Intended learning outcomes: Identify the weighted mean as well as exponential demand weighting. Explain first-order exponential smoothing: mean, MAD, and standard deviation. Disclose the average age of the observed values.
If we wish to adapt the forecasting technique to actual demand, the demand values for the last periods must be weighted more heavily, according to the principle of the weighted moving average. The formula in Figure 10.2.2.1 takes this weighting into account; the variables were chosen according to the definitions in Figure 10.1.3.4 and include an indefinite number of periods. Gt-i always expresses the weighting of demand in the period (t–i). [note 1005]
Fig. 10.2.2.1 Weighted mean.
In the first-order exponential smoothing forecast technique, or single (exponential) smoothing, the weights are in an exponentially declining relationship and adhere to the definitions in Figure 10.2.2.2.
Fig. 10.2.2.2 Exponential demand weighting.
Figure 10.2.2.3 shows the calculation of Mean smoothed consumption as measure of mean, and Mean absolute deviation (MAD) as measure of dispersion. See also the definitions of indexes and variables in Figure 10.1.3.4.
Fig. 10.2.2.3 First-order exponential smoothing: mean, MAD, and standard Deviation.
Since the weighting Gy follows a geometric series, the recursive calculation indicated in the formulas is self-evident. These formulas allow us to perform the same calculation as in moving average using only the past values for mean and MAD and the demand value for the current period instead of many demand values. With a normal distribution, standard deviation and mean absolute deviation (MAD) stand in the same relationship as that given in Figure 10.2.2.3.
The recursion to Mt-1 results by factoring out (1-a) of the part of the formula that is emphasized by the horizontally cambered bracket. Factual equality between σ and MAD*1.25 requires n>30 or α < 6.5%. Figure 10.2.2.4 shows the average age of the observed values. The age of Nt-i is i for 0 ≤ i ≤ n-1.
Fig. 10.2.2.4 Average age of the observed values.
Continuation in next subsection (10.2.2b).
Course section 10.2: Subsections and their intended learning outcomes
10.2 Historically Oriented Techniques for Constant Demand
Intended learning outcomes: Describe the moving average forecast. Explain the first-order exponential smoothing forecast. Differentiate between the moving average forecast and the first-order exponential smoothing forecast.
10.2.1 Moving Average Forecast
Intended learning outcomes: Explain mean and standard deviation in the moving average forecasting technique. Disclose the average age of the observed values. Present an example of determining the forecast value using moving average.
10.2.2 First-Order Exponential Smoothing Forecast
Intended learning outcomes: Identify the weighted mean as well as exponential demand weighting. Explain first-order exponential smoothing: mean, MAD, and standard deviation. Disclose the average age of the observed values.
10.2.2b The Smoothing Constant α, or Alpha Factor
Intended learning outcomes: Describe how the smoothing constant α determines the weighting of the past. Present an example of first-order exponential smoothing.
10.2.3 Moving Average Forecast versus First-Order Exponential Smoothing Forecast
Intended learning outcomes: Disclose formulas for the relationship between α and n. Present the relationship between α and n in tabular form. Present an example of linear regression.
