CHAPTER 4

MOVING AVERAGES AND SMOOTHING METHODS

ANSWERS TO ODD-NUMBERED PROBLEMS AND CASES
1. Exponential smoothing
3. Moving average
5. Winters three-parameter smoothing procedure
7.
Price AVER1 FI!1 RE!I1
1"#$" % % %
1&#"' % % %
1&#() 1&#&*)) % %
1+#&" 1&#$*)) 1&#&*)) -)#"')))
1&#,$ 1&#1+$$ 1&#$*)) )#)&)))
1"#"& 1&#+''+ 1&#1+$$ 1#&)''+
1"#*1 1"#$)'+ 1&#+''+ )#+,$$$
()#'$ ()#),)) 1"#$)'+ 1#$($$$
1"#+& 1"#"+$$ ()#),)) -)#(')))
(1#(* ()#**$$ 1"#"+$$ 1#(+''+
(1#1& ()#+$'+ ()#**$$ )#'(''+
((#1, (1#*($$ ()#+$'+ 1#,)$$$
Accurac- Measures
MAPE. ,#'$1" MA/. )#",(( M!E. 1#1+(&
he na0ve approach is 1etter#
9. a# 2 c3 d3 e3 4 $-month moving-average 5!ee plot 1elo6#7
Month 8ield MA Forecast Error
1 "#(" % % %
( "#"" % % %
$ 1)#1' "#&1$ % %
, 1)#(* 1)#1$$ "#&1$ )#,$+
* 1)#'1 1)#$,) 1)#1$$ )#,++
' 11#)+ 1)#',$ 1)#$,) )#+$)
+ 11#*( 11#)'+ 1)#',$ )#&++
& 11#)" 11#((+ 11#)'+ )#)($
" 1)#&) 11#1$+ 11#((+ -)#,(+
1) 1)#*) 1)#+"+ 11#1$+ -)#'$+
11 1)#&' 1)#+() 1)#+"+ )#)'$
1
1( "#"+ 1)#,,$ 1)#+() -)#+*)
Accurac- Measures
MAPE. ,#*&+* MA/. )#,"11 M!E. )#$1"$ MPE. #'"),
Forecast 4or month 1$ 59an#7 is 1)#,,$

1# 2 c3 d3 e3 4 *-month moving-average 5!ee plot 1elo6#7
Month 8ield MA Forecast Error
1 "#(" % % %
( "#"" % % %
$ 1)#1' % % %
, 1)#(* % % %
* 1)#'1 1)#)') % %
' 11#)+ 1)#,1' 1)#)') 1#)1)
+ 11#*( 1)#+(( 1)#,1' 1#1),
& 11#)" 1)#")& 1)#+(( )#$'&
" 1)#&) 11#)1& 1)#")& -)#1)&
1) 1)#*) 1)#""' 11#)1& -)#*1&
11 1)#&' 1)#"*, 1)#""' -)#1$'
1( "#"+ 1)#',, 1)#"*, -)#"&,
Accurac- Measures
MAPE. *#*&$) MA/. )#'),) M!E. )#*()( MPE. #+1))
Forecast 4or month 1$ 59an#7 is 1)#',,
(

g# :se $-month moving average 4orecast. 1)#,,$$
11. !ee plot 1elo6#
Month /emand !mooth Forecast Error
1 ()* ()*#))) ()*#))) )#))))
( (*1 ((&#))) ()*#))) ,'#))))
$ $), (''#))) ((&#))) +'#))))
, (&, (+*#))) (''#))) 1&#))))
* $*( $1$#*)) (+*#))) ++#))))
' $)) $)'#+*) $1$#*)) -1$#*)))
+ (,1 (+$#&+* $)'#+*) -'*#+*))
& (&, (+&#"$& (+$#&+* 1)#1(*)
" $1( ("*#,'" (+&#"$& $$#)'(*
1) (&" ("(#($, ("*#,'" -'#,'&&
11 $&* $$&#'1+ ("(#($, "(#+'*'
1( (*' ("+#$)" $$&#'1+ -&(#'1+(
Accurac- Measures
MAPE. 1,#'+ MA/. ,$#,, M!E. (",$#(,
Forecast 4or month 1$ 59an# ())+7 is ("+#$)"
$
13. a# ; #,
Accurac- Measures
MAPE. 1,#)* MA/. (,#)( M!E. 11+,#*)

Forecast 4or <1 ())). $('#$'+
1# ; #'
Accurac- Measures
MAPE. 1,#'& MA/. (,#*' M!E. 1)&)#(1
Forecast 4or <1 ())). $$,#)+)
c# =oo>ing at the error measures3 there is not much di44erence 1et6een the t6o
choices o4 smoothing constant# he error measures 4or ? ; #, are slightl- 1etter#
he 4orecasts 4or the t6o choices o4 smoothing constant are also not much
di44erent#
d# he residual autocorrelations 4or ? ; #, are sho6n 1elo6# he residual
autocorrelations 4or ? ; #' are similar# here are signi4icant residual
autocorrelations at lags 13 , and 5ver- nearl-7 &# A 4orecasting method that -ields
no signi4icant residual autocorrelations 6ould 1e desira1le#
,
15. A time series plot o4 @uarterl- Revenues and the autocorrelation 4unction sho6
that the data are seasonal 6ith a trend# A4ter some experimentation3 Winters
multiplicative smoothing 6ith smoothing constants ? 5level7 ; )#&3 A 5trend7 ; )#1
and B 5seasonal7 ; )#1 is used to 4orecast 4uture Revenues# !ee plot 1elo6#
Accurac- Measures
MAPE $#&
MA/ '"#1
M!E 111,'#,
Forecasts
<uarter Forecast =o6er :pper
+1 (,,,#'$ ((+*#$, ('1$#"(
+( 1"&+#"& 1++$#&, (()(#1(
+$ (($+#"& 1"'"#($ (*)'#+(
+, 1&&+#+, 1**"#,' ((1'#)1
+* (,*'#1& ()'*#+) (&,'#'*
+' 1""+#$' 1*,$#1) (,*1#'(
*

An examination o4 the autocorrelation coe44icients 4or the residuals 4rom
Winters multiplicative smoothing sho6n 1elo6 indicates that none o4 them
are signi4icantl- di44erent 4rom Cero#

17. a# he 4our-6ee> moving average seems to represent the data a little 1etter#
Dompare the error measures 4or the 4our-6ee> moving average in the 4igure 1elo6
6ith the 4ive-6ee> moving average results in Figure ,-,#
'
1# !imple exponential smoothing 6ith a smoothing constant o4 ? ; #+ does a
1etter Eo1 o4 smoothing the data than a 4our-6ee> moving average as Eudged
1- the uni4orml- smaller error measures sho6n in the plot 1elo6#

19. a# he results o4 Folts smoothing 6ith ? 5level7 ; #" and A 5trend7 ; #1 4or
!outh6est Airlines @uarterl- income are sho6n 1elo6# A plot o4 the residual
autocorrelation 4unction 4ollo6s# It appears as i4 Folts procedure represents the
data 6ell 1ut the residual autocorrelations have signi4icant spi>es at the seasonal
+
lags o4 , and & suggesting a seasonal component is not captured 1- Folts
method#
1# Winters multiplicative smoothing 6ith ? ; A ; B ;#( 6as applied to the @uarterl-
income data and the results are sho6n in the plot 1elo6# he 4orecasts 4or the
4our @uarters o4 ())) are.
<uarter Forecast
," &&#"')
*) 1&,#&11
&
*1 1&1#,',
*( 11+#"&*

he 4orecasts seem reasona1le 1ut the residual autocorrelation 4unction 1elo6 has
a signi4icant spi>e at lag 1# !o although Winters procedure captures the trend and
seasonalit-3 there is still some association in consecutive o1servations not
accounted 4or 1- Winters method#
"
CASE 4-1: THE SOLAR ALTERNATIVE COMPANY
his case provides the student 6ith an opportunit- to deal 6ith a 4re@uent real 6orld
pro1lem. small data sets# A plot o4 the t6o -ears o4 data sho6s 1oth an up6ard trend and seasonal
pattern# he 4orecasting model that is selected must do an accurate Eo1 4or at least three months into
the 4uture#
Averaging methods are not appropriate 4or this data set 1ecause the- do not 6or> 6hen data
has a trend3 seasonalit-3 or some other s-stematic pattern# Moving average models tend to smooth out
the seasonal pattern o4 the data instead o4 ma>ing use o4 it to 4orecast#
A naive model that ta>es into account 1oth the trend and the seasonalit- o4 the data might
6or># !ince the seasonal pattern appears to 1e strong3 a good 4orecast might ta>e the same value it
did in the corresponding month one -ear ago or 8tG1

; 8t-11
#
Fo6ever3 as it stands3 this 4orecast ignores the trend# Hne approach to estimate trend is to calculate
the increase 4rom each month in ())* to the same month in ())'# As an example3 the increase 4rom
9anuar-3 ())* to 9anuar-3 ())' is e@ual to 581$

- 817 ; 51+ - *7 ; 1(#
A4ter the increases 4or all 1( months are calculated3 the- can 1e summed and then divided 1-
1(# he 4orecast 4or each month o4 ())+ could then 1e calculated as the value 4or the same month in
())' plus the average increase 4or each o4 the 1( months 4rom ())* to the same month in ())'#
Donse@uentl-3 the 4orecast 4or 9anuar-3 ())+ is
8(*

; 1+ G I51+ - *7 G 51, - '7 G 5() - 1)7 G 5($ - 1$7 G 5$) - 1&7 G 5$& - 1*7 G 5,, - ($7 G
5,1 - ('7 G 5$$ - (17 G 5($ - 1*7 G 5(' - 1(7 G 51+ - 1,7JK1(
8(*

; 1+ G
1(
1,&
; 1+ G 1( ; ("
he 4orecasts 4or ())+ are. 9an ("
Fe1 ('
Mar $(
Apr $*
Ma- ,(
9un *)
9ul *'
Aug *$
!ep ,*
Hct $*
Lov $&
/ec ("
Winters multiplicative method 6ith smoothing constants ? ; #13 A ; #13 B ; #$ seems to
represent the data 4airl- 6ell 5see plot 1elo67 and produces the 4orecasts.
Month Forecast
9anK())+ 1"#&
Fe1K())+ 1&#)
MarK())+ ('#&
1)
AprK())+ $(#)
Ma-K())+ ,(#,
9unK())+ ,*#&
9ulK())+ *&#,
AugK())+ *&#"
!epK())+ ,+#'
HctK())+ $$#+
LovK())+ $$#*
/ecK())+ (&#)

he na0ve 4orecasts are not unreasona1le 1ut the Winters 4orecasts seem to have captured the
seasonal pattern a little 1etter3 particularl- 4or the 4irst $ months o4 the -ear# Lotice that i4 the trend
and seasonal pattern are strong3 Winters smoothing procedure can 6or> 6ell even 6ith onl- t6o
-ears o4 monthl- data#
CASE 4-2: MR TUX
his case sho6s ho6 several exponential smoothing methods can 1e applied to the Mr# ux
data# 9ohn Mos1- tries simple exponential smoothing and exponential smoothing 6ith adEustments
4or trend and seasonal 4actors3 along 6ith a three-month moving average#
!tudents can 1egin to see that several 4orecasting methods are t-picall- tried 6hen an
important varia1le must 1e 4orecast# !ome method o4 comparing them must 1e used3 such as the
three accurac- methods discussed in this case# !tudents should 1e as>ed their opinions o4 9ohnMs
progress in his 4orecasting e44orts given these accurac- values# It should 1e apparent to most that
the degree o4 accurac- achieved is not su44icient and that 4urther stud- is needed# !tudents should
1e reminded that the- are loo>ing at actual data3 and that the pro1lems 4aced 1- 9ohn Mos1- reall-
occurred#
11
1# H4 the methods attempted3 Winters multiplicative smoothing 6as the 1est method 9ohn
4ound# Each 4orecast 6as t-picall- o44 1- a1out (*3&(*# he error in each 4orecast 6as
a1out ((N o4 the value o4 the varia1le 1eing 4orecast#
$# 9ohn should examine plots o4 the residuals and the residual autocorrelations# I4 Winters
procedure is ade@uate3 the residuals should appear to 1e random# In addition3 9ohn can
examine the 4orecasts 4or the next 1( months to see i4 the- appear to 1e reasona1le#
CASE 4-3: CONSUMER CREDIT COUNSELING
1# !tudents should realiCe immediatel- that simpl- using the 1asic naive approach o4
using last period to predict this period 6ill not allo6 4or 4orecasts 4or the rest o4
1""$# !ince the autocorrelation coe44icients presented in Dase $-$ indicate
some seasonalit-3 a naive model using April 1""( to predict April 1""$3 Ma- 1""( to
predict Ma- 1""$ and so 4orth might 1e tried# his approach produces the error
measures
MA/ ; ($#$" M!E ; &'1#$, MAPE ; 1&#"*
over the data region3 and are not particularl- attractive given the magnitudes o4 the ne6
client num1ers#
$ !ince the data have a seasonal component3 Winters multiplicative smoothing
procedure 6ith smoothing constants ? ; A ; B ;#( 6as tried# For these choices.
MA/ ; 1"#("3 M!E ; *,*#,1 and MAPE ; 1'#+,# For smoothing constants ? ; #*3
A ; B ; #13 MA/ ; 1'#",3 M!E ; ,*1#(' and MAPE ; 1,#$)#

*# :sing Winters procedure in ,3 the 4orecasts 4or the remainder o4 1""$ are.
Month Forecast
AprK1""$ 1,&
Ma-K1""$ 1,1
9unK1""$ 1,&
9ulK1""$ 1,1
AugK1""$ 1,$
!epK1""$ 1$'
HctK1""$ 1*"
LovK1""$ 1,'
/ecK1""$ 1('
1(


CASE 4-4: MURPHY BROTHERS FURNITURE
1# Lo ade@uate smoothing model 6as 4oundO A Winters multiplicative model using
? ; #$3 A ; #( and B ; #1 6as deemed the 1est 1ut there 6as still some signi4icant
residual autocorrelation#
$# Pased on the 4orecasting methods tested3 actual Murph- Prothers sales data should 1e
used# A plot o4 the results 4or the 1est Winters procedure 4ollo6s#

1$
An examination o4 the autocorrelation coe44icients 4or the residuals 4rom this Winters
model sho6n 1elo6 indicates that none o4 them are signi4icantl- di44erent 4rom Cero#

Fo6ever3 9ulie decided to use the na0ve model 1ecause it 6as ver- simple and she could
explain it to her 4ather#
CASE 4-5: FIVE-YEAR REVENUE PROJECTION FOR DOWNTOWN RADIOLOGY
his case is designed to emphasiCe the use o4 su1Eective pro1a1ilit- estimates in a
4orecasting situation# he methodolog- used to generate revenue 4orecasts is 1oth appropriate
and accuratel- emplo-ed# he >e- to ans6ering the @uestion concerning the accurac- o4 the
proEections hinges on the accurac- o4 the assumptions made and estimates used# Examination
o4 the report indicates that the anal-sts 6ere conservative each time the- made an assumption or
computed an estimate# his is pro1a1l- one o4 the maEor reasons 6h- the Pro4essional
Mar>eting Associates 5PMA7 4orecast is considera1l- lo6er# !ince 6e do not >no6 ho6 the
accountant proEected the num1er o4 procedures3 it is di44icult to determine 6h- his revenue proEections
6ere higher# Fo6ever3 it is reasona1le to assume that his 4orecast o4 the num1er
o4 cases 4or each t-pe o4 procedure 6as not nearl- as sophisticated or thorough as PMAs#
here4ore3 the recommendation to management should indicate that the PMA 4orecast3 6hile
pro1a1l- on the conservative side3 is more li>el- to 1e accurate#
/o6nto6n Radiolog- evidentl- agreed 6ith PMAMs 4orecast# he- decided not to
purchase a "3&)) series D scanner# he- also decided to purchase a less expensive MRI#
Finall-3 the- decided to o1tain outside 4unding and did not resort to an- t-pe o4 pu1lic o44ering#
he- 1uilt their ne6 imaging center3 purchased an MRI and have created a ver- success4ul
imaging center#
CASE 4-: WEB RETAILER
1# he time series plot 4or Hrders sho6s a slight up6ard trend and a seasonal pattern
6ith pea>s in /ecem1er# Pecause o4 the relativel- small data set3 the autocorrelations
are onl- computed 4or a limited num1er o4 lags3 ' in this case# Donse@uentl- 6ith
monthl- data3 the seasonalit- does not sho6 up in the autocorrelation 4unction# here
1,
is signi4icant positive autocorrelation at lag 13 so Hrders in consecutive months are
correlated#
he time series plot 4or DPH sho6s a do6n6ard trend 1ut a seasonal component is
not readil- apparent# here is signi4icant positive autocorrelation at lag 1 and the
autocorrelations die out relativel- slo6l-# he DPH series is nonstationar- and
o1servations in consecutive time periods are correlated#
$# !imple exponential smoothing 6ith ? ; #++ 5the optimal ? in Minita17 represents the
the DPH data 6ell 1ut3 li>e an- QaveragingR procedure3 produces 4lat-line 4orecasts#
Forecasts o4 DPH 4or the next , months are.
Month Forecast =o6er :pper
9ulK())$ )#1),* )#)+&+ )#1$)$
AugK())$ )#1),* )#)+&+ )#1$)$
!epK())$ )#1),* )#)+&+ )#1$)$
HctK())$ )#1),* )#)+&+ )#1$)$
he results 4or simple exponential smoothing are pictured 1elo6# here are no
signi4icant residual autocorrelations 5see plot 1elo67#

1*

*# It seems reasona1le to 4orecast Dontacts directl- i4 the data are availa1le#
Multipl-ing a 4orecast o4 Hrders 1- a 4orecast o4 DPH to get a 4orecast o4 Dontacts
has the potential 4or introducing additional error 5uncertaint-7 into the process#
CASE 4-!: SOUTHWEST MEDICAL CENTER
1# Autocorrelation 4unction 4or total visits suggests time series is nonstationar-
5since autocorrelations slo6 to die out7 and seasonal 5relativel- large autocorrelation
at lag 1(7#
$# I4 another 4orecasting method can ade@uatel- account 4or the autocorrelation
in the otal Visits data3 it is li>el- to produce Q1etterR 4orecasts# his issue
is explored in su1se@uent cases#
CASE 4-": SURTIDO COO#IES
1# 9ame learned that !urtido Doo>ie sales have a strong seasonal pattern
5sales are relativel- high during the last t6o months o4 the -ear3 lo6 during
the spring7 6ith ver- little3 i4 an-3 trend 5see Dase $-*7#
$# Winters multiplicative smoothing 6ith ? ; A ; B ; #( seems to represent the
data 4airl- 6ell and produce reasona1le 4orecasts 5see plot 1elo67# Fo6ever3
there is still some signi4icant residual autocorrelation at lo6 lags#
1'
Month Forecast =o6er :pper
9unK())$ '*$(*, "1$*1 1(1*1*+
9ulK())$ +1(1*" 1,1,*$ 1(&(&'*
AugK())$ '**&&" +*$'& 1($',11
!epK())$ 1*$(",' ",1',+ (1(,(,*
HctK())$ 1+1)*() 11)+*$$ ($1$*)+
LovK())$ (1$$&&& 1*1&$*, (+,",(1
/ecK())$ 1")$*&" 1(+,+)( (*$(,+'

1+