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First-Order Exponential Smoothing Guide

First-order exponential smoothing uses three principles: older data is less important, present forecast errors impact future forecasts, and a smoothing factor weights recent data more than past data. The basic exponential smoothing formula calculates the current basic value as the smoothing factor multiplied by the actual demand plus one minus the smoothing factor multiplied by the previous basic value. The smoothing factor determines how quickly the forecast reacts to changes - a higher factor means more weight on recent data. Exponential smoothing is useful for time series without trends or seasons.

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Natalija Karlović
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22 views1 page

First-Order Exponential Smoothing Guide

First-order exponential smoothing uses three principles: older data is less important, present forecast errors impact future forecasts, and a smoothing factor weights recent data more than past data. The basic exponential smoothing formula calculates the current basic value as the smoothing factor multiplied by the actual demand plus one minus the smoothing factor multiplied by the previous basic value. The smoothing factor determines how quickly the forecast reacts to changes - a higher factor means more weight on recent data. Exponential smoothing is useful for time series without trends or seasons.

Uploaded by

Natalija Karlović
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Constant Model w.

1st Order Exponential Smoothing


The principles of first-order exponential smoothing are:
 The older the time series values, the less important they are for the calculation of the forecast.
 The present forecast error is taken into account in subsequent forecasts.
The constant model with first-order exponential smoothing (forecast strategies 11 and 12) can be
derived from the above two considerations. A simple transformation gives the basic formula for
exponential smoothing (see below).
Determining the Basic Value
G(t) = α ∙ V(t) + (1 − α) ∙ G ∙ (t − 1)

G(t) = the current basic value for the current period (t)
G(t − 1) = the previous basic value from the previous period
V(t) = actual demand for the current period (t)
α = smoothing factor for the basic value

To calculate the forecast value, the system uses the preceding forecast value, the last historical value,
and the alpha smoothing factor. This smoothing factor weights the more recent historical values
more than the less recent ones, so that they have a greater influence on the forecast.
How quickly the forecast reacts to a change in pattern depends on the smoothing factor. If you choose
0 for alpha, the new average is equal to the old one and the basic value calculated previously
remains; that is, the forecast does not react to current data. If you choose 1 for the alpha value,
the new average equals the last value in the time series.
The most common values for alpha lie, therefore, between 0.1 and 0.5. For example, an alpha value of
0.5 weights historical values as follows:
1st historical value: 50%
2nd historical value: 25%
3rd historical value: 12.5%
4th historical value: 6.25%
The weightings of historical data can be changed by a single parameter. Therefore, it is relatively easy
to respond to changes in the time series.
Use
Use the constant model with first-order exponential smoothing for time series that do not have trend-
like patterns or seasonal variations.

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