DP Statistical Forecasting

Statistical Forecasting Basics –
Demand Planning
May 28, 2018

Prashant Gopalan
SAP APO 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
2 5/28/2018
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
MAD, total error,

Forecast errors MAPE, RMSE,
MSE, MPE
3 5/28/2018
Elements Of Univariate Forecast in APO
 Actual Value / Basic Value / Trend Value /

Seasonal Index
 Length of season / Model Initialization / Ex-post
Forecast
 Forecast Parameters
 Outlier Correction
 Univariate Forecast Model explanation
 Example of forecast calculation
 Forecast Errors
4 5/28/2018
Actual / Basic / Trend Value / Seasonal Index
5 5/28/2018
How APO Help in forecasting!!
History
500
400
Units
300
200
100
0
Y-4 Y-3 Y-2 Y-1 Y+1
Time Now
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Determine Base Level & Trend
History Trend
500
400
Units
300 Level = 170
200
100
0
Y-4 Y-3 Y-2 Y-1 Y+1
Now
7 5/28/2018
Model Seasonality
History Model Trend

500
400
Units
300
200
100
0
Y-4 Y-3 Y-2 Y-1 Y+1
Now
8 5/28/2018
Forecast Future Sales / Demand
History Forecast Model Trend

500
400
Units
300
200
100
0
Y-4 Y-3 Y-2 Y-1 Y+1
Time Now
9 5/28/2018
 Actual Value / Basic Value / Trend Value / Seasonal

Index
Forecast
 Forecast Errors
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Length of Season / Model Initialization
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Ex post forecast
12 5/28/2018

Index
Forecast
 Forecast Errors
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Univariate Model Parameters
Seasonal value (g)

Trend value (b)
Basic value (a)
Past Future
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Data smoothing – Significance of a
 Single exponential smoothing (SES) – Mathematical Calculation is

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) + …..
 Based on above formula, an alpha value of 0.5 weights historical

values as follows:
– 1st historical value: 50%, 2nd historical value: 25%
– 3rd historical value: 12.5%, 4th historical value: 6.25%......
 Hence, as you increase value of alpha from 0.1 to 0.9,

– 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.
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Example – Constant using alpha 01 Vs 0.5
16 5/28/2018
Weighting of historical periods
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Constant & Trend using alpha & beta 01. Vs 0.5
18 5/28/2018
Seasonal Method – Weighting factor Gamma
 Recommendation : Gamma should be between 0.5 and 0.7

(for 2 or 3 yrs of history)
19 5/28/2018

Index
Forecast
 Forecast Errors
20 5/28/2018
Outliers
5/28/2018
Parameters for Outlier Correction
 Tolerance lane calculated based on sigma factor & ex-post forecast
 Smaller the sigma factor, Less the tolerance, greater the control
 Historical value outside upper & lower limit of tolerance lane is

corrected
 SAP recommended value for sigma factor should be between 0.6 –

2.0
22 5/28/2018
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
23 5/28/2018
Outlier Calculation logic
 Outliers are calculated in following

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
Note :Outlier correction can be done based on Median as

well in SAP APO version 4.1 and up
24 5/28/2018
Outlier Correction - Effect of Sigma value
 Sigma Value 1.25

– 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
25 5/28/2018
 Sigma Value 0.6

– 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
– Smaller the sigma factor, Smaller the tolerance, Greater control
26 5/28/2018
 Sigma Value 2.00

– None of the Historical value are outside tolerance lane
– Corrected history is the same as history
– Higher the sigma factor, Bigger the tolerance lane, Lesser control
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Index
Forecast
 Forecast Errors
28 5/28/2018
Forecasting Models - Explanation
 Moving Average –
– Assumption : Data varies 12
Series 3 point MA 5 point MA
around a constant value and

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
29 5/28/2018
 Trend Method – Exponential

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
 Seasonal Method – Exponential

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
30 5/28/2018

 Seasonal – Trend Method – Exponential Smoothing
– Assumption : Data varies around a constant value plus a trend & seasonal
pattern
 Seasonal Linear Regression –

– 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
31 5/28/2018
 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
32 5/28/2018
Trend Method – Linear Regression
 Assumption : Data varies around a constant value plus a linear trend,

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.
33 5/28/2018
Seasonal Method – Seasonal Linear Regression
 Assumption : Data varies around a

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
34 5/28/2018
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
 Note : SLR tends to calculate lower

forecast in the first future periods for
data with strong trends, It is more robust
and needs no parameters.
35 5/28/2018
Croston Method -
 Assumption – Demand occurs every x period with similar quantities

 Croston Method estimates –
– The average number of periods between two historical demands and
– The average demand quantity
36 5/28/2018

Index
Forecast
 Example of Forecast calculation
 Forecast Errors
37 5/28/2018
Trend Model – Initialization & Ex-Post forecast
38 5/28/2018
Trend Model – Calculate new basic & Trend
39 5/28/2018
Trend Model – Calculation Repeated
40 5/28/2018
Trend Model – Calculation Repeated
41 5/28/2018
Seasonal Method – Seasonal trend
42 5/28/2018

Index
Forecast
 Forecast Errors
43 5/28/2018
Forecast Errors
 Mean Absolute Deviation –

– 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
 Mean Percentage Error (MPE)

– Moving average of error
– Error = Difference between the fitted forecast and the actual demand
44 5/28/2018
Forecast Errors (Cont..)
 Mean Absolute Percentage Error (MAPE)

– 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
 Mean square error (MSE)

– 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 the mean squared error (RMSE)

– Square root of Mean square error
45 5/28/2018
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
46 5/28/2018
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.
47 5/28/2018
Questions and Answers
???
Your Opportunity to ask Questions!
48 5/28/2018

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Statistical Forecasting Basics –

May 28, 2018

Univariate Profile in APO

MAD, total error,

Elements Of Univariate Forecast in APO

 Actual Value / Basic Value / Trend Value /

Actual / Basic / Trend Value / Seasonal Index

How APO Help in forecasting!!

Determine Base Level & Trend

300 Level = 170

History Model Trend

Forecast Future Sales / Demand

History Forecast Model Trend

Elements Of Univariate Forecast in APO

 Actual Value / Basic Value / Trend Value / Seasonal

Length of Season / Model Initialization

Elements Of Univariate Forecast in APO

 Actual Value / Basic Value / Trend Value / Seasonal

Univariate Model Parameters

Seasonal value (g)

Data smoothing – Significance of a

 Single exponential smoothing (SES) – Mathematical Calculation is

 Based on above formula, an alpha value of 0.5 weights historical

 Hence, as you increase value of alpha from 0.1 to 0.9,

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

 Recommendation : Gamma should be between 0.5 and 0.7

Elements Of Univariate Forecast in APO

 Actual Value / Basic Value / Trend Value / Seasonal

Parameters for Outlier Correction

 Tolerance lane calculated based on sigma factor & ex-post forecast

 Historical value outside upper & lower limit of tolerance lane is

 SAP recommended value for sigma factor should be between 0.6 –

Outlier Calculation logic

Outlier Calculation logic

 Outliers are calculated in following

Note :Outlier correction can be done based on Median as

Outlier Correction - Effect of Sigma value

 Sigma Value 1.25

Outlier Correction - Effect of Sigma value

 Sigma Value 0.6

Outlier Correction - Effect of Sigma value

 Sigma Value 2.00

Elements Of Univariate Forecast in APO

 Actual Value / Basic Value / Trend Value / Seasonal

Forecasting Models - Explanation

around a constant value and

Forecasting Models - Explanation

 Trend Method – Exponential

 Seasonal Method – Exponential

Forecasting Models - Explanation

 Seasonal Linear Regression –

Forecasting Models - Explanation

Trend Method – Linear Regression

 Assumption : Data varies around a constant value plus a linear trend,

Seasonal Method – Seasonal Linear Regression

 Assumption : Data varies around a

Seasonal Method – Seasonal Linear Regression

 Note : SLR tends to calculate lower

 Assumption – Demand occurs every x period with similar quantities

Elements Of Univariate Forecast in APO

 Actual Value / Basic Value / Trend Value / Seasonal