Forecasting
Forecasting
Period Demand
1 42
2 40
3 43
4 40
5 41
Moving Average (cont’d.)
• Note that in a moving average, as each new actual values becomes
available, the forecast is updated by adding the newest value and
dropping the oldest and then recomputing the average.
• The moving average can incorporate as many data points as desired.
In selecting the number of periods to include, the decision maker
must take into account the number of data points in the average
determines its sensitivity to each new data point: The fewer the data
points in an average, the more sensitive (responsive) the average
tends to be.
Weighted Moving
Average
• A weighted average is similar to moving
average, except that it typically assigns
more weight to the most recent values in
a time series.
• For instance, the most recent value might
be assigned a weight of .40, the next most
recent value a weight of .30, the next after
a weight of .20, and the next after that a
weight of .10.
• Note that the weight must sum to 1.00
and that the heaviest weights are assigned
to the most recent values.
• Note that if four weights are used, only
the four most recent demands are used to
prepare the forecast.
Computing a Weighted Moving Average
Given the following demand data,
a. Compute a weighted average forecast using a weight of .40 for the
most recent period, .30 for the next most recent, .20 for the next,
and .10 for the next.
b. If the actual demand for period 6 is 39, forecast demand for period
7 using the same weights as in part a.
Period Demand
1 42
2 40
3 43
4 40
5 41
Exponential Smoothing
• Exponential smoothing is a sophisticated weighted
averaging method that is still relatively easy to use
and understand.
• Each new forecast is based on the previous forecast
plus a percentage of the difference between that
forecast and the actual value of the series at that
point. That is:
Next forecast = Previous forecast + α (Actual – Previous
forecast)