W02 L1 TimeSeries ANNOTATED

CTL.
SC1x -Supply Chain & Logistics Fundamentals
Time Series Analysis

Demand – Sales By Month
What do you notice?
CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Time Series Analysis 2
Demand – Sales by Week
Demand – Sales by Day
Demand - Seasonality Sales also differ dramatically
by day of week (DOW)!
Sales differ dramatically

by quarter and month
within quarter!
Demand Forecast
Now
Past Future
Identifying patterns in the past

help us to forecast the future.
Agenda
• Time Series Components
• Cumulative Forecasts
• Naïve Forecasts
• Moving Average Forecasts
Time Series Components
• Level (a)
Demand rate
 Value where demand hovers around (mean) a
 Captures scale of the time series
 With no other pattern present its a constant value
time
• Trend (b)
 Rate of growth or decline
Demand rate
 Persistent movement in one direction
 Typically linear but can be exponential, quadratic, etc.
b
• Seasonal Variations (F) time
 Repeated cycle around a known and fixed period

 Hourly, daily, weekly, monthly, quarterly, etc.
F
Can be caused by natural or man-made forces
Demand rate

• Random Fluctuations (e or ε)
 Remainder of variability after other components time
 Irregular and unpredictable variations, noise
• Cyclical Movements (C)
 Periodic movement not of a fixed period
 Duration can be of different lengths
 Most often tied to longer term business cycles or economic conditions
80
70
60
50
40
70 30
Institute of Supply Management (ISM)
20
65
Purchasing Manager Index ( PMI)
Expansion
60
55
50
Contracting
45
40
35
30
Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10
Data source: Federal Reserve of St. Louis.
http://research.stlouisfed.org/fred2/series/NAPM
Time Series Models
• Components can be combined in different ways:
Note – we can transform the multiplicative
 Multiplicative: xt = bFtCtet xt = bFtCtet to: ln(xt)=ln(b)+ln(Ft)+ln(Ct)+ln(et)
 Additive: xt = a + bt + Ft + Ct + et
 Mixed: xt = (a + bt)Ft + Ct + et Model depends on how
xt = a + btFt + Ct + et seasonality impacts
xt = aFt + bt + Ct + et trend and/or level?
• We will focus on four models

 Level Model: xt = a + et
 Trend Model: xt = a + bt + et
 Mix Level-Seasonality Model: xt = aFt + et
 Mix Level-Trend-Seasonality Model: xt = (a + bt)Ft + et
Notation:
xt = Actual demand in period t t = time period (0, 1, 2,…n)
a = Level component b = linear trend
Ft = Seasonal index appropriate for period tCt = Cyclical index for period t
et = Error – independent random variable (μ=0) and constant σ2
Cumulative vs. Naïve Forecasts
Time Series Models
• Predominant use of Time Series is for forecasting product demand of . . .
Mature products at the SKU level over a . . .
Short time horizon (weeks, months, quarters, year) . . .
Where demand of items is independent.
• So, components used are level, trend, seasonality, and error.
• Simple Procedure
1. Select an appropriate underlying model of the demand pattern over time
2. Estimate and calibrate values for the model parameters
3. Forecast future demand with the models and parameters selected
4. Review model performance and adjust parameters and model accordingly
Time Series Analysis
• Critical assumption: How important is the history?
• Two extreme assumptions: Very Important or Not at All
Cumulative Forecast Naïve Forecast
 All history matters equally  Most recent dictates next
 Pure stationary demand  Random Walk, Last is Next
Underlying Model: Underlying Model:

xt = a + et xt = xt-1 + e t
where: where:
et ~ iid (μ=0 , σ2=V[e]) e t ~ iid (μ=0 , σ2=V[e])
Forecasting Model: Forecasting Model:

t
x x̂t ,t1  xt
i1 i
x̂t,t1 
t
x̂t,t = Forecast made at end of period t for demand in period t+ , for  =1,2,3 ...
xt = Actual demand for period t
Cumulative vs. Naïve Forecasts
Suppose we are at time=10 and want to find forecast for time=11; x^10,11
110
t xt
1 109
108 Cumulative Forecast:
106

10
2 92 x
104 i1 i 995
3 98
102
x̂10,11    99.5
4 96 10 10
100
5 104
98
6 98
96
7 109
94 Naïve Forecast:
8 99
9 94 92 x̂10,11  x10  96
90
10 96
1 2 3 4 5 6 7 8 9 10 11
Lets look at “next period” forecasts for cumulative and naïve models . . .
Cumul Naïve 110
108
t xt x^t,t+1 x^t,t+1 Note:
106
1 109 109 109
104 • Cumulative model is
2 92 100.5 92
3 98 99.7 98 102 “calm” while the
4 96 98.8 96 100 Naïve model is
5 104 99.8 104 98 “nervous”.
6 98 99.5 98 96 • Naïve model is more
7 109 100.9 109 94 responsive than the
8 99 100.6 99 92 cumulative model.
9 94 99.9 94 90
1 2 3 4 5 6 7 8 9 10 11
10 96 99.5 96
Moving Average Forecast
Underlying Model:
Time Series Models xt = a + et
• Moving Average where:
 Only include the last M observations
 Compromise between cumulative et ~ iid (μ=0 , σ2=V[e])
and naïve Forecasting Model:

t
xi
x̂t,t1  it1M
M
x̂t ,t1 110
108
106
t xt Naïve M2 M4 M6 Cum 104
1 109 109 109.0
2 92 92 100.5 100.5 102
3 98 98 95.0 99.7 100
4 96 96 97.0 98.8 98.8
98
5 104 104 100.0 97.5 99.8
6 98 98 101.0 99.0 99.5 99.5 96
7 109 109 103.5 101.8 99.5 100.9 94
8 99 99 104.0 102.5 100.7 100.6
92
9 94 94 96.5 100.0 100.0 99.9
10 96 96 95.0 99.5 100.0 99.5 90
1 2 3 4 5 6 7 8 9 10 11
Actual Naïve M2 M4 M6
Moving Average Models 
t
xi
x̂t ,t1  it1M
• Moving Average Model is a general model M

 Cumulative model (M=t)
 Naïve model (M=1)
• How big should M be?

 Too small? Overly responsive to noise, very nervous
 Too big? Averages out noise, misses step changes in demand
 Often use “practical” values of M (4, 6, 12, etc.)
• Note that Moving Average models always lag!

 Assumes stationary demand
 The larger the M, the longer the lag
Key Points from Lesson
Key Points from Lessons
• Time Series Analysis
Demand rate
 Pattern matching of data that is
distributed over time time
• Five Components (focus on first four)
Demand rate
 Level (a) a
 Trend (b)
 Seasonality (F) time
Demand rate
 Error (e)
 Cyclical (C) b
• Decompose the Demand using Models time
 Level Model: xt = a + et F
Demand rate
 Trend Model: xt = a + bt + et
 Seasonality Model: xt = (a + bt)Ft + et
time

t
x
Key Points from Lessons x̂t,t1  i1 i
t
• Three Models
x̂t ,t1  xt
 Cumulative – “everything matters”
 Naïve – “only yesterday matters”

t
 Moving Average – “select how much matters” xi
x̂t,t1  it1M
• Differences M
 Level of volatility
 Naïve (nervous) to Cumulative (calm) with MA in middle
 Required amount of data to store
 Naïve & Cumulative (1 per SKU)
 Moving Average (M items for each SKU)
• Similarities
 Assume level demand – no trends or steps or seasonality
 All of these models lag to some degree
 Equal weighting of observations regardless of time
CTL.SC1x -Supply Chain & Logistics Fundamentals
Questions, Comments, Suggestions?

Use the Discussion!
“Dude”
Photo courtesy Yankee Golden
Retriever Rescue (www.ygrr.org)
caplice@mit.edu

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CTL.

SC1x -Supply Chain & Logistics Fundamentals

Time Series Analysis

Sales differ dramatically

Identifying patterns in the past

• Seasonal Variations (F) time

 Repeated cycle around a known and fixed period

• We will focus on four models

Underlying Model: Underlying Model:

• Moving Average Model is a general model M

• How big should M be?

• Note that Moving Average models always lag!

• Five Components (focus on first four)

• Decompose the Demand using Models time

Questions, Comments, Suggestions?

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