FORECASTING

Part-4
Dr. A NOORUL HAQ
Contents:

Forecasting Techniques
- Single Exponential Smoothing

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Single Exponential Smoothing
• The most frequently used forecasting method is Single
Exponential Smoothing because of its simplicity.
• And the small amount of data needed to support it.
• This method is called single exponential smoothing because only
the average of the series is estimated.
• The basic argument of exponential smoothing is that recent
demand should have more weight than earlier one in computing
the average for forecasting purposes.

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• However, single exponential smoothing requires only 3 pieces of
data.
- Average for the last period
- Demand for this period
- A smoothing parameter, alpha (α)
• An average of past demand at the end of current period is
calculated.
• It is used as a forecast for the next period.
• Much data is not needed to make the forecast.
• Amount of emphasis given to the most recent demand and
can be adjusted by simply adjusting the smoothing parameter. 4
• Equations for the average of the demand series and the forecast
using exponential smoothing are;
Average, At = αDt + (1-α) (At-1)
Forecast, F(t+1) = At
where, α = smoothing parameter with a value between 0 and 1.
• Larger values of α emphasis recent demand and
• Result in forecast that are more responsive to changes in the
average.
• Smaller values of α treat past demand more uniformly and
results in more stable forecast.
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• Exponential smoothing gets its name from the nature of the
weights placed on each successive demand used to compute the
average.
• The following are the general expression for the weights to be
placed.
At = αDt + (1-α) (At-1)
For t=1,
A1 = αD1 + (1-α) (A0)
where α+(1-α) =1
(sum of the weights is always equal to 1)

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For t =2,
A2 = αD2 + (1-α) (A1)
= αD2 + (1-α) [αD1 + (1-α) (A0)]
= αD2 + α (1-α) D1 + (1-α)2 (A0)

where, α + α(1-α) + (1-α)2 = α +( α- α2) +1-2α + α2

= α + α - α2 +1 - 2α + α2
=1

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for t=3,
A3 = αD3 + (1-α) (A2)
= αD3 + (1-α) [αD2 + α (1-α) D1 + (1-α)2 (A0)]
= αD3 + α (1-α)D2 + α (1-α)2 D1+(1-α)3 (A0)

where, α + α - α2 + α (1 - 2α + α2) + …… = 1

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Therefore, the weights for the demands at the different period is,

Numerical weights for,

Demand Weight α =0.1 α =0.2 α =0.8
Dt α 0.100 0.200 0.8000
Dt-1 α (1- α) 0.090 0.160 0.1600
Dt-2 α (1- α)2 0.081 0.128 0.0320
Dt-3 α (1- α)3 0.073 0.102 0.0064
Dt-4 α (1- α)4 0.066 0.082 0.0013
Dt-5 α (1- α)5 0.059 0.066 0.0003

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• Similar to the WMA method, the sum of the weights must be
equal to 1.
• This is implicit in the single exponential smoothing equation.
• In order to use the single exponential smoothing method, an
initial value for the average is needed.
• One recommended practice is the simple average of the most
recent ‘N’ observation as the initial value.
• When no demand history is available, initial value is made equal
to a subjective prediction of the average.
• Based on the judgement of marketing people.
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Problem 1:
A firm uses single exponential smoothing with α = 0.2 to forecast the demand.
The initial value for the average is 480. Forecast the demand for the month of
January for the next year. The demand data is given in the following table.

Month Actual
demand
t Dt
March 460
April 510
May 520
June 495
July 475
August 560
September 510
October 520
November 540
December 550 11

January -
Solution 1:

Month Actual Average Forecast

demand
t Dt At Ft+1
March 460 476 -
April 510 483 476
May 520 490 483
June 495 491 490
July 475 488 491
August 560 502 488
September 510 504 502
October 520 507 504
November 540 514 507
December 550 521 514
January - - 521 12
Problem 2:
A firm uses single exponential smoothing with α = 0.2 to forecast the demand.
The initial value for the average is 400 units. Forecast the demand for the week
8. The demand data is given in the following table.

Week Actual
demand
t Dt
Week-1 450
Week-2 460
Week-3 465
Week-4 434
Week-5 420
Week-6 498
Week-7 462
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Solution 2:

Week Actual Average Forecast

demand
t Dt At Ft+1
Week-1 450 410 -
Week-2 460 420 410
Week-3 465 429 420
Week-4 434 430 429
Week-5 420 428 430
Week-6 498 442 428
Week-7 462 446 442
Week-8 446

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• Single exponential smoothing has the advantages of simplicity
and minimal data requirement.
• It is inexpensive to use and,
• Therefore it is attractive to firms that makes a lot of forecast
each time period.
• But the simplicity is also a disadvantage when the average is
changing as in the case of a demand series with a trend.

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END

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