Unit 2

Time Series Anaylsis:

Time series analysis is a specific way of analysing a sequence of data points collected over an
interval of time. In time series analysis, analysts record data points at consistent intervals over
a set period of time rather than just recording the data points intermittently or randomly.
However, this type of analysis is not merely the act of collecting data over time.

What sets time series data apart from other data is that the analysis can show how variables
change over time. In other words, time is a crucial variable because it shows how the data
adjusts over the course of the data points as well as the final results. It provides an additional
source of information and a set order of dependencies between the data.

Time series analysis typically requires a large number of data points to ensure consistency
and reliability. An extensive data set ensures you have a representative sample size and that
analysis can cut through noisy data. It also ensures that any trends or patterns discovered are
not outliers and can account for seasonal variance. Additionally, time series data can be used
for forecasting—predicting future data based on historical data.

Time series analysis helps organizations understand the underlying causes of trends or
systemic patterns over time. Using data visualizations, business users can see seasonal trends
and dig deeper into why these trends occur. When organizations analyze data over consistent
intervals, they can also use time series forecasting to predict the likelihood of future events.
Time series forecasting is part of predictive analytics.

This task aims to determine the objective and extent of demand forecasting within the
organization. By understanding the purpose and scope, it becomes easier to align the
forecasting process with business goals and make informed decisions. It helps in identifying
potential areas of improvement and areas where forecasting can be applied to optimize
operations. In the simplest terms, time-series forecasting is a technique that utilizes historical and current
data to predict future values over a period of time or a specific point in the future. By analyzing data that we
stored in the past, we can make informed decisions that can guide our business strategy and help us
understand future trends.

7 Steps of Demand Forecasting Process

 Define the purpose and scope of demand forecasting.
 Identify key factors influencing demand.
 Select an appropriate forecasting method.
 Gather and prepare relevant historical data.
 Implement the chosen forecasting method.
 Evaluate the initial forecast results.
 Approval: Evaluation Results.
There are quite a few factors associated with time-series forecasting, but the most important
ones include the following:

 Amount of data

 Data quality

 Seasonality

 Trends

 Unexpected events

The amount of data is probably the most important factor (assuming that the data is
accurate). A good rule of thumb would be the more data we have, the better our model will
generate forecasts. This also makes it much easier for our model to distinguish between
trends and noise in the data.

Data quality entails some basic requirements, such as having no duplicates, a standardized data
format, and for the data to be collected consistently or at regular intervals.
Seasonality means that there are distinct periods of time when the data contains consistent
irregularities. For example, if an online web shop analyzed its sales history, it would be evident that
the holiday season results in an increased amount of sales. In this example, we can deduce the
correlation intuitively, but there are many other examples where analysis methods such as time-series
forecasting are needed to detect such consumer behavior.
Trends are probably the most important information you are looking for. They indicate whether a
variable in the time series will increase or decrease in a given period. We can also calculate the
probability of a trend in order to make even more informed decisions with our data.
Unexpected events (sometimes also referred to as noise or irregularities) can always occur, and we
need to consider that when creating a prediction model. They present noise in historical data, and they
are also not predictable.

Exponential Smoothing
When it comes to time-series forecasting, data smoothing can tremendously improve the accuracy of
our predictions by removing outliers from a time-series dataset. This leads to increased visibility of
distinct and repeating patterns that would otherwise be hidden between the noise.
Exponential smoothing is a rule-of-thumb technique for smoothing time-series data using the
exponential window function. Whereas the simple moving average method weighs historical data
equally to make predictions about the future, exponential smoothing uses exponential functions to
calculate decreasing weights over time. Different types of exponential smoothing include simple
exponential smoothing and triple exponential smoothing (also known as the Holt-Winters method).

Below you can find a basic overview of several forecasting methods that we covered and the theory
behind them:
 Time-series decomposition
  Time-series regression models
 Exponential smoothing
 ARIMA models
 Neural networks
Time-Series Decomposition
Time-series decomposition is a method for explicitly modeling the data as a combination of seasonal,
trend, cycle, and remainder components instead of modeling it with temporal dependencies and
autocorrelations. It can either be performed as a standalone method for time-series forecasting or as
the first step in better understanding your data.

When using a decomposition model, you need to forecast future values for each of the components
above and then add these predictions together to find the most accurate overall forecast. Some of the
most relevant forecasting techniques using decomposition are Seasonal-Trend decomposition using
LOESS, Bayesian structural time-series (BSTS), and Facebook Prophet.
Time-series decomposition refers to a technique that decomposes time-series data into the following
four components:
Trend
Cycle
Seasonality
Remainder
Time-Series Regression Models
Time-series regression is a statistical method of forecasting future values based on historical data. The
forecast variable is also called the regress and, dependent or explained variable. The predictor
variables are sometimes called the regressors, independent or explanatory variables. Regression
algorithms attempt to calculate the line of best fit for a given dataset.

Exponential Smoothing
When it comes to time-series forecasting, data smoothing can tremendously improve the accuracy of
our predictions by removing outliers from a time-series dataset. This leads to increased visibility of
distinct and repeating patterns that would otherwise be hidden between the noise.
Exponential smoothing is a rule-of-thumb technique for smoothing time-series data using the
exponential window function. Whereas the simple moving average method weighs historical data
equally to make predictions about the future, exponential smoothing uses exponential functions to
calculate decreasing weights over time. Different types of exponential smoothing include simple
exponential smoothing and triple exponential smoothing (also known as the Holt-Winters method).

Tracking Signal and seasonality models:

A tracking signal is an automatic indication of variation of the actual with the forecasts in
relation to sales, inventory, or anything pertaining to an organization’s future demand. It
monitors, and warns when there are unexpected departures of the outcomes from the
forecasts.
A tracking signal can be defined as the ratio of the cumulative sum of the deviations between
the estimated forecasts and the actual values to the mean absolute deviation. In 1967, Trigg
and Leach proposed an adaptive method of forecasting where the tracking signal ratio as
above is used as the smoothing parameter in simple exponential smoothing.