In: Operations Management
Exponential Smoothing
With the following information, identify which alpha value would you use to forecast july-dic using exponential smoothing and why? Choose between 0.1, 0.5 or 0.8
Month June |
Actual 16 |
July |
12 |
August |
16 |
Sept. |
15 |
Oct. |
11 |
Nov. |
19 |
Dec. |
21 |
ALPHA 0.1
FORECAST = FORECAST + (ALPHA * (ACTUAL DEMAND - FORECAST))
FORECAST 2 = 16 + (0.1 * (16 - 16) = 16
FORECAST 3 = 16 + (0.1 * (12 - 16) = 15.6
FORECAST 4 = 15.6 + (0.1 * (16 - 15.6) = 15.64
FORECAST 5 = 15.64 + (0.1 * (15 - 15.64) = 15.58
FORECAST 6 = 15.58 + (0.1 * (11 - 15.58) = 15.12
FORECAST 7 = 15.12 + (0.1 * (19 - 15.12) = 15.51
FORECAST ERROR
PERIOD |
ACTUAL DEMAND |
FORECAST |
DEVIATION(D - F) |
ABS DEVIATION |
1 |
16 |
16 |
0 |
0 |
2 |
12 |
16 |
-4 |
4 |
3 |
16 |
15.6 |
0.4 |
0.4 |
4 |
15 |
15.64 |
-0.64 |
0.64 |
5 |
11 |
15.58 |
-4.58 |
4.58 |
6 |
19 |
15.12 |
3.88 |
3.88 |
7 |
21 |
15.51 |
5.49 |
5.49 |
SIGMA |
0.55 |
18.99 |
MAD = SIGMA(ABSOLUTE DEVIATION) / N, WHERE N = 7
MAD = 18.99 / 7 = 2.71
ALPHA 0.5
FORECAST = FORECAST + (ALPHA * (ACTUAL DEMAND - FORECAST))
FORECAST 2 = 16 + (0.5 * (16 - 16) = 16
FORECAST 3 = 16 + (0.5 * (12 - 16) = 14
FORECAST 4 = 14 + (0.5 * (16 - 14) = 15
FORECAST 5 = 15 + (0.5 * (15 - 15) = 15
FORECAST 6 = 15 + (0.5 * (11 - 15) = 13
FORECAST 7 = 13 + (0.5 * (19 - 13) = 16
FORECAST ERROR
PERIOD |
ACTUAL DEMAND |
FORECAST |
DEVIATION(D - F) |
ABS DEVIATION |
1 |
16 |
16 |
0 |
0 |
2 |
12 |
16 |
-4 |
4 |
3 |
16 |
14 |
2 |
2 |
4 |
15 |
15 |
0 |
0 |
5 |
11 |
15 |
-4 |
4 |
6 |
19 |
13 |
6 |
6 |
7 |
21 |
16 |
5 |
5 |
SIGMA |
5 |
21 |
MAD = 21 / 7 = 3
ALPHA 0.8
FORECAST = FORECAST + (ALPHA * (ACTUAL DEMAND - FORECAST))
FORECAST 2 = 16 + (0.8 * (16 - 16) = 16
FORECAST 3 = 16 + (0.8 * (12 - 16) = 12.8
FORECAST 4 = 12.8 + (0.8 * (16 - 12.8) = 15.36
FORECAST 5 = 15.36 + (0.8 * (15 - 15.36) = 15.07
FORECAST 6 = 15.07 + (0.8 * (11 - 15.07) = 11.81
FORECAST 7 = 11.81 + (0.8 * (19 - 11.81) = 17.56
FORECAST ERROR
PERIOD |
ACTUAL DEMAND |
FORECAST |
DEVIATION(D - F) |
ABS DEVIATION |
1 |
16 |
16 |
0 |
0 |
2 |
12 |
16 |
-4 |
4 |
3 |
16 |
12.8 |
3.2 |
3.2 |
4 |
15 |
15.36 |
-0.36 |
0.36 |
5 |
11 |
15.07 |
-4.07 |
4.07 |
6 |
19 |
11.81 |
7.19 |
7.19 |
7 |
21 |
17.56 |
3.44 |
3.44 |
SIGMA |
5.4 |
22.26 |
MAD = 22.26 / 7 = 3.18
2. USING THE MEAN ABSOLUTE DEVIATION, WE CAN SAY THAT FORECAST WITH ALPHA VALUE OF 0.1 IS THE CLOSEST TO THE ACTUAL DEMAND VALUE AND IS, THEREFORE, MORE SUITABLE.
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