Business Forecasting Methods and Techniques

Descriptive Statistics Analysis Single & Multiple Moving Averages Single & Multiple-Parameters Exponential Smoothing Exponential Smoothing with Seasonality Methods

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Exponential Smoothing With Seasonality Methods

The previous two pages explained the moving averages and exponential smoothing methods, which are suitable only for dealing with non-seasonal time series, whether they are stationary or non-stationary data. If the data are stationary, Moving Averages or Single Exponential Smoothing methods are appropriate. If the data series exhibit a linear trend, either Brown's linear one-parameter smoothing method or Holt's linear two-parameter smoothing method are appropriate. But if the data series are seasonal, these methods, on their own, can not handle the problem well. Therefore, Winter's threeparameters method which will be explained in this section, can handle the data with seasonality well.

Winter's 3-Parameter Trend and Seasonality Exponential Smoothing

If you look at Table 4.1, you see that there is a systemic error pattern occurs every fourth period (negative values). Only there is an exception at period 21 where there are twice negative values, because of randomness. Using Winter's method would be able to eliminate this kind systematic pattern in the errors. Winter's method is based on three smoothing equations - St for overall smoothing, bt for trend, and Ot for seasonality.

Overall Smoothing, Trend Smoothing, Seasonal Smoothing, Forecast,

(1) (2) (3) (4)

Table 4.1 shows applying the earlier three smoothing methods that had been discussed, to a seasonal data series. Looking at the descriptive statistics summary, it appears that the Holt's three-parameter smoothing method gives the smallest errors (MAE=72.80, MAPE=13.09, MSE=7265.55, and the standard deviation of errors is giving 85.24). However, there is too much smoothing that is done, and the every fourth-month periodic systemic errors also need to be eliminated. Clearly, we require the Winter's method to improve it, as shown in Table 4.2. The descriptive statistics in Table 4.2 shows that Winter's method gives the smallest errors among the four methods (MAE=28.61, MAPE=5.41, MSE=1102.76, standard deviation of errors =33.21). In Figure 4.1, the Winter's method is super-imposed over the other three methods versus the original observed series. The original data clearly shows a linear trend with additive seasonality. The seasonal cycle repeats in almost every four periods. The Winter's method shows that the forecast (the yellow curve) trails the original data closely and yet not overly smoothed as was the case in the other three methods. Table 4.1 Application of Single Exponential Smoothing, Linear 2-Parameter and 3-Parameter Linear Smoothing Methods To Seasonal Data
Single Brown's One-Parameter Linear Exponential Holt's Two-Parameter Linear Exponential Smoothing, =0.2 Exponential Smoothing, Smoothing, = =0.2, =0.3 0.35 Mont Peri Histori Foreca Forecas Single Double Value Value Foreca Foreca Smooth Smoothi Forecas Forecas h od cal st t Error Expone Expone of of st st Error ing ng t t Error t Sales (SES) (SES) ntial ntial Data Trend St +bt Ft+m a b

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