BY –ISHANI

DWIVEDI
RICHA
THAKUR
 INTRODUCTION-
This is the method of demand forecasting.
It tries to overcome the limitation of moving averages and eliminates
the records of passed data.
It also tries to screened out the irregularities in the demand pattern.
This method takes into consideration the short term fluctuations.
It decreases in geometric progression as we move towards the old
observations.
In this method the later figures reflect more up to date average of the
series.
This is the easier method of achieving a progressing from of
weighting.
 CONCEPT OF EXPONENTIAL
SMOOTHING
New estimate =old estimate of latest actual demand+ α(latest
actual demand-old estimate of latest demand)
Formula-
 Ft= α.Dt+(1-α)Ft-1= Ft-1+α et
Where,
Ft is the forecast at time t.
Dt is the actual demand at time t.
Ft-1 is the forecast at time (t-1)
Α is the smoothing coefficient, et=(Dt-Ft-1)
METHOD OF FINDING ERROR IN
THE FORECAST OF DEMAND
First of all find error by subtracting the recent average from the
latest in coming observation.
Multiply error et by α.
Add α.et to the Ft. this gives new Ft as the forecast the next
period.
 PERFORMANCE
The performance of this method depends on the value of
smoothing coefficient α and the initial forecast Ft-1.
α gives the selector a major of control over the degree of
smoothing induced in the series.
The choice of α depends upon how much weight is desired to
be given to later periods relative to earlier periods.
Low value of α gives more weightage to the past figure and are
used where the series is rather stable and vice versa.
The value of α lies between 0 and 1 and in practice α is
generally taken between 0.1 and 0.З.
In cyclical fluctuations we take low value of α and in case
of long term fluctuations we take high value of α.
 EXPONENTIAL
SMOOTHING FORECASTING
SYSTEM

Initial
Ft-1 Transformation
Process Forecast
demand Ft-1+α et Ft

Feedback
et
 ADVANTAGES
Exponential smoothing provides a convenient systematic
method .
The amount of adjustment is determined by the selected
smoothing coefficient the greater the coefficient the
greater is the adjustment and vice-versa.
EXAMPLE-
Forecast the demand for the following series by
exponential smoothing method:
Period (t) 1 2 3 4 5 6 7 8 9 10 11
12
Actual Demand (Dt) 10 12 8 11 9 10 15 14 16
15 14 15
SOLUTION- The forecasts for various periods can be
calculated in the following tabular form. Here we consider
α=0.1 and then compare the forecasts for α=0.7.
 THE INITIAL FORECAST IS TAKEN TO BE 10 FOR PERIOD:-
Period Actual Ft-1 α=0.1 et Ft-1 α=0.7 et
demand Ft Ft

0 10.00 10
1 10 10.00 10.00 0.0 10 10 0.0
2 12 10.00 10.20 2.00 10 11.4 2.0
3 8 10.20 9.98 -2.20 11.4 9.02 -3.40
4 11 9.98 10.08 1.02 9.02 10.41 1.98
5 9 10.08 9.97 -1.08 10.41 9.42 -1.41
6 10 9.97 9.97 0.03 9.42 9.83 0.58
7 15 9.97 10.47 5.03 9.83 13.45 5.17
8 14 10.47 10.82 3.53 13.45 13.81 0.55
9 16 10.82 11.34 5.18 13.81 15.35 2.16
10 15 11.34 11.71 3.66 15.35 15.11 -0.35
11 14 11.71 11.94 2.29 15.11 14.33 -1.11
12 15 11.94 12.25 3.06 14.33 14.80 0.67
Now we calculate MDA= ∑ | et | /1 2
 =2.42 for α =0.1 and 1.62 for α=0.7
since MAD for α=0.7 is lesser than MAD for α=0.1, α=0.7
gives better forecast.
 BOX – JENKINS METHOD-
This forecasting approach has been borrowed from the
control theory.
In a control system there is a target which has to be
tracked where the target itself is moving or changing its
value or position.
The control mechanism measures the difference between
the target and actual output.
Any error is used along with its derivatives and integrals
for improving the forecast for the next period and so on.
The basic equation is:-
New forecast =old forecast+the direct term:A(error in old
forecast)+time derivative term:B(change in error between
last time and time immediately before)+the integral term:
C(sum of the errors so far)
Ft=Ft-1 +(r-1)(et-1 –et-2)+re(et-1)+r1 Σet