Supply Chain & Logistics Analytics – Session 3

Forecasting and Accuracy Measurement Part II

Chapter 1, 2, 3 from the Recommended Textbook
What will we cover?

 Forecast Accuracy Measurements

 Forecast and Accuracy Measurement Working
 Accuracy and Forecast Selection Measure Discussion
 Forecast Accuracy and Inventory
• The global retail market continues to grow larger and the influx of
consumer data increases daily.
• The rise in volume, variety, and velocity of data poses challenges with
demand forecasting and inventory planning.
• Outdated systems generate inaccurate demand forecasts.
• This results in multiple challenges for retailers. They are faced with
over-stocking and lost sales, and often have to rely on increased levels
of safety stock to avoid losing sales.

• A recent McKinsey study indicates that AI-based forecasting improves

forecasting accuracy by 10–20 percent.
• This translates to revenue increases of 2–3 percent.
• An accurate forecasting system can also help determine ideal inventory
levels and better predict the impact of sales promotions.
• It provides a single view of demand across all channels and a better
customer experience overall.
Forecast Accuracy Measures
 Forecast Accuracy Measures
MAD (Mean Absolute Deviation)

Mean of (Absolute Variation between FORECAST and

ACTUALS) in case of many products in a category

MAPE (Mean Absolute Percentage Error)

MAD / Sales or Forecast based on company policy

WAPA (Weighted Absolute Percentage Accuracy)

1 – MAPE

MAPE measures error and WAPA measures accuracy

MAPE and WAPA are inverse of same picture
 Forecast Accuracy Case Discussion
Home Care, Stationery and Safety are the divisions with a Sales
and Marketing Head

There are Separate Division Managers for each division

S&M is happy with last month performance 52K achievement vs

48K

Home care and Safety over performed while Stationery under

performed

Supply Chain is indicating next month home care would miss

their targets
 Forecast Accuracy Case Discussion
Stationery will have double hit with under performance and over
stock provisions in their P&L

Finance Controller is skeptical about mismatch in their budget,

forecast and sales

Inventory Controller wants a newer method of accuracy measure

SMA
 SMA
Month Actual SME 3 SME 5
1 1104 1104 1104
2 885 885 885 SMA 3
3 976 976 976 Forecast for month 4 = Average of
4 1101 988 1101 Month 1 + Month 2 + Month 3
5 1120 987 1120
6 1276 1066 1037 SMA 5
7 1419 1166 1072 Forecast for month 6 = Average of
8 1615 1272 1178 Month 1 + Month 2 + Month 3 + Month
9 1836 1437 1306 4 + Month 5
10 1730 1623 1453
11 1686 1727 1575
We will go back in history and
12 1769 1751 1657
1727
start building up the forecasts
13 1521 1728
1708
based on Simple Moving
14 1504 1659
1642 Average 3 and 5 Months
15 1478 1598
16 1480 1501 1592
17 1726 1487 1550 When to choose which period
18 1759 1561 1542 for SMA
SES
 SES
SES 0.8
Forecast for Period 2
Month Actual SES .8 SES .4
1 1104 1104 1104
0.8 * Period 1 Sales
2 885 1104 1104
+
3 976 929 1016
4 1101 967 1000
0.2 * Period 1
5 1120 1074 1041 Forecast
SES 0.4
6 1276 1111 1072
Forecast for Period 2
7 1419 1243 1154
8 1615 1384 1260
0.4 * Period 1 Sales
9 1836 1569 1402
+
10 1730 1783 1576
11 1686 1741 1637
0.6 * Period 1 Forecast
12 1769 1697 1657
13 1521 1755 1702 We will go back in history and
14 1504 1568 1629 start building up the forecasts
15 1478 1517 1579 based on SES Alpha 0.8 & 0.4
16 1480 1486 1539
17 1726 1481 1515
18 1759 1677 1600
What Alpha to Choose?
Forecast Accuracy Measures
Forecast Accuracy Measures
Forecast Accuracy Measures
Forecast Accuracy Measures
 Indicative Methods
Walmart’s JDA system is currently responsible
for crunching historical sales data on a
weekly basis to come up with demand
forecasts for roughly 500 million item-by-
store combinations in the US, said Walmart
Labs‘ Distinguished Data Scientist and
Director of Data Science John Bowman. “We
forecast out a full 52-week horizon in weekly
increments, and we generate a new set of
forecasts every week, over the weekend,”
During a presentation at Nvidia’s GPU Technology Conference (GTC)
this week, the director of data science for Walmart Labs shared how
the company’s new GPU-based demand forecasting model achieved
a 1.7% increase in forecast accuracy compared to the existing
approach
How Forecasting Algorithms Work
How does Forecasting work?

Why is History Significant?

Why is Cleaning History

Important?
Indicative Methods
Forecastability Matrix
 Decisions on Statistical Forecasting
• Forecastability-based segmentation of your portfolio enables you to focus on segments
where you can realise the maximum return on invested effort towards statistical
forecasting

• What is the lowest level in the hierarchy you should forecast at? What level of product
or customer gives the best balance of forecast quality vs planning processes you want
the forecast to feed into.

• What should be the time granularity of your forecasts and the proper forecast offset
(lag)? Is it necessary to generate weekly forecasts – especially when the timing of
demand is difficult to predict – or is it better to do monthly or even quarterly rolling
forecasts

• Choose statistical forecasting algorithms correctly based on the forecast profile.

Forecast plus inventory policy
 Tips to Improve Statistical Forecasting
• Finding the right planning level to run your stat forecasts

• Improving data quality of time series

• Multiple back testing periods

• Choice of algorithms

• Transparency and understanding statistical forecast behaviour

Product Behaviour
Indicative Methods
Indicative Methods
 Ensemble Methods
• Another way to handle non-stationery data is ensemble methods
• Ensembling uses multiple machine learning and data mining
methods to further combine their results and increase predictive
accuracy.
• The technique has nothing to do with new approaches in data
science, but it has critical meaning in terms of business decisions
related to data science initiatives.
• While building robust forecasting is expensive and time-
consuming, it doesn’t narrow down to making and validating one
or two models with further choosing of the best performer.
• In terms of time series, non-stationary components – like
different durations of cycles, low weather predictability, and
other irregular events that have an impact across multiple
industries – make things even harder.
 Ensemble Methods
By averaging the forecast of many models that perform differently
in different time series situations, they achieved better
predictability than they could with a single model.

While some models work better with their specific non-stationary

data, others shine in theirs.

The average that they yield acts like an expert opinion and turns out
to be very precise.
Ensemble Methods
 More Retail Limited Mini Case
More Retail Ltd. (MRL) is one of India’s top four grocery retailers,
with a revenue in the order of several billion dollars. It has a store
network of 22 hypermarkets and 624 supermarkets across India,
supported by a supply chain of 13 distribution centers, 7 fruits and
vegetables collection centers, and 6 staples processing centers.
With such a large network, it’s critical for MRL to deliver the right
product quality at the right economic value, while meeting
customer demand and keeping operational costs to a minimum.

How can analytics come handy in MRL situation?

 More Retail Case Discussion
More Retail Ltd. (MRL) is one of India’s top four grocery retailers, with a revenue in
the order of several billion dollars. It has a store network of 22 hypermarkets and
624 supermarkets across India, supported by a supply chain of 13 distribution
centers, 7 fruits and vegetables collection centers, and 6 staples processing
centers.

With such a large network, it’s critical for MRL to deliver the right product quality at
the right economic value, while meeting customer demand and keeping operational
costs to a minimum. MRL collaborated with Ganit as its AI analytics partner to
forecast demand with greater accuracy and build an automated ordering system to
overcome the bottlenecks and deficiencies of manual judgment by store managers.
MRL used Amazon Forecast to increase their forecasting accuracy from 24% to
76%, leading to a reduction in wastage by up to 30% in the fresh produce category,
improving in-stock rates from 80% to 90%, and increasing gross profit by 25%.
 More Retail Case Discussion
An ML-based approach unlocked the true power of data for MRL. With Forecast,
two national models were created for different store formats, as opposed to over
1,000 traditional models that was existing.

Forecast also learns across time series. ML algorithms within Forecast enable
cross-learning between store-SKU combinations, which helps improve forecast
accuracies.

Additionally, Forecast allows to add related time series and item metadata, such as
customers who send demand signals based on the mix of items in their basket.
Forecast considers all the incoming demand information and arrives at a single
model. Unlike conventional models, where the addition of variables leads to
overfitting, Forecast enriches the model, providing accurate forecasts based on
business context. MRL gained the ability to categorize products based on factors
like shelf life, promotions, price, type of stores, affluent cluster, competitive store,
and stores throughput.
More Retail Case Discussion
 Air Travel Forecast Mini Case
Passenger traffic at the world’s airports is projected to reach 6.5
billion in 2022, down by -28.9% on 2019 levels, according to
Airports Council International (ACI) World.

The association said that despite persistent challenges, the industry

has reached “a potential turning point in the recovery of travel.
Despite slower than expected recovery and persisting financial
challenges, the easing of travel restrictions in key aviation markets
brings some renewed optimism and momentum amid the addition
of new geopolitical tensions.”

What factors can play key role in forecasting of Global Air Travel in
2022 – 2023? Keeping analytics in view, how can this situation be
forecasted?
Backup Slides