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In simple exponential smoothing forecasting, to give higher weightage to recent demand information, the smoothing constant must be close to

In simple exponential smoothing forecasting, to give higher weightage to recent demand information, the smoothing constant must be close to Correct Answer 1

Explanation:

In exponential smoothing method of forecast the forecast for the next period is equal to 

Ft = α Dt-1 + (1 - α) Ft-1 

If we further expand the expression

Ft = α Dt-1 + (1 - α) (α Dt-2 + (1-α) Ft-2

Ft = α Dt-1 + α (1-α ) Dt-2 + (1 - α )2 Ft-2

If we put the value of α = 0.8 (Close to 1) then,

Ft = 0.8 Dt-1 + 0.16 Dt-2 + 0.04 Ft-2 

It can be observed from the above expression that recent data is given more weightage compared to the previous data, therefore, the higher value of exponential smoothing constant (Close to 1) is used for changing pattern of demand or to follow recent demand.

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