A state space model for exponential smoothing with group seasonality

Abstract

We present an approach to improve forecast accuracy by simultaneously forecasting a group of products that exhibit similar seasonal demand patterns. Better seasonality estimates can be made by using information on all products in a group, and using these improved estimates when forecasting at the individual product level. This approach is called the group seasonal indices (GSI) approach, and is a generalization of the classical Holt-Winters procedure. This article describes an underlying state space model for this method and presents simulation results that show when it yields more accurate forecasts than Holt-Winters.Common seasonality; demand forecasting; exponential smoothing; Holt-Winters; state space model.