MGT 782

MANAGERIAL BUSINESS ANALYTICS

INDIVIDUAL ASSIGNMENT 2

12.2 - FORECASTING WEEKLY SALES AT AMANTA

AA701-MASTERS IN BUSINESS
AA7012B / SEMESTER SEPTEMBER
ADMINISTRATION

(GROUP AA7012B)

PREPARED BY:
SHAHRUL AZRIN BIN ABD AZIZ
MATRIC NO: 2019839174

PREPARED FOR:
DR. CHUAH SOO CHENG
 Data summary and analysis
Data consist of weekly sales of two different type of refrigerators at more than 50 locations in the
Midwest for a period of 70 weeks. Product 1 is an expensive model while product 2 is a standard
and less expensive model. Amanta Appliances, the seller of the refrigerators is having problem
on estimating the future demand of the products as they incurred high cost on the inventory cost
or shipping cost whenever they under or over forecast the demand.

Amanta management also claims that analysis from the past data shows that there was no
evidence of any upward or downward trends or of any seasonality. In fact, it might appear that
each series is an unpredictable sequence of random ups and downs. To validate the statement,
scattered graph was plotted to look if there is any trend that can be observed: -

WEEKLY SALES OF PRODUCT 1

600

500

400

300

200

100

0 0 10 20 30 40 50 60 70 80

Diagram 1.1

WEEKLY SALES OF PRODUCT 2

940

920

900

880

860

840

820

800

780
0 10 20 30 40 50 60 70 80

Diagram 1.2

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From Diagram 1.1 and 1.2 it’s clear that there is no obvious trend on the sales of Product 1 & 2.
It can be also said that both products 1 & 2 are not seasonal products as the graphs show random
sales throughout the whole period of 70 weeks.

Hence to forecast the data, 5 forecast tools will be used to find the best method to forecast
Amanta’s future demand. The models that will be used are as follows: -

• Naiive
• Moving average
• Moving average with weight
• Trendline
• Exponential smoothing

Furthermore, every each of the forecast tool will calculate the bias or forecast error, Median
Absolute Deviation (MAD), Mean Squared Error (MSE), Mean Absolute Percentage Error (MAPE)
and Root Mean Squared Error (RMSE) which will be describe further below:

MAD (Median Absolute Deviation)

➢ MAD is a robust measure of the variability of a univariate sample of quantitative data. It is

calculated by absolute the forecast error calculated in the data

MSE (Mean Squared Error)

➢ MSE measures the square difference between the prediction and actual data (forecast
error/bias). The higher value means the worse the model is.

MAPE (Mean Absolute Percentage Error)

➢ MAPE is a statistical measure of how accurate a forecast system is. It measures this
accuracy as a percentage and it is calculated by dividing the MAD with the actual data (Y)
times by 100 to be in a percentage form.

RMSE (Root Mean Squared Error)

➢ RMSE is a square root of average sum of MSE in the population. The square root is
introduced to make scale of the errors to be the same as the scale of the targets hence
lower RMSE translates to better result.

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 1) Naiive

Product 1 Product 2
FE MAD MSE MAPE FE MAD MSE MAPE
Total 55 1409 44547 315.7538 Total -37 2007 86191 230.6253

Average 0.797101 20.42029 645.6087 4.576143 Average -0.53623 29.08696 1249.145 3.342396
RMSE = 25.40883 RMSE = 35.34324

Naiive is the most basic model of forecasting where it estimates in which the last period's actuals
are used as this period's forecast without adjusting them or attempting to establish casual factors.

As the model didn't take into consideration of any other factors, the forecast error normally would
be high and this can be seen in the total forecast error of 55 for product 1 which means that Naiive
model was over forecasted by 55 aggregately over the period of 70 weeks.

As for product 2, -37 means that Naiive model was under forecast by 37 aggregately. However,
by looking solely at the total forecast error is not accurate as negative and positive forecast error
would cancel-off each other in the data population.

The solution to this is by looking at the RMSE as the square root of MSE would make the scale
of errors to be the same as the scale of the targets. The high RMSE of 25.4 and 35.3 for both
products is another evidence that Naiive model is not a good tool to be used to forecast future
demand of Amanta Appliances’ products.

2) Moving Average (MA)

Product 1 Product 2
FE MAD MSE MAPE FE MAD MSE MAPE
Total 31 1305 36730.5 295.6809 Total -7.5 1741.5 62361.75 200.5074

Average 0.455882 19.19118 540.1544 4.348249 Average -0.11029 25.61029 917.0846 2.948638
RMSE = 23.24122 RMSE = 30.2834

Moving Average model is a simple technical analysis tool that smooths out price data by creating
constantly updated average price. The current year forecast is driven from the average of two
prior years actual data.

RMSE for Moving Average model is 23.2 and 30.3 for product 1 and 2 respectively. By comparing
Naiive and MA model, lower RMSE for MA model suggest that MA is better model compared to
Naiive.
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 3) Moving Average with Weight (MAW)

Product 1 Product 2
FE MAD MSE MAPE FE MAD MSE MAPE
Total 27.33333 1292 36513.33 291.7285 Total -6 1758 65174.67 202.1571

Average 0.401961 19 536.9608 4.290126 Average -0.088235 25.85294 958.451 2.972899

RMSE = 23.17241 RMSE = 30.95886

Moving Average with Weight is similar to normal moving average except for the 'weight' that it
includes in the average. For the case of Amanta Appliances, the immediate prior year were times
by 2 and the average of the ‘weighted’ two prior years become the forecast sale for the current
year.
Comparing the normal Moving Average (MA) model earlier and Moving Average with Weight
(MAW) model, it shows that the root mean square error (RMSE) for MAW model for product 1 is
lower compared to MA model. This indicates that MAW model is the better forecasting tool
compared to MA. However, product 2 shows otherwise where MA model shows lower RMSE and
this suggest that MA model is more suitable to be used to forecast future demand in product 2.

4) Trendline

Product 1 Product 2
FE MAD MSE MAPE FE MAD MSE MAPE
Total -36.8411 2600.609 148379.9 623.4714 Total -0.00214 1825.668 69531.12 210.5144

Average -0.53393 37.68998 2150.433 9.035818 Average -3.1E-05 26.45896 1007.697 3.050933
RMSE = 46.37276 RMSE = 31.74425

Trendline analysis is a linear least squares regression tool that can be employed to provide some
correlation to data points. It was done by generating regression analysis from raw data to find the
'A' and 'B' in Y=A+B(X) equation and replacing in the equation to find the forecasted figure. Below
are the regression analysis output for product 1 and product 2.

Product 1
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 417.1863354 11.33865293 36.79328912 1.26991E-46 394.5604058 439.812265 394.5604058 439.812265
X Variable 1 0.971008661 0.27758651 3.498039805 0.000831063 0.417093405 1.524923917 0.417093405 1.524923917

Product 2
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 864.3335769 8.011254769 107.8899126 7.39231E-77 848.3430455 880.3241084 848.3430455 880.3241084
1 0.134453782 0.194721911 0.690491281 0.492270466 -0.254212779 0.523120342 -0.254212779 0.523120342
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 4) Trendline (Cont’d)

The result shows that RMSE for both products are high i.e 46.37 and 31.74 hence it concludes
that the sales of the product doesn't have a 'pattern' or strong relation that can be used to forecast
future demand and trendline analysis is not a good tool for Amanta Appliances.

5) Exponential Smoothing

Product 1 Product 2
FE MAD MSE MAPE FE MAD MSE MAPE
Total -23.421 1811.127 73183.95 419.6966 Total 20.86096 1688.973 61730.91 194.6042

Average -0.33943 26.24822 1060.637 6.08256 Average 0.302333 24.47788 894.6508 2.820351
RMSE = 32.56742 RMSE = 29.91071

Exponential Smoothing forecasting method is similar in that a prediction is a weighted sum of past
observations, but the model explicitly uses an exponentially decreasing weight for past
observations. This was done by creating an alpha (in this case 0.2) and multiplies it with the
previous forecast error before adding it with previous forecast value.

RMSE for Exponential Smoothing is lower compared to trendline which suggest that Exponential
Smoothing is a better forecasting tool. However, Moving Average model produce much lower
RMSE hence Exponential Smoothing is not the best forecast tool to be used in Amanta Appliances
case.

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Summary analysis

To find the best method to be used in forecasting Amanta Appliances, graph below was plotted
to show the relationship of all forecasting tools with the actual sales made.

Relationship Method Product 1

600

500

400

300

200

100

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69

Y Naïve MA MA W Trendline Exponential Series7

Diagram 1.3

Method RMSE
MAW 23.1724
MA 23.2412
Naiive 25.4088
Exponential 32.5674
Trendline 46.3728

For product 1, Trendline method shows almost a straight-line indicating increase in demand over
time. However, it’s far from line Y which represents the actual sales been made. Other methods
are showing almost similar to line Y and it’s hard to interpret from the graph above which line is
closer to the Y. However, detail analysis previously proves that Moving Average method have
lowest RMSE i.e 23.17 which indicate it’s the best method to forecast future demand of product
1 of Amanta Appliances.

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 Relationship Method Product 2
950

900

850

800

750

700
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69

Y Naïve MA MA W Trendline Exponential

Diagram 1.4

Method RMSE
Exponential 29.9107
MA 30.2834
MAW 30.9589
Trendline 31.7443
Naiive 35.3432

Similar to product 1, Trendline method for product 2 represents a steady increasing line which
caused by the assumptions of Trendline method that suggest that the demand will increase over
the time and again it’s far from the actual sales been made. For product 2, Exponential smoothing
is the closer forecast tool with the actual (Y) and this is supported by the RMSE where exponential
smoothing have the lowest compared to other methods.

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 Relationship between Product 1 and Product 2
1000
900
800
700
600
500
400
300
200
100
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70

Sales Product 1 Sales Product 2

Diagram 1.5

Graph in Diagram 1.5 above shows the sales trend of product 1 and product 2 over the period of
70 weeks. The observation that can be made from the graph is that both product 1 and product 2
are not complimentary products. This is because of the sales trend for both products do not move
in the same direction.

Both products are more likely a substitute product to each other as both products tend to move in
the opposite direction at the beginning and towards the end of the observation period. Even
though part of the middle of the data does not show that way, it might be caused by other
uncontrollable external factors such as festival period or natural disasters in the area of Midwest.

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Conclusion and recommendation

In short, without accurate information there will be no perfect forecast tool that can predict future
demand. However, the risk of having high cost due to under/over forecast can be mitigated by
choosing the right method. Amanta Appliances should use Moving Average (MA) method for
product 1 as our analysis proves that MA method gives least forecast error compared to other
methods.

Product 2 on the other hand is best to be forecasted with Exponential Smoothing method as the
risk of having forecast error is the lowest among other methods available.

Amanta appliances incurred high inventory cost when they were over forecasted the demand of
the products. Hence it is suggested that Amanta adopts Just-In-Time (JIT) system to overcome
this issue. JIT system manufacture/assemble the product in respond of the customer demand
hence there will be no stocks or lower stocks that need to be kept by Amanta which translates to
lower inventory/storage cost.

For the issue of high shipping cost for not having enough inventory, Amanta should use
centralised inventory system that can monitor stocks availability of each store and give warning
whenever the stocks at each of the store is at minimal level. Alternatively, Amanta should have
more suppliers to have contract with. By having one or few suppliers, Amanta will face problems
such as delay and slow process in supplying the products hence by spreading it to a larger number
will solve it.