When using exponential smoothing, the value of the smoothing constant chosen has a direct impact on the sensitivity of the forecast to recent data. If a manager has a good sense of the underlying demand pattern, it is best to use a smoothing constant that is no larger than 0.2. In general, it is best to pick smoothing constants that minimize the error term that a manager is most comfortable with from among MSE, MAD, and MAPE. In the absence of a preference among error terms, it is best to pick smoothing constants that minimize the MSE.
We illustrate the impact of picking smoothing constants that minimize different error measures using the 10-period demand data shown in cells B3:B12 of Figure 7-5 (accompanying spreadsheet Chapter 7-Tahoe-salt and worksheet Figures 7-5, 6). The initial level is estimated using Equation 7.11 and is shown in cell C2. The smoothing constant a is obtained using Solver by minimizing the MSE (cell F13) at the end of the 10 periods as shown in Figure 7-5. The forecast shown in Figure 7-5 uses the resulting a = 0.54 and gives MSE = 2,460, MAD = 42.5, and MAPE = 2.1 percent.
The smoothing constant can also be selected using Solver by minimizing the MAD or the MAPE at the end of 10 periods. In Figure 7-6, we show the results from minimizing MAD (cell G13). The forecasts and errors with the resulting a = 0.32 are shown in Figure 7-6. In this case, the MSE increases to 2,570 (compared to 2,460 in Figure 7-5), whereas the MAD decreases to 39.2 (compared to 42.5 in Figure 7-5) and the MAPE decreases to 2.0 percent (compared to 2.1 percent in Figure 7-5). The major difference between the two forecasts is in Period 9 (the period with the largest error, shown in cell D11), when minimizing MSE picks a smoothing constant that reduces large errors, whereas minimizing MAD picks a smoothing constant that gives equal weight to reducing all errors even if large errors get somewhat larger.
In general, it is not a good idea to use smoothing constants much larger than 0.2 for extended periods of time. A larger smoothing constant may be justified for a short period of time when demand is in transition. It should, however, generally be avoided for extended periods of time.
Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.
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