In the exponential smoothing method, which one of the following is true?
A
α≥1 and high value of α is used for stable demand
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B
0≤α≤1 and high value of α is used for stable demand
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C
0≤α≤1 and high value of α is used for unstable demand
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D
α≤0 and high value of α is used for unstable demand.
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Solution
The correct option is C0≤α≤1 and high value of α is used for unstable demand In exponential smoothing forecast,
Ft=Ft−1+α(Dt−1−Ft−1)
where, α=2n+1 (n = number of periods)
Case I: For n→∞,α=0, i.e. stable demand.
Case II: For n→1,α=1 i.e. unstable demand.
So, 0≤α≤1 and high value of α is used for unstable demand.
Points to Remember :
Responsiveness indicates that forecast has a fluctuating and swinging pattern. It is preferred for new products and for that number of period is kept two i.e. n→1
Stability represents that a forecast pattern is flat or has less fluctuation. It is preferred for old existing products and for that number of period kept large i.e. n→∞