Forecast Demand Decay Factor

The Forecast Demand Decay Factor is the recency weight used in the forecast calculation. For example, if the Forecast Demand Decay Factor equals 0.85 and the Period Length in Days equals 30 (one month) then:

• each historical month gets a weight

• the most recent month (now) gets weight 1

• the previous month the weight becomes 0.85

• the month before the weight becomes 0.85² = 0.7225

• the month before the weight becomes 0.85³ = 0.6141

• and so on.

So older months still matter, but less and less.

The formula used is effectively:

• weighted monthly demand = SUM(monthlyQty × decayWeight) / SUM(decayWeight)

where: decayWeight = ForecastDemandDecayFactor^(MonthsAgo - 1)

With a higher Forecast Demand Decay Factor value, such as 0.95:

• older months keep more influence

• forecast is smoother, less reactive

With a lower Forecast Demand Decay Factor value, such as 0.60:

• recent months dominate

• forecast reacts faster, but is noisier

For example, if monthly sales were:

• last month: 100

• 2 months ago: 50

• 3 months ago: 0

The demand forecasting figure with a Forecast Demand Decay Factor of 0.85 is:

• (100×1 + 50×0.85 + 0×0.85²) / (1 + 0.85 + 0.7225)

• = 142.5 / 2.5725

• ≈ 55.4

So, the Forecast Demand Decay Factor behaves like a recency-biased factor.