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Adjusted Exponential Smoothing Guide

This document outlines the adjusted exponential smoothing forecasting method. It defines the method as using measurable historical data to make forecasts by calculating a weighted average of the current period's actual value and forecast, with a trend adjustment added. It describes when the method works best, which is when a trend is present, and provides an example and exercise to demonstrate how to use the method to forecast sales and income.

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Jonas Mondala
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84 views20 pages

Adjusted Exponential Smoothing Guide

This document outlines the adjusted exponential smoothing forecasting method. It defines the method as using measurable historical data to make forecasts by calculating a weighted average of the current period's actual value and forecast, with a trend adjustment added. It describes when the method works best, which is when a trend is present, and provides an example and exercise to demonstrate how to use the method to forecast sales and income.

Uploaded by

Jonas Mondala
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

ADJUSTED EXPONENTIAL SMOOTHING FORECASTING METHOD

Prepared by Dan Milewski


November 29, 2005

Tutorial Outline
1. 2. 3. 4. 5. 6. 7. Defining the Method When to Use the Method How to Use the Method An Example An Exercise Summary Readings List

Defining the Method


A Forecasting Model:

Predicts future levels of a variable


Can be either quantitative or qualitative

Defining the Method


Exponential Smoothing:

Quantitative forecasting method


Weighted average of two variables

Defining the Method


Adjusted

Trend adjustment factor included


Better at picking up on trends

Defining the Method


So, combined,. Adjusted Exponential Smoothing Forecasting Method: A method that uses measurable, historical data observations, to make forecasts by calculating the weighted average of the current periods actual value and forecast, with a trend adjustment added in.
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When to Use the Method


Preferred Scenario: When a trend is present Good Scenario: When theres a cyclical or seasonal pattern Least-effective Scenario Working with random variations
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When to Use the Method

When to Use the Method


Manufacturing Firms:
To forecast demand

Service Organizations:
To forecast customer arrival patterns

Financial Analysts:
To forecast revenues and profits

Investors:
To forecast economic indicators
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How to Use the Method


Exponential Smoothing: Ft+1 =
Where Ft +1 = Dt = Ft =

Dt + (1 -

)Ft

forecast for next period actual value for present period previously determined forecast for present period = weighting factor (between 0 and 1)
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How to Use the Method


Adjusted Exponential Smoothing: AFt+1 = Ft+1 + Tt+1
Where Tt +1 = (Ft+1 Ft ) + (1 - ) Tt = trend factor for the next period Tt = trend factor for the current period = smoothing constant for the trend adjustment factor (just add a trend adjustment factor)
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How to Use the Method


Points to Consider: To start, pick an unadjusted forecast In period 1, trend equals 0

An Example
2005 U.S. Housing Starts (monthly):

An Example
2005 U.S. Housing Starts (monthly):

An Exercise
Using the adjusted exponential smoothing forecasting method and the following data

Predict Q4 2005 sales revenues for Intel Where = 0.4 and = 0.7
Predict Q4 2005 net income for Intel Where = 0.2 and = 0.6
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An Exercise
Intel Quarterly Sales Revenue

An Exercise
Intel Quarterly Net Income

An Exercise
Which series of data best fits with this method? What makes this so? What other financial data could be predicted accurately with this method?

Summary
Adjusted Exponential Smoothing Forecasting Method:

Quantitative forecasting model


Highly accurate

Best when trends exist

Readings List
Gardner, Jr., E.S. Exponential Smoothing: The State of the Art. Journal of Forecasting. April 1985, Vol. 3, Iss. 1. Jain, Chaman L. Business Forecasting Practices in 2003. The Journal of Business Forecasting Methods & Systems. Fall 2004, Vol. 23, Iss. 3 [Link]
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