Scribd
Upload
137 views

Time Series Analysis: 1.case Study

The document discusses using time series analysis to forecast tractor sales for an agricultural equipment manufacturer. Key steps included decomposing the sales data into trend, seasonality, and irregular components. The trend was identified using a 12-month moving average. Seasonality was found by plotting sales monthly, with peak sales in July and August. The irregular component captured remaining variations. Based on increasing sales trends and seasonality patterns observed, the analysis concluded that tractor sales would increase near 300% over the next 36 months.

Uploaded by

Ankit Madan
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
137 views

Time Series Analysis: 1.case Study

The document discusses using time series analysis to forecast tractor sales for an agricultural equipment manufacturer. Key steps included decomposing the sales data into trend, seasonality, and irregular components. The trend was identified using a 12-month moving average. Seasonality was found by plotting sales monthly, with peak sales in July and August. The irregular component captured remaining variations. Based on increasing sales trends and seasonality patterns observed, the analysis concluded that tractor sales would increase near 300% over the next 36 months.

Uploaded by

Ankit Madan
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 15

Time Series Analysis

1.Case Study
Power Horse, a tractor and farm equipment
manufacturing company, was established a few
years after World War II. The company has
shown a consistent growth in its revenue from
tractor sales since its inception. However, over
the years the company has struggled to keep
it’s inventory and production cost down
because of variability in sales and tractor
demand. The management at PowerHorse is
under enormous pressure from the
shareholders and board to reduce the
production cost. Additionally, they are also
interested in understanding the impact of their
marketing and farmer connect efforts towards
overall sales. In the same effort, they have
hired you as a data science and predictive
analytics consultant.

You will start your investigation of this problem in the next part
of this series using the concept discussed in this article.
Eventually, you will develop an ARIMA model to forecast sale /
demand for next year. Additionally, you will also investigate the
impact of marketing program on sales by using an exogenous
variable ARIMA model

2.OBJECTIVE OF THE STUDY


The final goal is to forecast tractor sales in the next
36 months. In this article, we will delve deeper into
time series decomposition. As discussed earlier, the
idea behind time series decomposition is to extract
different regular patters embedded in the observed
time series. But in order to understand why this is
easier said than done we need to understand some
fundamental properties of mathematics and nature
as an answer to the question.
3.STASTICAL TECHNIQUE
Time Series Decomposition –
Manufacturing Case Study Example
Back to our case study example, you are
helping Power Horse Tractors with sales
forecasting. As a part of this project, one of
the production units you are analysing is
based in South East Asia. This unit is
completely independent and caters to
neighbouring geographies. This unit is just a
decade and a half old. In 2014 , they
captured 11% of the market share, a 14%
increase from the previous year. However,
being a new unit they have very little
bargaining power with their suppliers to
implement Just-in-Time (JiT) manufacturing
principles that have worked really well in
PowerHorse’s base location. Hence, they
want to be on top of their production
planning to maintain healthy business
margins. Monthly sales forecast is the first
step you have suggested to this unit
towards effective inventory management.

In the same effort, you asked the MIS team


to share month on month (MoM) sales
figures (number of tractors sold) for the last
12 years. The following is the time series
plot for the same:
Now you will start with time series
decomposition of this data to understand
underlying patterns for tractor sales. As
discussed in the previous article, usually
business time series are divided into the
following four components:

Trend – overall direction of the series i.e.


upwards, downwards etc.
Seasonality – monthly or quarterly patterns
Cycle – long term business cycles
Irregular remainder – random noise left
after extraction biof all the components
In the above data, a cyclic pattern seems to
be non-existent since the unit we are
analysing is a relatively new unit to notice
business cycles. Also in theory, business
cycles in traditional businesses are observed
over a period of 7 or more years. Hence,
you won’t include business cycles in this
time series decomposition exercise. We will
build our model based on the following
function:

Y_{t} = f(Trend_{t}\ , Seasonality_{t}\ ,


Remainder_{t})
In the remaining article, we will study each
of these components in some detail starting
with trend.

Trend – Time Series Decomposition


Now, to begin with let’s try to decipher
trends embedded in the above tractor sales
time series. One of the commonly used
procedures to do so is moving averages. A
good analogy for moving average is ironing
clothes to remove wrinkles. The idea with
moving average is to remove all the zigzag
motion (wrinkles) from the time series to
produce a steady trend through averaging
adjacent values of a time period. Hence, the
formula for moving average is:
Moving\ Average =
\frac{\sum\limits_{i=-m}^m Y_{t+i}}{2m}
Now, let’s try to remove wrinkles from our
time series using moving average. We will
take moving average of different time
periods i.e. 4,6,8, and 12 months as shown
below. Here, moving average is shown in
blue and actual series in orange.
As you could see in the above plots,
12-month moving average could produced a
wrinkle free curve as desired. This on some
level is expected since we are using
month-wise data for our analysis and there
is expected monthly-seasonal effect in our
data. Now, let’s decipher the seasonal
component

Seasonality – Time Series Decomposition


The first thing to do is to see how number
of tractors sold vary on a month on month
basis. We will plot a stacked annual plot to
observe seasonality in our data. As you
could see there is a fairly consistent month
on month variation with July and August as
the peak months for tractor sales.
Irregular Remainder – Time Series
Decomposition
To decipher underlying patterns in tractor
sales, you build a multiplicative time series
decomposition model with the following
equation

Y_{t} = Trend_{t}\times Seasonality_{t}


\times Remainder_{t}
Instead of multiplicative model you could
have chosen additive model as well.
However, it would have made very little
difference in terms of conclusion you will
draw from this time series decomposition
exercise. Additionally, you are also aware
that plain vanilla decomposition models like
these are rarely used for forecasting. Their
primary purpose is to understand
underlying patterns in temporal data to use
in more sophisticated analysis like
Holt-Winters seasonal method or ARIMA.
The following are some of your key
observations from this analysis:

1) Trend: 12-months moving average looks


quite similar to a straight line hence you
could have easily used linear regression to
estimate the trend in this data.

2) Seasonality: as discussed, seasonal plot


displays a fairly consistent month-on-month
pattern. The monthly seasonal components
are average values for a month after
removal of trend. Trend is removed from
the time series using the following formula:

Seasonality_{t} \times
Remainder_{t}=\frac{Y_{t}}{Trend_{t}}
3) Irregular Remainder (random): is the
residual left in the series after removal of
trend and seasonal components. Remainder
is calculated using the following formula:

Remainder_{t}=\frac{Y_{t}}{Trend_{t}\times
Seasonality_{t} }
The expectations from remainder
component is that it should look like a
white noise i.e. displays no pattern at all.
However, for our series residual display
some pattern with high variation on the
edges of data i.e. near the beginning
(2004-07) and the end (2013-14) of the
series.

4.RESULT
We have noticed that
Sales increasing at every session
Monthly moving average is also increasing
But in sessional data in last months sales is
decreasing
Tractor trend is also trending

5.conclusion
After studying all the data it is clearthat
tractor sale will benear 300percent from
nowin upcoming36months time period.

You might also like