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Week Demand Forecast
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At
100
90
120
140
180
120
150
100
130
152
200
180
Ft
150
130
90
110
200
90
100
150
70
120
150
250
Assumingthattheorderleadtimeis1week,thenaweeklyforecastcanbeusedtoestimatethe
demandinonereplenishmentcycle.
Therearenumerousmethodstoestimateforecastaccuracy.Practitionersoftenusethemeanabsolute
percentageerror(MAPE)toestimatethedemandforecasterror:
MAPEt
1 N 1 At i Ft i
A
N i 0
t i
Note:Nisthenumberofobservationsusedincalculatingthemeasure.
Unfortunately,theMAPE,and/orsymmetricMAPEdonotworkinaserieswheredemandvalueiszero
(0).Ademandtimeserieswithoneormorezerovaluesaremorecommon,especiallyforproductswith
intermittentdemands(e.g.spareparts).Inpracticemanywouldextractobservationswithzerovalue,
andusetherestoftheobservations(nonzerovalues)tocalculatetheMAPE.Bydoingso,theinput
seriesnature(e.g.intermittentstable)wouldbealtered,andthecalculatedvalueisirrelevant,at
best,totheforecastinquestion.
InRastProsolution,weopttouseasimilarmeasureMAD/MEAN.DissimilartoMAPE,the
MAD/MEANisarobustforecastaccuracymeasuretotheintermitteddemand,aswellothers.The
MAD/MEANisdefinedasfollow:
MADt
MAD-To-MEAN t t
MEAN t
1
N
N 1
i 0
1
N
At i Ft i
N 1
A
i 0
t i
N 1
A
i 0
t i
Ft i
N 1
A
i 0
t i
Where:
At i istheactualdemandiperiodsago
Ft i istheforecastmadeiperiodsago
N isthemovingaveragewindowsize
Inanutshell,theMAD/MEANistheratiobetweentwomovingaverages:theforecasterrorandthe
actualdemand.Weuseafinitewindow(i.e.N)totrackthelatestchangesinboththedemandandthe
forecasterror.
WhatvalueshouldbeuseforN?Choosingasmallvalue(sayN=2)willresultinameasurevolatilebiased
towardrecentperiods,andlesstofundamentallongrunmeasure.However,makingNtoolong,like25
periods,willresultinastablemeasure,butcanbeinsensitiveandslowtoreacttosuddenchanges.A
balancemustbedrawnso,inourexampleletschooseN=6periods.
Anotherimportantconsideration,especiallyforintermittentdemand,isthedurationofazerorun.
Usersdonotwantthemovingaveragetobezeroatanytime,soyoushouldchooseNtobelarge
enoughtoavoidthiscasefromoccurrence.
Usingthesameexample,letscalculatetheMA,MADandMAD/MEANwitha6weekaveragewindow:
Week Demand Forecast
Error
Error
Demand
At
Ft
Et
MAD
MA
MAD/MEAN
100
90
120
140
180
120
150
100
130
152
200
180
150
130
90
110
200
90
100
150
70
120
150
250
50
40
30
30
20
30
50
50
60
32
50
70
33
33
35
40
40
45
52
125
133
135
137
139
142
152
27%
25%
26%
29%
29%
32%
34%
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RastProsetsthemovingaveragewindowsize,bydefault,tosix(6),buttheendusercanoverridethis
value,onperSKUbasis.
IMPORTANT:Thechoiceofthemovingaveragewindowsizeismerelydrivenbystatisticalconsideration
forstabilityversussensitivity.
[Answer]ForRastPro,theforecastwindowofconcernis2months,soyouwillneedtoconvert
(i.e.aggregate)themonthlyforecasttobimonthly.
Goingforward,tocomputetheforecastperformancemeasureforagivenSKU,youcompletethe
following:
SelectaForecasthorizonclosefromtheorderleadtime(e.g.2month).
Generatethedemandandforecasttimeserieswithperiodequalstoforecasthorizon(e.g.2
month).
Selectamovingaveragewindowsize(e.g.N=6).
CalculatetheMADtoMEANfortheSKUatgiventime(e.g.now)
Soundssimple?Itis!Doingitfor50,000SKUisadifferentstory.Fortunately,RastProcompilesthe
requireddataandcalculatesbehindthescenepresentingyouwithfinalvalues.
1
M
i 1
(i )
t
Where:
t istheforecastingperformanceindexattimet
t(i ) istheMAD/MEANvalueforithSKUattimet
M isthenumberSKUinourportfolio
Fromadecisionmakingstandpoint,asimpleaverageisagoodstart,butitassignsequalweighttoeach
SKU,thus,givesanaiveviewoftheforecastprocesscapability.
Notallproductsareequallyimportanttoacompanyduetodifferentprofitmargins,valuetocustomer,
competitiveadvantage,andsoon.Toreflectthat,letsrevisethedefinitiontouseaweightingscheme:
t i t(i )
i 1
i 1
Where
i istherelativeweightfortheithSKU
Next,letusrevisittheinventorycontrolandreplenishmentscenario.Companiesmaintainasafetystock
(SS)toabsorbuncertaintyindemandandorderleadtimethroughoutareplenishmentcycle,which
reducesthechancesofalostsalesduetooutofstock.
Thesmallertheforecastingerror,thelowertheSafetyStock,andtheexpectedlostsalesduetostock
outisloweraswell.Ifyouweretoreducethedemandforecasterrorby,say,5%,thecompanywillsave
moneybyrequiringlowersafetystock,andincreaserevenuesbyreducingexpectedlostsalesdueto
stockout.
Fromademandplannerperspective,he/shewouldliketoidentifytheSKUthathashighestcostsaving
potential,andallocatehis/hertimeandefforttoimprovetheforecastaccuracy.
Fromthecompanysperspective,theSKUwithhighinventorycost,orpossiblyhightotalgrossmargin,
aremoreimportanttothebottomline,andthusshouldbeassignedhigherweightsintheperformance
index.
ROP f (r , d , d , l , l )
LS g (r , d , d , l , l )
Next,definetheutilitycostfunctionbycombiningcostofcarryandexpectedopportunityloss.
ROP
CoC LS ( P C )
2
ROP
C LS ( P C )
2
Bearinmind,thebaseunitoftimeisonereplenishmentcycle(averageleadtime),sothecostofcarry
used(i.e. C )mustcorrespondtothesameduration.
Changingthetimeunitfromaproductsreplenishmentcycle,toproductindependentunitsayone
year,youneedtocalculatethecorrespondingutilitycostfunction( U y )perannum.
U y(i ) U (i )
365
Where:
l isthereplenishmentcycle(orleadtime)indays.
RastProusesthevalueoftheutilitycostfunctiontodeterminetheweightsforthedifferentSKUsinthe
forecastingperformanceIndex.
M
U
i 1
(i )
y
t( i )
U
i 1
(i )
y
Insum,theRastPromethodologytiesuptheweightingschemeoftheforecastperformanceindexwith
theinventorycost.
Demand Planning
Fromdemandplannersperspective,he/shemightwishtoprioritizetheirtimeandeffortsonthoseSKU
withhighestsensitivity( U )todemandforecasterror.
So,computethechangeintheutilityfunction( U )whenthedemanderrorchangesby5%,while
keepingeverythingelseconstant.
U H (r , d ,1.05 d , l , l )
ROPH
C LS H ( P C )
2
ROPb
C LSb ( P C )
2
ROPL
U L (r , d , 0.95 d , l , l )
C LS L ( P C )
2
U UL
U H
2
U ( r , d , d , l , l )
Changingthetimeunitfromaproductsreplenishmentcycle,toaproductindependentunitsayone
year,youdneedtocalculatethecorrespondingchangeinutilitycostfunction( U y )perannum.
U y U
365
Conclusion
Inthispaper,wehavediscussedindetailstheperformancemeasureofthedemandforecastingprocess
foroneSKU,andfollowedwithadefinitionforamultiproductsperformanceindex.Theselected
measureisdefinedtobeintuitive,yetrobusttoprovideinsightoftheunderlyingprocess,andtrack
overtime,detectchangesand,conductcorrectionswhenneeded
Havingdoneso,theimportantquestionweoftenfaceis:howcanweimprovetheforecastprocess?This
isatopicforaseriesoffollowuppapers,butfornowherareafewpointstoconsider:
Forecastsources:Forecastvaluesoriginatefromdifferentsources:analyticalmodels,internal
sources(e.g.marketingresearch),external(e.g.customersforecast,industryexperts,etc.).
Blendingschemeoftheforecastsources:youneedtoblendthedisparatesources,andmake
onefinalofficialforecast.Asyoucansee,itisnotjustthenumbers,buthowdowechooseor
incorporatetheforecastsourcesintothefinaldecisionthataffectstheperformanceofthe
forecastprocess.
Suppliersorderleadtime:Suppliersperformanceisadriverthatisoftenoverlooked,butit
influencesthespanoftheforecastwindow.Forexample,forecastingoneweekdemandhas
inherentlylowererrorthanforecastingdemandforthenextmonths.
DomainandMarketIntuition:Plannersanddomainexpertscanprioritizehis/hertimeand
improvetheforecastingofthoseproductswithhighestsensitivitytoforecastingerror,and
achievethegreatestimprovement.