Winter’s Exponential smoothing

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Presentation transcript:

Winter’s Exponential smoothing

Winter’s Exponential Smoothing Winter’s exponential smoothing model is the second extension of the basic Exponential smoothing model. It is used for data that exhibit both trend and seasonality. It is a three parameter model that is an extension of Holt’s method. An additional equation adjusts the model for the seasonal component.

Winter’s Exponential Smoothing The four equations necessary for Winter’s multiplicative method are: The exponentially smoothed series: The trend estimate: The seasonality estimate:

Winter’s Exponential Smoothing Forecast m period into the future: Ft = Smoothed value for period t.  = smoothing constant for the level Xt = Actual value now (in period t). Ft-1 = Average experience of series smoothed to period t-1 Tt+1 = trend estimate St = Seasonality estimate  = smoothing constant for seasonality estimate.  = smoothing constant for trend estimate. St =seasonal component estimate. m = Number of periods in the forecast lead period. p = number of periods in the seasonal cycle W t+m = Winters’forecast for m periods into the future.

Winter’s Exponential Smoothing As with Holt’s linear exponential smoothing, the weights , , and  can be selected subjectively or by minimizing a measure of forecast error such as RMSE. As with all exponential smoothing methods, we need initial values for the components to start the algorithm. To start the algorithm, the initial values for Ft, the trend Tt, and the indices St must be set.

Winter’s Exponential Smoothing To determine initial estimates of the seasonal indices we need to use at least one complete season's data (i.e. s periods).Therefore,we initialize trend and level at period s. Initialize level as: Initialize trend as Initialize seasonal indices as:

Winter’s Exponential Smoothing We will apply Winter’s method to Acme Tool company sales. The value for  is .4, the value for  is .1, and the value for  is .3. The smoothing constant  smoothes the data to eliminate randomness. The smoothing constant  smoothes the trend in the data set.

Winter’s Exponential Smoothing The smoothing constant  smoothes the seasonality in the data. The initial values for the smoothed series Ft, the trend Tt, and the seasonal index St must be set.

Example: Quarterly Sales of Saws for Acme tool

Example: Quarterly Sales of Saws for Acme tool RMSE for this application is:  = 0.4, = 0.1,  = 0.3 and RMSE = 83.36 Note the decrease in RMSE.

Additive Seasonality The seasonal component in Holt-Winters’ method. The basic equations for Holt’s Winters’ additive method are:

Additive Seasonality The initial values for Ls and bs are identical to those for the multiplicative method. To initialize the seasonal indices we use