Performing Simple Exponential Smoothing

Scenario

We wish to create a simple exponential smoothing (SES) forecast with the following monthly sales values:

[33, 44, 23]

Approach

We will do this manually in order to illustrate the technique.

The level updating equation is:

Lₜ=αYₜ+(1-α)Lₜ-₁

Expressed differently:

Fₜ₁= Lₜ= αYₜ+(1-α)Lₜ-₁ = Fₜ + αeₜ

Where eₜ is the error.

Alpha is the smoothing constant and it has this property:

0 <= α <= 1

We will use an α equal to 0.1.

Set Lₜ-₁ to the first observation in the data set or 33 . We could also choose another value, like the average of all the observations, or (33 + 44 + 23)/3.

So to forecast we do:

Values  Forecast (Lₜ) or (Fₜ₁)        Error (eₜ)
33
44 33 +11.0
23 33.0 + 0.1 * 11 = 34.10 -11.1
34.1 + 0.1 * -11.1 = 32.99

Here we arrive at a future forecast of 32.99.

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Ole Ersoy

Ole Ersoy

Founder of Firefly Semantics Corporation