DP Statistical Forecasting

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DP Statistical Forecasting

© All Rights Reserved

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Demand Planning

Statistical Toolbox

Univariate Forecasting

– Moving Average

– Simple Linear Regression

– Exponential Smoothing

– Holt-Winters

– Croston’s Model (for sporadic demand)

Causal Analysis

– Multiple Linear Regression

Composite Forecasting

– Weighted Averaging of Multiple Models

Univariate Profile in APO

Entries

Historical input

Version,

Version and key figure

Key figure

Model parameters

Forecast strategy,

Strategy, seasonal length,

Periods per season,

smoothing parameters

Parameters: a, b, g, s

Control parameters

Without Leading Zeros,

Outlier correction, adjustment Outliers,

of corrected history,

workdays correction Days in Period

Forecast errors MAPE, RMSE,

MSE, MPE

Elements Of Univariate Forecast in APO

Seasonal Index

Length of season / Model Initialization / Ex-post

Forecast

Forecast Parameters

Outlier Correction

Univariate Forecast Model explanation

Example of forecast calculation

Forecast Errors

Actual / Basic / Trend Value / Seasonal Index

How APO Helps in forecasting!!

History

500

400

Units

300

200

100

0

Y-4 Y-3 Y-2 Y-1 Y+1

Time Now

Determine Base Level & Trend

History Trend

500

400

Units

200

100

0

Y-4 Y-3 Y-2 Y-1 Y+1

Now

Model Seasonality

500

400

Units

300

200

100

0

Y-4 Y-3 Y-2 Y-1 Y+1

Now

Forecast Future Sales / Demand

500

400

Units

300

200

100

0

Y-4 Y-3 Y-2 Y-1 Y+1

Time Now

Elements Of Univariate Forecast in APO

Index

Length of season / Model Initialization / Ex-post

Forecast

Forecast Parameters

Outlier Correction

Univariate Forecast Model explanation

Example of forecast calculation

Forecast Errors

Length of Season / Model Initialization

Ex post forecast

Elements Of Univariate Forecast in APO

Index

Length of season / Model Initialization / Ex-post

Forecast

Forecast Parameters

Outlier Correction

Univariate Forecast Model explanation

Example of forecast calculation

Forecast Errors

Univariate Model Parameters

Trend value (b)

Basic value (a)

Past Future

Data smoothing – Significance of a

based on following formula

– Ft+1 = a X t + (1-a) Ft

– Ft+1 = a X t + a(1-a) X(t -1) + a. a.(1- a) X(t-2) + …..

values as follows:

– 1st historical value: 50%, 2nd historical value: 25%

– 3rd historical value: 12.5%, 4th historical value: 6.25%......

– weights attached to the most recent observation increases

– weights to past observation decreases exponentially

The most common values for alpha lie, between 0.1 and 0.5.

Example – Constant using alpha 01 Vs 0.5

Weighting of historical periods

Constant & Trend using alpha & beta 01. Vs 0.5

Seasonal Method – Weighting factor Gamma

(for 2 or 3 yrs of history)

Elements Of Univariate Forecast in APO

Index

Length of season / Model Initialization / Ex-post

Forecast

Example of forecast calculation

Forecast Parameters

Outlier Correction

Univariate Forecast Model explanation

Forecast Errors

Outliers

Parameters for Outlier Correction

Smaller the sigma factor, Less the tolerance, greater the control

corrected

2.0

Outlier Calculation logic

Outliers are calculated in following

steps, it is assumed that data has

trend. Trend model is used for

explanation.

– Step 1 –

• Based on history, Forecast

model is initialized

• Basic value / Trend Value

calculated based on Alpha /

Beta value

• Ex-post forecast calculated

based on Basic / Trend value

• MAD calculated based on Ex-

post forecast

• Basic / Trend / Ex-post forecast

/ MAD calculated for history

horizon

– Step 2 –

• Tolerance lane values are

calculated based on Sigma Note :Outlier correction can be done based on Median as

factor, MAD & Ex-post forecast well in SAP APO version 4.1 and up

values

Outlier Calculation logic

steps

– Step 3 –

• System compares values of

Tolerance lane (+/-) with history

• If the historical value of some

period is outside tolerance lane

system stores Ex-post value as

it’s corrected history for that

period.

– Step 4 –

• Corrected history is used to re-

calculate Basic / Trend / Ex-

post forecast values

• Based on these new

parameters statistical forecast

is generated in future

well in SAP APO version 4.1 and up

Outlier Correction - Effect of Sigma value

– Historical value Period 7 are outside tolerance lane

– Period 7 history modified based on ex-post forecast for that period

– Forecast generated based on corrected history

Outlier Correction - Effect of Sigma value

– Historical values for Period 6 & Period 7 are outside tolerance lane

– Period 6 & Period 7 history modified based on ex-post forecast for that

period

– Forecast generated based on corrected history

– Smaller the sigma factor, Smaller the tolerance, Greater control

Outlier Correction - Effect of Sigma value

– None of the Historical value are outside tolerance lane

– Corrected history is the same as history

– Forecast generated based on corrected history

– Higher the sigma factor, Bigger the tolerance lane, Lesser control

Elements Of Univariate Forecast in APO

Index

Length of season / Model Initialization / Ex-post

Forecast

Example of forecast calculation

Forecast Parameters

Outlier Correction

Univariate Forecast Model explanation

Forecast Errors

Forecasting Models - Explanation

Moving Average –

– Assumption : Data varies 12

Series 3 point MA 5 point MA

shows no seasonality and

trend

11

Volume

Weighted Moving Average –

– Assumption : Data varies 10

around a constant value and

shows no seasonality and

trend

9

Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct

– Every historical value is

History Future

weighted with a factor

Forecasting Models - Explanation

Smoothing

3

–Assumption : Data varies around a

Series 5 Point MA Exponential Smoothing

constant value plus a linear trend,

but shows no seasonality

2.5

–Alpha value also controls the

variability of the trend

Volume

2

Smoothing 1.5

–Assumption : Data varies around a

constant value plus a seasonal

pattern, but shows no trend 1

Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct

–Alpha value also controls the

History Future

variability of the seasonality

Forecasting Models - Explanation

Seasonal – Trend Method – Exponential Smoothing

– Assumption : Data varies around a constant value plus a trend & seasonal

pattern

– Assumption : Data varies around a constant value plus a small trend &

seasonal pattern

– Forecast is controlled by seasonal values & periods per season

Manual Forecast –

– Assumption – Not interested in system to propose basic & trend values

– Define Basic, trend value yourself.

Croston Method

– Assumption : Demand Occurs every X period

Forecasting Models - Explanation

Auto Model I

– Assumption : Data has visible trend & seasonal pattern, 1st order

exponential smoothing required

– System checks intermittent pattern in historical data – If data is not there

for more than 66% of total period, Propose Croston Model.

– System checks seasonal effect by determining Auto co-relation

– System checks trend by trend significance test

– If any of these checks are not valid, results in no forecast

Auto Model II

– Assumption : Data has visible trend & seasonal pattern, 1st order / 2nd

order exponential smoothing required

– System checks intermittent pattern in historical data – If data is not there

for more than 66% of total period, Propose Croston Model.

– System checks white noise, if it finds, Propose Constant model.

– Checks for Constant / Trend / Seasonal / Seasonal trend / Seasonal

Linear Regression starting from alpha / beta / gamma equal to 0.1

Trend Method – Linear Regression

but shows no seasonality

– A straight line is calculated minimizing the sum of quadratic deviations to

all historical data inputs (method 94)

Note – This method is heavily influenced by outliers.

Seasonal Method – Seasonal Linear Regression

constant value plus a moderate trend

& seasonal pattern

– Step 1 –

• per year avg value is

calculated,

– Step 2 –

• Per year the seasonality is

calculated as ratio between the

historical data and yearly

average,

• For the future the average of

yearly seasonalities i.e

seasonal index is calculated,

• Seasonality can be smoothed

by averaging several

consecutive periods. The

number of periods is given by

the parameter PERSMO

Seasonal Method – Seasonal Linear Regression

– Step 3 –

• Every historical value is divided

by the corresponding average

seasonal index

• This results in historical data

corrected by seasonality

– Step 4 –

• Linear regression is carried out

for the corrected historical data

• The linear regression forecast is

multiplied by the seasonal index

forecast in the first future periods for

data with strong trends, It is more robust

and needs no parameters.

Croston Method -

Croston Method estimates –

– The average number of periods between two historical demands and

– The average demand quantity

Elements Of Univariate Forecast in APO

Index

Length of season / Model Initialization / Ex-post

Forecast

Forecast Parameters

Outlier Correction

Univariate Forecast Model explanation

Example of Forecast calculation

Forecast Errors

Trend Model – Initialization & Ex-Post forecast

Trend Model – Calculate new basic & Trend

Trend Model – Calculation Repeated

Trend Model – Calculation Repeated

Seasonal Method – Seasonal trend

Elements Of Univariate Forecast in APO

Index

Length of season / Model Initialization / Ex-post

Forecast

Forecast Parameters

Outlier Correction

Univariate Forecast Model explanation

Example of forecast calculation

Forecast Errors

Forecast Errors

– Difference between the fitted forecast and the actual demand

– “Absolute” refers to an actual measurement of units rather than a

percentage or profile

Error Total

– Used primarily as a measure of systematic error

– Bias: Measure of error that can create large cumulative error

– Moving average of error

– Error = Difference between the fitted forecast and the actual demand

Forecast Errors (Cont..)

– Moving average of Percent error

• Percent error: Error stated as percent of Actual or as percent of

Forecast

• Absolute percent error: Percent error stated as a positive number

– Use arithmetic average of user defined weights

– Moving average of Squared error

• Squared error: Square of (Actual minus Forecast)

• Moving average: Method to average recent history to forecast

forward for short period

– Use arithmetic average of user defined weights

– Square root of Mean square error

Forecast Errors (Cont..)

From all the available methods for forecast errors most common is:

– Mean Absolute Percent Error (MAPE)

Reason -

– It’s easy to Understand

– It’s relatively easy to calculate and correlate with the business results

– All errors weighted equally

Forecast Bias

Definition-

– Variance of historical sales volume over the forecasted sales volume as a

positive or negative percentage.

– Positive is oversell or under-forecasted &

– Negative is undersell or over-forecasting

Develop Custom Reports for generating forecast bias, This is a good method

to keep track of forecast Vs. current sales.

– In APO there is no default calculation for forecast bias.

Questions and Answers

???

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