Forecasting Techniques

1. Forecasting Techniques Supplement to class notes

2. Simple Moving Average • 3 month moving average: Sum the demand for the previous 3 periods; divide by 3 to get the forecast for the next period • 5 month moving average: Sum the demand for the previous 5 months; divide by 5 to get the forecast for the next period

3. Weighted Moving Average • 3 month weighted moving average: assign weights to each of the previous 3 periods demands; add the weighted demands • Ex: period 1: .25; period 2: .35; period 3: .4 • Demand period 1 = 75; demand period 2 = 90; demand period 3 = 125 • 75(.25) + 90(.35) + 125(.4) = 100.25 = forecast for period 4

4. Exponential Smoothing • Choose smoothing factor between 0 – 1 • The closer to 1 the more emphasis on more recent data (ex. 0.6) • Forecast for period t = demand of previous period • Forecast for period t+1 = (smoothing factor)(actual demand of period t) + (1 – smoothing factor)(forecast for period t)

5. Example of Exponential Smoothing • Smoothing factor =.6