An Exponential Smoothing Model with a Life Cycle Trend

39 Pages Posted: 8 Jul 2016 Last revised: 4 Sep 2019

See all articles by Xiaojia Guo

Xiaojia Guo

University College London - School of Management

Kenneth C. Lichtendahl

University of Virginia - Darden School of Business

Yael Grushka-Cockayne

University of Virginia - Darden School of Business; Harvard University - Business School (HBS)

Date Written: March 20, 2019

Abstract

We study the problem of forecasting a time series that evolves according to a dynamically changing, skewed life cycle. For instance, firms often need accurate distributional forecasts of product life cycles to make operational decisions about capacity and inventory management. These forecasts often need to be made prior to launch, updated frequently thereafter, and generated at scale. Exponential smoothing models are commonly used in practice to make time series forecasts because they are tractable, accurate, and easy to interpret. This work is the first to develop an exponential smoothing model with a life-cycle trend. The life-cycle trend in the model follows the density of a new distribution called the tilted-Gompertz distribution. The model includes prior distributions on its parameters. These prior distributions become regularization terms in the model and allow the manager to make accurate forecasts from the beginning of a life cycle, which is a notoriously difficult problem. We provide closed-form quantile forecasts from our model and demonstrate that the model can capture a wide range of skewed diffusions. In two empirical studies, our model outperforms leading diffusion models in out-of-sample point forecasting and quantile forecasting. The model's accuracy appears to be due to its flexible shape and regularized and time-varying parameters.

Keywords: demand forecasting; capacity planning; inventory management; new product adoption; skewed diffusions; quantile forecasts

Suggested Citation

Guo, Xiaojia and Lichtendahl, Kenneth C. and Grushka-Cockayne, Yael, An Exponential Smoothing Model with a Life Cycle Trend (March 20, 2019). Darden Business School Working Paper No. 2805244. Available at SSRN: https://ssrn.com/abstract=2805244 or http://dx.doi.org/10.2139/ssrn.2805244

Xiaojia Guo

University College London - School of Management ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Kenneth C. Lichtendahl

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Yael Grushka-Cockayne (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

HOME PAGE: http://https://www.hbs.edu/faculty/Pages/profile.aspx?facId=263650

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