Exponential smoothing forecasts: taming the bullwhip effect when demand is seasonal

Abstract

In this paper, we study the influence of seasonal demands and forecasts on the performance of an Automatic Pipeline, Variable Inventory, Order-Based, Production Control System (APVIOBPCS) using linear control theory. In particular, we consider a system that uses a seasonal forecast based on a no-trend, additive-seasonality exponential-smoothing model, and compare its performance to an equivalent system using simple exponential smoothing. We find that the system with seasonal forecasting significantly outperforms the system with simple exponential smoothing under certain demand assumptions. With optimal parameter settings, the forecast error of the seasonal model can be up to 40% lower. However, we also find that the forecast superiority does not necessarily translate to the performance of the system measured through the bullwhip metrics. In addition, the seasonal forecasting model is very sensitive to the demand frequency and smoothing parameters, while the simple exponential smoothing model is very robust. This implies that the real life benefits of implementing a seasonal forecasting model are not obvious and depend on the particular situation; under a large number of settings (e.g. low seasonality, high-smoothing), the good performance of simple exponential smoothing certainly justifies its popularity in the industry and research worlds alike.