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.