ME2053 Logistics & Supply Chain

Management
Second period 2023

Case 1: Group 11
Dwyan Zakaria
Giorgio Edoardo Biguzzi
Jondlin John Rose
Omar Zabian
Valentino Cervi

Seminarium date: 2023/11/13

Background and problem formulation
SPC is a company that produces food containers from polystyrene and its product
offer is composed of Clear and Black containers. The demand for this kind of products is
affected by seasonality and the company doesn't manage to have enough production
capacity to satisfy the demand during the moment of peak. This results in having a bigger
inventory of raw materials to anticipate the future demand.
In order to initiate a decision making process on whether to invest or not, accurate
forecasts are required.

Method
The analysis is conducted by comparing the forecast errors in different models and
then by choosing the method that minimizes them. The models taken into consideration are:
● Static seasonal forecasting: utilizes fixed seasonal indices to predict future values,
making it suitable for time series data with consistent and unchanging seasonal
patterns.
● Moving Average: it uses the average of a certain amount of previous periods as an
input. The amount of periods included depends on the data and an expert decision.
● Simple Exponential Smoothing: It uses smoothing parameters to balance past
observations and adjust forecasts accordingly. It also assumes that the future will be
more or less the same as the recent past, so last demands are taken more into
consideration.
● Holt: an extension of the simple exponential smoothing, incorporates a trend
component for linear trends.
● Winter: an enhancement of Holt’s method, includes a seasonal component to capture
recurring patterns.

In order to get the best forecasting result, it is necessary to reduce the overall error as
much as possible. This requires keeping track of different forecasting errors, like Mean
Absolute Deviation (MAD), Mean Absolute Percentage Error (MAPE) and Mean Squared
Error (MSE). Considering the case data, MAPE is the most adapted metrics for dealing with
significant seasonality and high demand variation from one period to the next (Chopra, 2016,
p. 206)
Furthermore, for those forecasting methods that include smoothing constants (simple
exponential smoothing, Holt and Winter), nonlinear optimizers have been used to minimize
the errors according to the data available.

Results
In this section, the results from the analysis mentioned above are presented
comparing the different forecasting methods. As mentioned, the Mean Absolute Percentage
Error (MAPE) was chosen as the evaluation metric to assess the accuracy of each model.
The results obtained can be seen in the charts below.
Black Plastic Forecast - Measure of Errors
Categor Static Moving Simple Winter
Holt
y Regression Average Exponential Optimized

MPE 1.5% 9.0% 22.9% 21.3% 1.5%

MAPE 9.7% 36.4% 51.0% 44.0% 9.7%

MSE 346,930 8,222,662 9,620,812 7,435,851 346,930

RMSE 589 2868 3102 2727 589

MAD 446 2069 2250 2148 446

Min TS -3.5 -4.7 -3.9 -2.3 -3.5

Max TS 4.5 2.7 5.0 3.0 4.5

Clear Plastic Forecast - Measure of Errors

Categor Static Moving Simple

Holt
Winter
y Regression Average Exponential Optimized

MPE 2.4% 28.4% 62.5% 38.1% 2.4%

MAPE 12.1% 59.6% 62.5% 63.1% 12.1%

MSE 792,728 18,527,671 17,015,711 16,027,735 792,728

RMSE 890 4304 4125 4003 890

MAD 656 3238 3154 3078 656

Min TS -3.9 -4.9 -3.1 -1.9 -3.9

Max TS 3.5 1.0 4.6 2.1 3.5

Due to this specific case, the minimum error should be obtained by using models that
account for seasonality. Indeed, as expected by the theory, the best MAPE is reached with
the static seasonal regression(B:9,7%; C:12,1%) and the Winter's model(B:9,7%; C:12,1%
for α = 0, β = 0.000253, γ = 0). On the other hand, poor performances are evident in the
other methods of forecasting in which the worst MAPE results are obtained through the
simple exponential model for the black containers(51%) and through the Holt's model for the
clear ones (63,1%). Moreover, MSE and MAD are aligned also with the MAPE highlighting
even more the strength of the chosen method for forecasting.
Visualizing the plots of the different models, it is even more immediate to evaluate the
accuracy and the error of the forecasts.(Appendix)
Discussion
As was visible in the graphic provided by the case information, the demand for both
types of plastic shows a clear seasonality in a constant way throughout the years. It was
expected that both the static seasonal regression and Winters model would outperform the
other models as these two have the ability to capture the seasonal variation and produce a
more accurate forecast. The other three methods exhibited varying levels of accuracy, being
the moving average the best of the rest.
According to Chopra (2016, p. 207), in order to guarantee the casual nature of the
error, the bias needs to be randomly distributed around 0. In consequence of that, the
tracking signal must be within the range -6;+6. It is important to note that the totality of the
models proposed fall within this safe range so the forecasts obtained should have a good
degree of reliability.
Comparing the static and dynamic methods, it is possible to see that the results
obtained after optimizing the smoothing constants are exactly the same for the seasonal
regression and Winters model. There are some reasons that can explain these results such
as stationary time series, meaning that the patterns, trends and seasonality remain relatively
constant, making it less critical to account for changes over time. Other reasons might
include a short time horizon, effective model initialization, etc.
As the results obtained were the same, it is possible to wonder which of the two
methods should be used. To begin this analysis, the first advantage of the static model is the
simplicity of calculation, as they are easier to understand and implement. There are less
formulas used, the complexity is lower and most importantly, it does not require an optimizer
to get the best result possible (Jackson and Abraham, 2018).
On the other hand, to obtain the least amount of error in Winter’s model, a nonlinear
optimizer is required, which adds complexity and requires much more processing power. In
this small scenario, the time consumed by the optimizer was negligible but in bigger cases,
this can be a decisive factor.
As was mentioned, one of the reasons why both models had the same results was
the constant patterns within the data. If this wasn’t the case, then Winter’s model has the
advantage as it has the capacity to adapt to new data and thus would probably obtain better
results.
Finally, it is important to also reflect on some of the limitations for these dynamic
models. Winter’s method struggles when it comes to long-term forecasting as it relies heavily
on recent data and exponential smoothing, which may not accurately capture long-term
trends. The need of smoothing constants and the optimization of these can also represent a
problem if there is no available nonlinear optimizer. It is also worth mentioning that in some
cases, these models can be unstable and thus not suitable for forecasting (Hyndman and
Akram, 2006).

Conclusion
In conclusion, the static seasonal forecast model and the Winter model, after being
optimized, are the best performing models with the lowest Mean Absolute Error (MAPE) from
the five models tried in this report. The static forecast manages to excel due to the stable and
predictable data, capturing the seasonality and trends without the need for dynamic
adjustments.
Meanwhile, the Winter model offers the same level of accuracy, but only after running
a nonlinear optimizer to determine the specific smoothing constants needed. This model is
the preferred option when the patterns are evolving and trends change over time, all while
presenting a seasonal component. The decision between the models ultimately depends on
the nature of the time series data and the level of accuracy required.

Reference list:
- Chopra, S. and Meindl, P. (2016). Supply chain management : strategy, planning,
and operation. 6th ed. Boston, Mass.: Pearson., pages 206-207
- Hyndman, R. J., & Akram, M. (2017). Some nonlinear exponential smoothing models
are unstable (Version 1). Monash University.
https://doi.org/10.4225/03/593616d566010
- Jackson, E. and Abraham (2018). Comparison between Static and Dynamic Forecast
in Autoregressive Integrated Moving Average for Seasonally Adjusted Headline
Consumer Price Index Comparison between Static and Dynamic Forecast in
Autoregressive Integrated Moving Average for Seasonally Adjusted Headline
Consumer Price Index. [online] Available at:
https://mpra.ub.uni-muenchen.de/86180/1/MPRA_paper_86180.pdf.
 Appendix

● Static Forecast:

● Moving Average:

● The Simple Exponential Model:

● Holt's model

● Winter's model