MANAGERIAL ECONOMICS

Quantitative Methods of
Demand Forecasting
Biplab Sarkar
Department of Management Studies
MANAGERIAL ECONOMICS

Quantitative Methods of Demand

Forecasting 2

Biplab Sarkar
Department of Management Studies
MANAGERIAL ECONOMICS
Quantitative Methods of Demand Forecasting

Smoothing Techniques
Quantitative Methods of
Demand Forecasting

Trend Projection

Barometric Techniques

Econometric Methods
MANAGERIAL ECONOMICS
Smoothing Techniques

Moving Average Method

Smoothing Techniques

Single Exponential Smoothing

Double Exponential Smoothing

Triple Exponential Smoothing

MANAGERIAL ECONOMICS
Single Exponential Smoothing

✓ One of the drawbacks of moving average technique is that

it gives equal weight to all the previous observations used
in forecasting the future value.

✓ This can be overcome by assigning differential weights to

the past observations. One easier way to assign
differential weight is achieved by using single/simple
exponential smoothing technique.

✓ Here, the weights assigned to past data decline

exponentially with the most recent observations assigned
higher weights.
MANAGERIAL ECONOMICS
Single Exponential Smoothing

✓ In single exponential smoothing, the forecast at time (t+1)

is given by:

✓ Parameter α is called the smoothing constant and its value

lies between 0 and 1. Since the model uses one smoothing
constant, it is called single exponential smoothing.
Substituting for Ft recursively, we get

✓ It is evident from the above equation that the weights

assigned to older observations decrease exponentially.
MANAGERIAL ECONOMICS
Single Exponential Smoothing

✓ If we have a time series that can be described using an

additive model with constant level and no trend, no
seasonality, simple exponential smoothing can be used to
make short-term forecasts.

✓ Smoothing is controlled by the parameter alpha (α); for the

estimate of the level at the current time point. The value of
alpha; lies between 0 and 1.

✓ Values of alpha that are close to 0 mean that little weight is

placed on the most recent observations when making
forecasts of future values.
MANAGERIAL ECONOMICS
Single Exponential Smoothing: Problem Solving

Quarter Firm's Actual Forecast with (A-F) (A-F)^2 Forecast with (A-F) (A-F)^2
Market Share (A) alfa = 0.3 (F) alfa = 0.5 (F)
1 20
2 22
3 23
4 24
5 18
6 23
7 19
8 17
9 22
10 23
11 18
12 23
13
MANAGERIAL ECONOMICS
Single Exponential Smoothing: Problem Solving

Year Electricity Forecast with (A-F) (A-F)^2 Forecast with (A-F) (A-F)^2
Consumption (A) alfa = 0.3 (F) alfa = 0.5 (F)
2008 10926
2009 12185
2010 13007
2011 13682
2012 15483
2013 16426
2014 17189
2015 17611
2016 18634
2017 19869
2018 20634
2019 23289
2020 23777
2021
MANAGERIAL ECONOMICS
Double Exponential Smoothing

✓ One of the drawbacks of single exponential smoothing is

that the model does not do well in the presence of trend.

✓ This can be improved by introducing an additional equation

for capturing the trend in the time-series data.

✓ Double exponential smoothing uses two equations to

forecast the future values of the time series, one for
forecasting the level (short term average value) and
another for capturing the trend.
MANAGERIAL ECONOMICS
Double Exponential Smoothing

✓ Level (or Intercept) equation (Lt):

✓ The trend equation is given by (Tt):

α and β are the smoothing constants for level and trend,
respectively, and 0<α<1 and 0<β<1.
✓ The forecast at time t+1 is given by:

Where Lt is the level which represents the smoothed value

up to and including the last data, Tt is the slope of the line
or the rate of increase or decrease at period t, n is the
number of time periods into the future.
MANAGERIAL ECONOMICS
Double Exponential Smoothing

✓ If we have a time series that can be described using an

additive model with increasing or decreasing trend and no
seasonality, we can use Holt’s exponential smoothing to
make short-term forecasts.
✓ Smoothing is controlled by two parameters, alpha, for the
estimate of the level at the current time point, and beta for
the estimate of the slope of the trend component at the
current time point.
✓ The parameters alpha and beta have values between 0 and
1, and values that are close to 0 mean that little weight is
placed on the most recent observations when making
forecasts of future values.
MANAGERIAL ECONOMICS
Triple Exponential Smoothing

✓ Moving averaging, single and double exponential

smoothing techniques discussed so far can handle data as
long as the data do not have any seasonal component
associated with it.

✓ When there is seasonality in the time-series data,

techniques such as moving average, exponential
smoothing, and double exponential smoothing are no
longer appropriate.

✓ Triple exponential smoothing is used when the data has

trend as well as seasonality.
MANAGERIAL ECONOMICS
Triple Exponential Smoothing

✓ Level (or Intercept) equation:

✓ Trend equation:

✓ Seasonal equation:
α,β, and γ are the smoothing constants for level, trend,
and season, respectively, and 0<α<1, 0<β<1, and 0<γ<1. C
is the number of seasons (if it is monthly seasonality, then
c = 12; in case of quarterly seasonality c=4; and in case of
daily data c=7).
✓ The forecast Ft+1 using triple exponential smoothing is
given by:
MANAGERIAL ECONOMICS
Triple Exponential Smoothing

✓ If a time series that can be described using an additive

model with increasing or decreasing trend and seasonality,
Holt-Winters exponential smoothing can be used to make
short-term forecasts.
✓ Holt-Winters exponential smoothing estimates the level,
slope and seasonal component at the current time point.
✓ Smoothing is controlled by three parameters: alpha, beta,
and gamma.
✓ The parameters alpha, beta and gamma all have values
between 0 and 1, and values that are close to 0 mean that
relatively little weight is placed on the most recent
observations when making forecasts of future values.
THANK YOU

Biplab Sarkar
Department of Management Studies
biplabsarkar@pes.edu
+91 80 6666 3333 Extn 337