A-CAT FORECASTING CASE

Nofal Amin
Numrah Nadeem
Rida Naeem
Shaharyar Naeem
 A-CAT FORECASTING CASE

• A-CAT Corp., a company that produces domestic electrical appliances in a poor region of
India.
• During the past several months, there has been an alarming dip in sales of its major product,
a voltage regulator that is used for varied purposes but most commonly as a protective
device for refrigerators and television sets,.
• The production department has been complaining about shortages of spares and components.
• Placing orders beyond a certain limit for the vital transformers used in most of its products
has also stretched the system - whereas the company previously had access to four suppliers
of transformers, now there is only one.
• The vice president has asked the chief operations manager to look into the problem.
VARIOUS METHODS AND
MODELS USED FOR
FORECASTING
 NAÏVE METHOD

This method assumes that demand in the next period is equal to demand in the
most recent period.
Therefore, according to Naïve approach the forecasted demand in January 2011
would be 1053 units of voltage regulators which is equal to that of demand in
December 2010.
 NAÏVE METHOD

As the name suggests it is a naïve approach, it won’t be 100% accurate but it’s a
good starting point since all the changes and information from the market have
been absorbed in December sales so the sales in January will not be very different
because the time horizon is not very long range.
Its also cost effective because we don’t have to go through complex methods to
calculate forecasted sales for next month.
 EXPONENTIAL SMOOTHING

Exponential smoothing is another weighted-moving-average forecasting method.

It involves very little record keeping of past data and is fairly easy to use. The
basic exponential smoothing formula can be shown as follows:

New forecast = Last period’s forecast + a (Last period’s actual demand −

Last period’s forecast)
 EXPONENTIAL SMOOTHING

We have used two different values of alpha, i.e. 0.3 & 0.5. We have used two
different values just to make our work more accurate.
We have assumed our forecasted sales of January 2006 to be 779, i.e. same as of
January 2006 which we decided from the Naïve method.
When alpha is 0.3,
• MAD is 19.466
• MSE is 22734.392
• MAPE is 11.383
 EXPONENTIAL SMOOTHING

When alpha is 0.5,

• MAD is 11.188
• MSE is 16158.614
• MAPE is 11.5
We use this method for forecasting and finding out errors as there is no clear
pattern in the trend of the data provided. It soothes out our data for making
forecasts.
 MOVING AVERAGES

A moving-average forecast uses a number of historical actual data values to

generate a forecast. Moving averages are useful if we can assume that market
demands will stay fairly steady over time.
A 4-month moving average is found by simply summing the demand during the
past 4 months and dividing by 4. With each passing month, the most recent
month’s data are added to the sum of the previous 3 months’ data, and the earliest
month is dropped.
This practice tends to smooth out short-term irregularities in the data series.
 MOVING AVERAGES

The 3 month and 4 month moving averages calculated for A-Cat are shown in the
graph below:
 WEIGHTED MOVING AVERAGE

• When a detectable trend or pattern is present, weights can be used to place

more emphasis on recent values.
• This practice makes forecasting techniques more responsive to changes
because more recent periods may be more heavily weighted.
 WEIGHTED MOVING AVERAGE

For A-Cat the graph for 3 month weighted moving average is show below:
 WEIGHTED MOVING AVERAGE

For A-Cat the graph for 4 month weighted moving average is show below:
 WEIGHTED MOVING AVERAGE

• For 2011 January the forecasted voltage regulators for 3 month weighted
moving average turned out to be 1130 units and for 4 month weighted moving
average it turned out to be 1128 units which is quite close to the projected 4
month moving average units i.e. 1123 units
 WEIGHTED MOVING AVERAGE

Moving averages do, however have drawbacks to it:

1. Increasing the size of n (the number of periods averaged) does smooth out
fluctuations better, but it makes the method less sensitive to changes in the
data.
2. Moving averages cannot pick up trends very well. Because they are
averages, they will always stay within past levels and will not predict
changes to either higher or lower levels. That is, they lag the actual values.
3. They predict the forecasted value only for subsequent period. In case of A-
Cat only the forecasted value for January 2011 is known i.e. 1171 units of
voltage regulators according to 3 month moving average and 1123 units of
voltage regulators according to 4 month moving average
 REGRESSION / TREND ANALYSIS

Regression is a statistical method used in finance, investing, and other disciplines

that attempts to determine the strength and character of the relationship between
one dependent variable (usually denoted by Y) and a series of other variables
(known as independent variables) which is usually denoted by X.
R-squared is a goodness-of-fit measure for linear regression models. This statistic
indicates the percentage of the variance in the dependent variable that the
independent variables explain collectively.
 REGRESSION / TREND ANALYSIS

In this case two Regression/trend analysis were carried to see which would be
more beneficial in the future, the first one was between actual transformer sales
and period while period was the independent variable and transformer sales was
the dependent one.
The R square in the first regression was 0.405 which is really bad as the sales of
transformers is affected by only 40% by the period while it is affected by 60% by
other factors.
 REGRESSION / TREND ANALYSIS

The second regression was between sales of refrigerators and transformers

required, the R squared turned out to be 0.864 which is very good as it shows
transformers required are 86 % affected by the sales of refrigerators and about
11% affected by other factors.
The second regression is more acceptable and therefore we would reject the first
one on the basis of R square calculated.
SEASONAL VARIATION
 SEASONAL VARIATION

Seasonality is expressed in terms of the amount that actual values differ from
average values in the time series.
Analyzing data in monthly or quarterly terms usually makes it easy for a
statistician to spot seasonal patterns. Seasonal indices can then be developed by
several common methods.
It is a variable element in the time-series analysis of forecasting, and refers to the
phenomenon where the production and plan of product change on a certain
seasonal trend depending to the characteristics of the product.
 SEASONAL VARIATION

The results of our seasonal variation will help us predict the sales of quarters in
future.
According to our result, the peak sales was in the second quarter, with a value of
1.245. The other 3 quarters had almost same sales with a slight difference.
BEST POSSIBLE METHOD
 BEST METHOD SELECTED

The best possible method is regression. All other methods are not suitable because
their tracking signal is not in the range specified, i.e. -2.5 to 2.5. All values are
greater than this range.
We had the least error in 3 month weighted moving average, but the tracking
signals did not result in the range specified.
Then we applied tracking signal on 4 year weighted moving. Similarly, it was
applied on 3 and 4 month moving averages and exponential smoothing as well.
But the tracking signal result was not what we needed.
 BEST METHOD SELECTED

We choose regression/ trend analysis for forecasting. We did regression on sales

of refrigerators. The answer was 0.864 which is a very good answer and this
proves it to be the best method to be used in future by the company.
QUALITATIVE FACTORS
 QUALITATIVE FACTORS

While working on the case and analyzing it, we found out two qualitative factors
which can improve our forecasting.
Firstly, sales from composite method. In this approach, each salesperson estimates
what sales will be in his or her region. These forecasts are then reviewed to
ensure that they are realistic. Then they are combined at the district and national
levels to reach an overall forecast.
This will help us to overcome all the issues discussed in the case of the parts of
refrigerators and thus help increase our sales.
 QUALITATIVE FACTORS

Secondly, we can use jury of execution opinion. Under this method, the opinions
of a group of high-level experts or managers, often in combination with statistical
models, are pooled to arrive at a group estimate of demand.
This will help us to forecast a better demand which will fulfill the needs of the
consumers and the company will not face any issues.
THANK YOU