An experienced purchase manager feels that moving average method would be most a
ID: 361124 • Letter: A
Question
An experienced purchase manager feels that moving average method would be most appropriate to make weekly sales forecasts of company’s main product. The manager has historical data of sales forecasts and actual sales for last 100 weeks of company’s main product. Explain how should the manager determine the number of moving periods he should use to make the forecasts- that is, should he use 2-period, or 3-period, or 4-period, or 5-period, etc., moving average. Use your own dataset to explain An experienced purchase manager feels that moving average method would be most appropriate to make weekly sales forecasts of company’s main product. The manager has historical data of sales forecasts and actual sales for last 100 weeks of company’s main product. Explain how should the manager determine the number of moving periods he should use to make the forecasts- that is, should he use 2-period, or 3-period, or 4-period, or 5-period, etc., moving average. Use your own dataset to explainExplanation / Answer
Since the manager has decided to use moving average method to make weekly sales forecasts of company’s main product, he need to determine if there is a trend in the data either increasing or decreasing. The longer the moving average period, the more the random elements are smoothed but if there is a trend in the data-either increasing or decreasing-the moving average has the adverse characteristic of lagging the trend. Therefore, while a shorter time span produces more oscillation, there is a closer following of the trend. Conversely, a longer time span gives a smoother response but lags the trend. The different moving averages produce different forecasts. The greater the number of periods in the moving average, the greater the smoothing effect. If the trend of past data is fairly constant with substantial randomness, then a greater number of periods should be chosen. But if more responsiveness is needed, fewer periods should be included in the moving average.
It can depicted by taking an example of 10 week period
week
Actual sales
3 week moving average
6 week moving average
10 week moving average
1
450
2
440
3
460
4
410
450+440+460/3=450
5
380
440+460+410/3=437
6
400
460+410+380/3=417
7
370
397
423
8
360
383
410
9
410
377
397
10
450
380
388
11
470
407
395
413
week
Actual sales
3 week moving average
6 week moving average
10 week moving average
1
450
2
440
3
460
4
410
450+440+460/3=450
5
380
440+460+410/3=437
6
400
460+410+380/3=417
7
370
397
423
8
360
383
410
9
410
377
397
10
450
380
388
11
470
407
395
413
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