Question

2.3.1 “A recent report produced by Shop n Pay’s chief demand planner has revealed that the retailer’s reliance on simple exponential smoothing to forecast demand for its products is partly responsible of the significant pile-up of goods in the company’s main distribution centre.” In light of the statement above, highlight any THREE (3) weakness of the simple exponential smoothing method of forecasting. (3)

C. Forecasting and other supply chain activities A recent report produced by Shop n Pay's chief demand planner has revealed that the retailer's reliance on simple exponential smoothing to forecast demand for its products is partly responsible for the significant bullwhip effect in the supply chain and the stock outs in the past few years. In this regard, the chief demand planner is recommending that exponential smoothing with trend adjustment (Holt's Model) should be used to forecast demand for aggregate planning for the 2020 fiscal year. Mr Msimanga has retrieved from the retailer's database the following information on number of goods sold over a two-year period. Year Monthly sales ('000 units) Feb Mar Apr May Jun Jul Aug Sep Oct Nov 2018 650 820 850 700 840 630 1050 750 2019 750 900 920 680 950 1080 742 920 820 Jan Dec 700 800 930 860 600 705 1100

Answer 1

The three main disadvantages of smple exponential smoothing are-

1. It produces forecasts that lag behind the actual trend. it neglects the ups and downs associated with random variation. As such, seeing this on a graph shows you a smoother line or curve. Since its 'smoothed', it will lag behind the actual ups and downs.
2. It cannot handle trends well. Its forecasts aren’t accurate when data with cyclical or seasonal variations are present. It should mostly be used for short term forecasts.
3. Fails to account for the dynamic changes at work in the real world, and the forecast constantly requires updating to respond to new information.