The following four cases are from our consulting practice and demonstrate different types of forecasting situations and the associated challenges that often arise.
The client was a large company manufacturing disposable tableware such as napkins and paper plates. They needed forecasts of each of hundreds of items every month. The time series data showed a range of patterns, some with trends, some seasonal, and some with neither. At the time, they were using their own software, written in-house, but it often produced forecasts that did not seem sensible. The methods that were being used were the following:
- average of the last 12 months data;
- average of the last 6 months data;
- prediction from a straight line regression over the last 12 months;
- prediction from a straight line regression over the last 6 months;
- prediction obtained by a straight line through the last observation with slope equal to the average slope of the lines connecting last year’s and this year’s values;
- prediction obtained by a straight line through the last observation with slope equal to the average slope of the lines connecting last year’s and this year’s values, where the average is taken only over the last 6 months.
They required us to tell them what was going wrong and to modify the software to provide more accurate forecasts. The software was written in COBOL, making it difficult to do any sophisticated numerical computation.
In this case, the client was the Australian federal government, which needed to forecast the annual budget for the Pharmaceutical Benefit Scheme (PBS). The PBS provides a subsidy for many pharmaceutical products sold in Australia, and the expenditure depends on what people purchase during the year. The total expenditure was around A$7 billion in 2009, and had been underestimated by nearly $1 billion in each of the two years before we were asked to assist in developing a more accurate forecasting approach.
In order to forecast the total expenditure, it is necessary to forecast the sales volumes of hundreds of groups of pharmaceutical products using monthly data. Almost all of the groups have trends and seasonal patterns. The sales volumes for many groups have sudden jumps up or down due to changes in what drugs are subsidised. The expenditures for many groups also have sudden changes due to cheaper competitor drugs becoming available.
Thus we needed to find a forecasting method that allowed for trend and seasonality if they were present, and at the same time was robust to sudden changes in the underlying patterns. It also needed to be able to be applied automatically to a large number of time series.
A large car fleet company asked us to help them forecast vehicle resale values. They purchase new vehicles, lease them out for three years, and then sell them. Better forecasts of vehicle sales values would mean better control of profits; understanding what affects resale values may allow leasing and sales policies to be developed in order to maximise profits.
At the time, the resale values were being forecast by a group of specialists. Unfortunately, they saw any statistical model as a threat to their jobs, and were uncooperative in providing information. Nevertheless, the company provided a large amount of data on previous vehicles and their eventual resale values.
In this project, we needed to develop a model for forecasting weekly air passenger traffic on major domestic routes for one of Australia’s leading airlines. The company required forecasts of passenger numbers for each major domestic route and for each class of passenger (economy class, business class and first class). The company provided weekly traffic data from the previous six years.
Air passenger numbers are affected by school holidays, major sporting events, advertising campaigns, competition behaviour, etc. School holidays often do not coincide in different Australian cities, and sporting events sometimes move from one city to another. During the period of the historical data, there was a major pilots’ strike during which there was no traffic for several months. A new cut-price airline also launched and folded. Towards the end of the historical data, the airline had trialled a redistribution of some economy class seats to business class, and some business class seats to first class. After several months, however, the seat classifications reverted to the original distribution.