Combining demand forecasts in a newsboy problem using an unequally weighted method

Authors: Chih-Ming Lee, Wen-Lung Wan

Journal: Chiao Da Management Review. Jun. 2014, 34(1): 177-199.

Keywords: Newsboy problem; Demand forecasting; Search algorithm

Abstract:
Demand forecasting is important for the decision maker facing a newsboy problem as goods cannot be carried over to be sold in the following period. In this paper, we develop a model to assist the decision maker using an unequally weighted method in combining forecasts to improve forecast accuracy. The optimal weights are decided by minimizing the variance of combined forecasts. We find that the optimal weights of uncorrelated forecasts decrease with their variances. When two uncorrelated forecasts are considered, one should select the forecast with smaller variance to combine with current forecasts in hand. Theoretically, the best combination of forecasts can be found by a complete search algorithm. We also propose three algorithms: a forward a lgorithm, a backward algorithm, and a correlated search algorithm to save computational time when the number of forecasts to be considered is large.