Practical Use of Exponential Smoothing

The important point to remember about exponential smoothing, or any forecast method, is that the choice of an appropriate forecasting technique depends on the pattern data that is to be forecast.

As a case in point, Figure 6.9 shows a typical pattern of sales for the life cycle of a product. Product life cycles often progress from the introduction point, to rapid growth and market penetration, to a mature phase of sales stability, to periods of declining market share and abandonment. Over this life cycle, different methods of sales forecasting may be appropriate.

In the initial phase, and before the generation of significant market data, qualitative analyses and market experiments are highly appropriate. Once the product has been launched and is rapidly gaining market acceptance, in phase II, three-parameter exponential smoothing methods that involve level, trend, and seasonal components become relevant. In the mature phase of sales stability, phase III, two-parameter exponential smoothing models (or econometric models)

4 P. R. Winters, "Forecasting Sales by Exponentially Weighted Moving Averages," Management Science 6 (April 1960), 324-342.

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