MOVING AVERAGE

Technique that averages a number of recent actual values,

updated as new values become available.

𝐹 1=At-n+…+At-2+At-1 =Man
n
where:

𝐹1 = Forecast for time period t

Man = n period moving average
At-I = Actual value in period t-i
n = Number of periods (data points) in the moving
average
 COMPUTING A MOVING AVERAGE
Compute a three-period moving average forecast given
demand for shopping carts for the last five periods.
Period Demand
1 42
2 40
3 43
The 3 most
4 40 recent
5 41 demands

Solution:
F6 = 43+40+41 = 41.33
3

If actual demand in period 6 turns out to be 38, the moving average

forecast for period 7 would be
F7=40+41+38 = 39.67
3
 WEIGHTED MOVING AVERAGE
More recent values in a series are given more
weight in computing a forecast.

A weighted average is similar to a moving average,

except that it typically assigns more weight to the
most recent values in a time series.
F1=wt-n(At-n)+…+wt-2(At-2)+wt-1(At-1)+…+wt-n(At-n)

where:
wt-1 = weight for period t-1, etc
At-1 = Actual value for period t-1, etc
COMPUTE A WEIGHTED MOVING AVERAGE

Given the following demand data:

A. Compute a weighted average forecast using a weight
of .40 for the most recent period, .30 for the next most
recent, .20 for the next, and .10 for the next.

B. If the actual demand for period 6 is 39, forecast

demand for period 7 using the same weights as in part a.

Period Demand
1 42
2 40
3 43
4 40
5 41
Solution:
A. F6 = .10(40)+.20(43)+.30(40)+.40(41) = 41.0

B. F7 = .10(43)+.20(40)+.30(41)+.40(39) = 40.2

The advantage of a weighted average over a

simple moving average is that the weighted
average is more reflective of the most recent
occurrences. However, the choices of weights
is somewhat arbitrary and generally involves
the use of trial and error to find a suitable
weighting scheme.
 EXPONENTIAL
SMOOTHING
A weighted averaging method based on
previous forecast plus a percentage of the
forecast error.
Next forecast = Previous forecast + α(Actual – Previous forecast)

where (Actual – Previous forecast) represents the forecast error

and α is a percentage of the error. More concisely,
Ft=Ft-1+α(At-1-Ft-1)
where;
Ft = Forecast for period t
Ft-1 = Forecast for the previous period (i.e.,period t-1)
α = Smoothing constant (percentage)
At-1 =Actual demand or sales for the previous period
Figure 3.4B The closer α is to zero, the greater the
smoothing.