16-01-2024

BM60116 – Modeling in Operations Management

Forecasting for Operations

Management

Sushil Punia
VGSOM, IIT KGP

Jan-May 2024

Time Series Forecasting

Smoothing Methods
SINGLE (SIMPLE) EXPONENTIAL AVERAGE METHOD

− used to model the stationary time series (mean + random error)

− when demand has no observable trend or seasonality

Period (t+1) forecast = α (demand at time period, t) +

(1 - α)(forecast at time period, t)

Ft+1 = α Xt + (1-α) Ft α = smoothing constant 0< α <1

or, Ft+1 = Ft - α(Ft - Xt) or Ft+1 = Ft - α(et)

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Time Series Forecasting

Smoothing Methods
Year Sales

2010 30

2011 28

2012 32

2013 32

2014 30

2015 31

2016 ?

Time Series Forecasting

Smoothing Methods
SINGLE (SIMPLE) EXPONENTIAL SMOOTHING METHOD
− Parameter is smoothing constant, alpha
• Larger the α , less is the smoothing and higher is the response to the most
recent values.
• For a given historic data, calculate SSE values for various values of α and
pick the value of α that gives the smallest sum of the squared forecast errors.
Initial values:
1) If the changes in the demand are expected to occur early and fast, use starting
demand as initial value.
2) If the demand is at stable at the beginning, then average demand value can be
preferred.

Alpha value of 0.1 and 0.2 are recommended for production planning to get stable
forecasts so that planning will be smooth rather than highly volatile (Brown, 1962).

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Demand Forecasting

Year Sales

2010 20

2011 25

2012 27

2013 29

2014 32

2015 35

2016 ?

Linear trend projection method

• If a time series exhibits a linear trend,

the method of least squares may be
used to determine a trend line
(projection) for future forecasts.
• Minimizes the mean square error
X(t)

between the trend line forecasts and the

actual observed values for the time
series.
• Independent variable is the time period Time (t)
• Dependent variable is the actual
observed value in the time series.

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Linear trend projection method

181 = 7a + 20b
101 = 11a + 7b

Solve for a and b.

X(t)
Y = 20 + 1.5t
Time (t)

Linear trend projection method

Important Observations:
1) Linear trend method considers all data point
2) Used equal importance to all data points

What will happen if linear trend method is applied to stationary

data?

• SES improved the forecasts by smoothing parameter

• Can we include all past data in trend forecasting and update
slope after each point (as compared to linear trend method)

Double exponential smoothing

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Time Series Forecasting

Smoothing Methods

Holt’s linear trend method (Double exponential smoothing)

- used when demand has observable trend but no observable seasonality
Smoothing equations:
Next period Forecast equation: Ft+1 = Lt + Tt

Level equation: Lt = α Xt + (1−α) (Lt-1+ Tt-1)

where,
Xt - is an estimate of the period t base level from the current period
Lt-1 + Tt-1 - is the forecast of the period t base level based on previous data

α: smoothing constant for the Level 0 < α < 1

Time Series Forecasting

Smoothing Methods

Holt’s linear trend method (Double exponential smoothing)

- used when demand has observable trend but no observable seasonality
Smoothing equations:
Level equation: Lt = α Xt + (1−α) (Lt-1+ Tt-1)

Trend equation: Tt = β (Lt − Lt-1) + (1− β) Tt-1

Next period Forecast equation: Ft+1 = Lt + Tt

α: smoothing constant for the Level 0 < α < 1

β: smoothing constant for the Trend 0 < β < 1

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Time Series Forecasting

Smoothing Methods
Next period Forecast equation: Ft+1 = Lt + Tt
Level equation: Lt = α Xt + (1−α) (Ft) and Ft = Lt-1+ Tt-1
Trend equation: Tt = β (Lt − Lt-1) + (1− β) Tt-1

Time Observation Level Trend Forecast

0 19 2.4

1 20 21.4

2 25

3 27

4 29

Suppose: Initial Level and Trend are given as 19 and 2.4, α = 0.1 and β = 0.1

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Demand data with seasonality

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Time Series Forecasting

Smoothing Methods
Time Demand
2010
Q1 100 2010 2011 2012
Q2 80 Q1 100 110 120
Q3 70
Q2 80 90 100
Q4 100
2011 Q3 70 80 90
Q1 110 Q4 100 120 135
Q2 90 Sum 350 400 445
Q3 80
Q4 120
2012
Q1 120
Q2 100
Q3 90
Q4 135

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Time Series Forecasting

Smoothing Methods
Seasonality Indices
2010 2011 2013 SI

Q1 100/350 110/400 120/445 0.83/3 = 0.277

Q2 80/350 90/400 100/445 0.2261

Q3 70/350 80/400 90/445 0.201

Q4 100/350 120/400 135/445 0.2964

350 400 445

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Time Series Forecasting

Smoothing Methods
Forecasting Sales:
• Use Linear trends and SI
• Fit a linear trend to the data and find value for Year four
(say = 470)
• Now use, SI to calculate quarterly sales,
Q1 = 470*0.277 = 130
Q2 = 470*0.2261 = 106
Q3 = 470*0.201 = 94
Q4 = 470*0.2964 = 140

The sum may not come out to be 470 due round offs..
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Time Series Forecasting

Smoothing Methods
Seasonal Factors
2010 2011 2013 SF

Q1 100/87.5 110/400 120/445 1.1071

Q2 0.9143 0.9 0.8989 0.9043

Q3 0.8 0.8 0.8089 0.8022

Q4 1.1428 1.20 1.2134 1.1854

Average
87.5 100 111.25
Demand

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Time Series Forecasting

Smoothing Methods
Using SF to deseasonalize the demand:
Time Demand Deseasonalized SF
Demand
Q1 1.1071
2010
Q1 100 90.32 Q2 0.9043
Q2 80 88.46
Q3 70 87.26 Q3 0.8022
Q4 100 84.36 Q4 1.1854
2011
Q1 110 99.35
Q2 90 99.52
Q3 80 99.72
Q4 120 101.23
2012
Q1 120 108.39 Deseasonalized
Q2 100 110.59 demand showing
Q3 90 112.20
Q4 135 113.89
clear trend. 17

Time Series Forecasting

Smoothing Methods
Using SF to deseasonalize the demand:
An example: SF

1 0.550
Period Demand To obtain the deseasonalized 2 1.075
1 10 series, divide each observation by 3 1.400
the appropriate seasonal factor.
2 20 4 0.975

3 26
4 17
5 12
6 23
7 30
18
8 22

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Time Series Forecasting

Smoothing Methods
Using SF to deseasonalize the demand:
An example: SF

1 0.550
Period Demand 2 1.075
1 10 18.182 3 1.400
2 20 18.605 4 0.975

3 26 18.571
4 17 17.436
Deseasonalized demand
5 12 21.818
showing clear trend.
6 23 21.395
7 30 21.429 Use linear trend method to
forecast 19
8 22 22.564

Time Series Forecasting

Smoothing Methods
Using SF to deseasonalize the demand:
An example: Use linear trend method to
forecast deseasonalized demand
Period Demand
And then multiply with SFs
1 10 18.182
2 20 18.605 Y_t = 5 16.91 + 0.686t

3 26 18.571 For example:

4 17 17.436 forecast for periods 9 through 12
SF
5 12 21.818 Deseasonalized forecast: 1 0.550
6 23 21.395 23.08, 23.77, 24.46, 25.14 2 1.075

7 30 21.429 3 1.400
Re-seasonalize forecast: 4 0.975
8 22 22.564 12.70, 25.55, 34.24, and 25.51
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