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
last period’s forecast
+ a (last period’s actual demand
– last period’s forecast)
Ft = Ft – 1 + a(At – 1 - Ft – 1)
where Ft = new forecast
Ft – 1 = previous forecast
a = smoothing (or weighting)
constant (0 a 1)
Exponential Smoothing Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant a = .20
New forecast = 142 + .2(153 – 142)
= 142 + 2.2
= 144.2 ≈ 144 cars
Problem 4.4
A check-processing center uses exponential
smoothing to forecast the number of incoming
checks each month. The number of checks received
in June was 40 million, while the forecast was 42
million. A smoothing constant of .2 is used.
A) What is the forecast for July?
B) If the center received 45 million checks in July,
what would be the forecast for August?
C) Why might this be an inappropriate forecasting
method for this situation?
Problem 4.4
A) What is the forecast for July?
B) If the center received 45 million checks in July, what would be the
forecast for August?
C) Why might this be an inappropriate forecasting method for this
situation?
Problem 4.18
Consider the following actual (At) and forecast (Ft) demand
levels for a product.
The first forecast, F 1 , was derived by observing A 1 and
setting equal to A 1 . Subsequent forecast averages were
derived by exponential smoothing. Using the exponential
smoothing method, find the forecast for time period 5
Problem 4.18
We need to find the smoothing constant .
We know in general that Ft = Ft–1 + (At–1 – Ft–1); t = 2, 3, 4.
Choose either
t = 3 or t = 4 (t = 2 won’t let us find because F2 = 50 = 50 + (50 – 50)
holds for any ).
Let’s pick t = 3. Then F3 = 48 = 50 + (42 – 50)
or 48 = 50 + 42 – 50
or –2 = –8
So, .25 =
Now we can find F5 : F5 = 50 + (46 – 50)
F5 = 50 + 46 – 50 = 50 – 4
For = .25, F5 = 50 – 4(.25) = 49
The forecast for time period 5 = 49 units.
Common Measures of Error
Mean Absolute Deviation (MAD)
∑ |actual - forecast|
MAD =
n
Mean Squared Error (MSE)
∑ (forecast errors)2
MSE =
n
Common Measures of Error
Mean Absolute Percent Error (MAPE)
n
100 ∑ |actuali - forecasti|/actuali
MAPE = i=1
n
Comparison of Forecast Error
Rounded Absolute Rounded Absolute
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded a = .10 a = .10 a = .50 a = .50
1 180 175 5 175 5
2 168 176 8 178 10
3 159 175 16 173 14
4 175 173 2 166 9
5 190 173 17 170 20
6 205 175 30 180 25
7 180 178 2 193 13
8 182 178 4 186 4
84 100
Comparison of Forecast Error
∑ |deviations|
Rounded Absolute Rounded Absolute
MAD =
Actual Forecast Deviation Forecast Deviation
Tonage withn for with for
Quarter Unloaded a = .10 a = .10 a = .50 a = .50
1
For a =
180
.10 175 5 175 5
2 168 = 84/8
176 = 10.50 8 178 10
3 159 175 16 173 14
4 For a175
= .50 173 2 166 9
5 190 173 17 170 20
6 205 = 100/8
175 = 12.50
30 180 25
7 180 178 2 193 13
8 182 178 4 186 4
84 100
Comparison of Forecast Error
∑ (forecast
Rounded
errors) 2
Absolute Rounded Absolute
MSE = Actual Forecast Deviation Forecast Deviation
Tonage withn for with for
Quarter Unloaded a = .10 a = .10 a = .50 a = .50
1
For a180
= .10 175 5 175 5
2 168= 1,558/8
176 = 194.758 178 10
3 159 175 16 173 14
4 For a175
= .50 173 2 166 9
5 190 173 17 170 20
6 205= 1,612/8
175= 201.5030 180 25
7 180 178 2 193 13
8 182 178 4 186 4
84 100
MAD 10.50 12.50
Comparison of Forecast Error
n
∑ |deviation
100 Rounded i|/actual
Absolute Rounded
i Absolute
MAPE =Actual i Forecast
=1 Deviation Forecast Deviation
Tonage with
Quarter Unloaded a = .10 n a for
= .10
with
a = .50
for
a = .50
1
a = .10 175
For180 5 175 5
2 168 = 45.62/8
176 = 5.70%
8 178 10
3 159 175 16 173 14
4 a=
For175 .50 173 2 166 9
5 190 173 17 170 20
6 205 = 54.8/8
175 = 6.85%
30 180 25
7 180 178 2 193 13
8 182 178 4 186 4
84 100
MAD 10.50 12.50
MSE 194.75 201.50
Comparison of Forecast Error
Rounded Absolute Rounded Absolute
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded a = .10 a = .10 a = .50 a = .50
1 180 175 5 175 5
2 168 176 8 178 10
3 159 175 16 173 14
4 175 173 2 166 9
5 190 173 17 170 20
6 205 175 30 180 25
7 180 178 2 193 13
8 182 178 4 186 4
84 100
MAD 10.50 12.50
MSE 194.75 201.50
MAPE 5.70% 6.85%
Problem 4.14
following are two weekly forecasts made by two different
methods for the number of gallons of gasoline, in thousands,
demanded at a local gasoline station. Also shown are actual
demand levels in thousands of gallons:
What are the MAD and MSE for each method?
Problem 4.14
What are the MAD and MSE for each method?
Method 1: MAD: (0.20 + 0.05 + 0.05 + 0.20)/4 = .125
MSE : (0.04 + 0.0025 + 0.0025 +
0.04)/4 = .021
Method 2: MAD: (0.1 + 0.20 + 0.10 + 0.11) / 4 = .1275
Exponential Smoothing with
Trend Adjustment
When a trend is present, exponential
smoothing must be modified
Forecast exponentially exponentially
including (FITt) = smoothed (Ft) + (Tt) smoothed
trend forecast trend
Exponential Smoothing with
Trend Adjustment
Ft = a(At - 1) + (1 - a)(Ft - 1 + Tt - 1)
Tt = b(Ft - Ft - 1) + (1 - b)Tt - 1
Step 1: Compute Ft
Step 2: Compute Tt
Step 3: Calculate the forecast FITt = Ft + Tt
Exponential Smoothing with
Trend Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17
3 20
4 19
5 24
6 21
7 31
8 28
9 36
10
Table 4.1
Exponential Smoothing with
Trend Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17
3 20
4 19
5 24 Step 1: Forecast for Month 2
6 21
7 31 F2 = aA1 + (1 - a)(F1 + T1)
8 28
9 36 F2 = (.2)(12) + (1 - .2)(11 + 2)
10 = 2.4 + 10.4 = 12.8 units
Table 4.1
Exponential Smoothing with
Trend Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17 12.80
3 20
4 19
5 24 Step 2: Trend for Month 2
6 21
7 31 T2 = b(F2 - F1) + (1 - b)T1
8 28
9 36 T2 = (.4)(12.8 - 11) + (1 - .4)(2)
10 = .72 + 1.2 = 1.92 units
Table 4.1
Exponential Smoothing with
Trend Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17 12.80 1.92
3 20
4 19
5 24 Step 3: Calculate FIT for Month 2
6 21
7 31 FIT2 = F2 + T1
8 28
9 36
FIT2 = 12.8 + 1.92
10 = 14.72 units
Table 4.1
Exponential Smoothing with
Trend Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17 12.80 1.92 14.72
3 20 15.18 2.10 17.28
4 19 17.82 2.32 20.14
5 24 19.91 2.23 22.14
6 21 22.51 2.38 24.89
7 31 24.11 2.07 26.18
8 28 27.14 2.45 29.59
9 36 29.28 2.32 31.60
10 32.48 2.68 35.16
Table 4.1
Exponential Smoothing with
Trend Adjustment Example
35 –
Actual demand (At)
30 –
Product demand
25 –
20 –
15 –
10 –
Forecast including trend (FITt)
5 –
0 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Time (month) Figure 4.3
Problem 4.19
Income at the law firm of Smith and Wesson for the period
February to July was as follows:
Month FEB MAR APR MAY JUNE JUL
Income 70.0 68.5 64.8 71.7 71.3 72.8
(In $ thousand)
Use trend-adjusted exponential smoothing to forecast the
law firm’s August income. Assume that the initial forecast for
February is $65,000 and the initial trend adjustment is [Link]
smoothing constants selected are α = 0.1 and β =0.2
Problem 4.19
Trend Projections
Fitting a trend line to historical data points to
project into the medium-to-long-range
Linear trends can be found using the least
squares technique
^
y = a + bx
^ where y = computed value of the variable to be
predicted (dependent variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable
Least Squares Method
Values of Dependent Variable
Actual observation Deviation7
(y value)
Deviation5 Deviation6
Deviation3
Deviation4
Deviation1
Deviation2
Trend line, y =^ a + bx
Time period Figure 4.4
Least Squares Method
Values of Dependent Variable
Actual observation Deviation7
(y value)
Deviation5 Deviation6
Deviation3 Least squares method
minimizes the sum of the
squared errors (deviations)
Deviation 4
Deviation1
Deviation2
Trend line, y =^ a + bx
Time period Figure 4.4
Least Squares Method
Equations to calculate the regression variables
^
y = a + bx
Sxy - nxy
b=
Sx2 - nx2
a = y - bx
Least Squares Example
Time Electrical Power
Year Period (x) Demand x2 xy
1999 1 74 1 74
2000 2 79 4 158
2001 3 80 9 240
2002 4 90 16 360
2003 5 105 25 525
2004 6 142 36 852
2005 7 122 49 854
∑x = 28 ∑y = 692 ∑x2 = 140 ∑xy = 3,063
x=4 y = 98.86
∑xy - nxy 3,063 - (7)(4)(98.86)
b= = = 10.54
∑x2 - nx2 140 - (7)(42)
a = y - bx = 98.86 - 10.54(4) = 56.70
Least Squares Example
Time Electrical Power
Year Period (x) Demand x2 xy
1999 1 74 1 74
2000 2 79 4 158
2001The trend3 line is 80 9 240
2002 4 90 16 360
^
2003 y =5 56.70 + 10.54x
105 25 525
2004 6 142 36 852
2005 7 122 49 854
∑x = 28 ∑y = 692 ∑x2 = 140 ∑xy = 3,063
x=4 y = 98.86
∑xy - nxy 3,063 - (7)(4)(98.86)
b= = = 10.54
∑x2 - nx2 140 - (7)(42)
a = y - bx = 98.86 - 10.54(4) = 56.70
Least Squares Example
Trend line,
160 – y^ = 56.70 + 10.54x
150 –
140 –
Power demand
130 –
120 –
110 –
100 –
90 –
80 –
70 –
60 –
50 –
| | | | | | | | |
1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
Least Squares Requirements
1. We always plot the data to insure a
linear relationship
2. We do not predict time periods far
beyond the database
3. Deviations around the least squares line
are assumed to be random
Problem 4.25
The following gives the number of accidents that occurred
on Florida State Highway 101 during the last 4 months:
Month Number of Accidents
January 30
February 40
March 60
April 90
Forecast the number of accidents that will occur in May,
using least squares regression to derive a trend equation.
Problem 4.25
Problem 4.25
