Whitepaper

Demand
management
forecasting
Causal Factors
Amit Ben Zvi

WHITE PAPER / APRIL 22, 2019

DISCLAIMER
The following is intended to outline our general product direction. It is intended for information
purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any
material, code, or functionality, and should not be relied upon in making purchasing decisions. The
development, release, and timing of any features or functionality described for Oracle’s products
remains at the sole discretion of Oracle.

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Table of Contents
Contents

Introduction .................................................................................................. 4

What is a causal factor ................................................................................ 4

Defining a Causal factor .............................................................................. 4

Analytical considerations for defining Causal factors ................................... 5

Decomposition Groups ................................................................................ 6

Seeded Causal Factors and DecomposITion Groups.................................. 6

Conclusion ................................................................................................... 8

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 INTRODUCTION

The Demand management (DM) analytical engine has various analytical settings to it, configured as part of a
“Forecasting Profile”.

The seeded forecasting profiles are fixed, and cannot be modified, but other, user-defined, profiles have various
configuration options for them, like configuring the forecast tree structure, selecting various forecasting
methods, forecasting parameters and causal factors.

This paper will focus on the decomposition groups and causal factors. This paper will describe and explain how
to configure them.

WHAT IS A CAUSAL FACTOR

Historical information includes two parts:

 Historical Demand
 Explanatories that can explain the historical demand – Causal factors.

Causal factors provide information about historical events that are expected to reoccur in the future.

Causal factor is a time-varying quantity that explains and drives demand and causes demand to deviate from a
norm.

A causal factor differs from any other historical explanatory by having full information not just in historical time
periods, but also in future dates.

Explanatories like Exchange rate or weather have full disclosure in history, but not any certainty for the future
values, as such, they are not good candidates to be a causal factor.

DEFINING A CAUSAL FACTOR

Causal factors are measures; new causal factors should be created as a measure, added to the relevant
catalog and the Forecasting profile.

The values for the measure (causal factor) should be defined for the complete time span of the plan (history and
future).

A causal factor measure can be define on various granularities.

Some of the default causals are defined on the following granularity:

- January – December – defined on Time granularity only with a SUM time aggregation.

- Price – defined on Item and Time granularity only with a WAVG Aggregation and time aggregation.

Each new causal needs to be added to a Decomposition group (existing or new).

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 For each causal factor, you need to assign the local groups; for example, Short, Long, Multiplicative, Not-
Seasonal.

Causal groups (Short, Long, Multiplicative, Not-Seasonal) define which forecasting methods will use this causal
factor.

As written in the analytical consideration section, models that can handle a larger set of casuals will use the
Long Causal group (models like Monte Carlo Regression).

 The following Forecasting Methods work with the Short group -

Causals Winters, Regression For Intermittent, Transformation Regression, LOGISTIC and Regression
 The following Forecasting Methods work with the Long group -
Auto Regression Logistic, Multiplicative Monte Carlo Regression, Combined Transformation,
Multiplicative Monte Carlo Intermittent, and Modified Ridge Regression
 The following Forecasting Methods work with the Not-Seasonal group -
Auto-Regressive Integrated External and Auto Regressive External
 The following Forecasting Methods work with the Multiplicative group -
Dual Group Multiplicative

Fill Causals parameter is relevant only for causals defined on Item – location – date granularity – defines if the
Analytical engine will automatically fill in data when there are missing dates – linear interpolation of the nearest
neighbors’ values, or use the value of Zero for missing dates.

ANALYTICAL CONSIDERATIONS FOR DEFINING CAUSAL FACTORS

 Causal factor data should be as complete as possible. Otherwise, the following may occur:
o If a causal factor does not have values for future dates, it may not have desired effect on
forecasts
o Likewise, if the historical data is not long enough to learn the influence of all causal factors,
the forecast may generate unexpected results. The causal should be aligned with the
historical data it needs to explain.

 If a causal factor has all zeros in the historical time period of the combination, the causal is ignored.

 The forecasting methods need to have some ratio between the number of historical demand points and
the number of causal factors.
The analytical reasoning is to avoid over fit that can compromise the validity and accuracy of the
forecast.
Some forecasting methods handle a larger set of causal factors better than others; please refer to the
section that discusses the definition of causal factors for more information.

It is desirable to have a ratio of at least 2 to 4 data points per causal factor.

 When defining causal factor, one should try to avoid Co-linearity.

In statistics, Co-linearity refers to an exact or approximate linear relationship between two or more
explanatory variables. These variables correspond to one another and are arranged in the same linear
sequence, lying on the same straight line (in a way that one of them can be defined as a linear
composition of the others).
Causal Co-linearity - the situation where two or more predictive variables in a statistical model are
linearly related.
Results of Co-linearity can include:
o Inaccuracy & Failed Forecast

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 o Large coefficients: -1000, 1000
o Decomposition can produce huge spikes

An example for Co-linearity in the seeded causals is the Constant causal factor that is the sum of the
Months causal factors (January – December) or the sum of the days of the week causals (Monday –
Sunday).

To avoid this seeded Co-linearity, the March and Tuesday causals are turned off.

It does not mean they are not being evaluated, but the weight of March and Tuesday (as in the seeded
configuration) is attributed to the Constant causal factors as not being any other month/ day.

The forecasting methods can tolerate some level of Co-linearity. In addition some Forecasting methods
can deal better with Co-linearity like Ridge and Monte Carlo regression (– the forecasting methods that
use the Long causal group), while most Forecasting methods, like Regression, are more sensitive to
Co-linearity.

DECOMPOSITION GROUPS

Causal factors are divided into Decomposition groups.

Each causal factor can belong to one Decomposition group, when adding a new causal it can be assigned to
one of the pre-configured Decomposition groups or assigned to a user-defined Decomposition group.

Decomposition group allows the user to split the total forecast to logical components, learning the effect of each
one of them.

* Enabling Decomposition affects the Engine run time performance and is not advisable for full batch engine
runs.

SEEDED CAUSAL FACTORS AND DECOMPOSITION GROUPS

Causal factors are available in the Decomposition Tab in the Forecasting Profile screen.

Decomposition Group Causal Comments

Level Decomposition Group Constant Mandatory causal factors, that provides the base
demand.

Seasonality Decomposition Group January 1 when it is January, 0 when it is not January

February 1 when it is February, 0 when it is not February

March 1 when it is March, 0 when it is not March.

By default it is turned off to avoid co-linearity

between the Moths causal factors and the
Constant causal factors

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 April 1 when it is April, 0 when it is not April

May 1 when it is May, 0 when it is not May

June 1 when it is J June, 0 when it is not June

July 1 when it is July, 0 when it is not July

August 1 when it is August, 0 when it is not August

September 1 when it is September, 0 when it is not

September

October 1 when it is October, 0 when it is not October

November 1 when it is November, 0 when it is not

November

December 1 when it is December, 0 when it is not

December

Monday 1 when it is Monday, 0 when it is not Monday

Tuesday 1 when it is Tuesday, 0 when it is not Tuesday

By default it is turned off to avoid co-linearity

between the days of the week causal factors and
the Constant causal factors

Wednesday 1 when it is Wednesday, 0 when it is not

Wednesday

Thursday 1 when it is Thursday, 0 when it is not Thursday

Friday 1 when it is January, 0 when it is not January

Saturday 1 when it is Friday, 0 when it is not Friday

Sunday 1 when it is Sunday, 0 when it is not Sunday

Trend Decomposition Group Trend A simple trend

TrendShort Gives more emphasis to the shorter Trend over

the longer one.

TrendLong Gives more emphasis to the longer Trend over

the shorter one.

Holidays Decomposition Group Christmas Holiday 1 when it is Christmas Holiday, 0 when it is not
Christmas Holiday

Easter Holiday 1 when it is Easter Holiday, 0 when it is not

Easter Holiday

New Year Holiday 1 when it is New Year Holiday, 0 when it is not

New Year Holiday

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 Holiday Indicator 1 A place holder to include additional holidays

Holiday Indicator 2 A place holder to include additional holidays

Holiday Indicator 3 A place holder to include additional holidays

Price Decomposition Group Final Price Final Price measure, this causal can cause
performance issues in run time, so advisable to
disable it if not needed.

Lag Decomposition Group Lag The previous observation as an explanatory for

the current observation.

Lag1 One time period lag.

By default is turned off.

LagK Optimal time period lag causal factor for models

that are not seasonal.

Not needed as those models have internal lag

mechanism.

By default is turned off.

Lag Forecast The constant causal factor.

By default is turned off.

CONCLUSION

This document provided information about Causal factors and Decomposition groups used by the DM analytical
engine; it explains what Causal factors are, and how to create and use them.

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