2012 Fifth International Joint Conference on Computational Sciences and Optimization

Data Mining Algorithms and Statistical Analysis for Sales Data Forecast

Lin Wu; JinYao Yan；YuanJing Fan

Department of Computer and Network
Communication University of China, Beijing, 100024, China
E-mail: wulin@cuc.edu.cn

Abstract—This paper develops and compares different incorporated multiple input factors to improve the forecast
models to forecast new product sales data with accuracy [2]. We analyze both pure time-series forecasting
increasing sales trend and multiple predictor inputs. In models and time-series forecasting model with causal factor
order to analyze new product with increasing sales forecasting method. We found that with causal factor inputs,
trend, we developed and evaluated multiple time series the forecasting result can be greatly improved [3]. We
forecasting methods, including Exponential Smoothing concluded that causal factor inputs can compensate for the
model, Holt’s Linear model, ARMA model, and ARMA less accurate forecast due to limited data in new product
wit linear trend models. Furthermore, we created sales forecasting.
multiple Causal Factor Forecasting models to II. TIME SERIES FORECASTING MODELS
incorporate various dependent input factors such as sale
person’s quotes, product pricing, product seasonality A. Exponential Smoothing (ES) Method
factors, to further reduce forecasting error. We analyzed The Exponential Smoothing method fits a trend model
original data regression model, trend and residual such that the most recent data are weighted more heavily
regression model, and ARMAV wit linear trend model than data in the early part of the series. It has a weight
to consider input factors. We discovered that ARMAV parameter α , which is between 0 and 1. The larger the
wit linear trend model gives best forecasting accuracy alpha, the new forecast is influenced more by the recent
and lowest RSS (Residual Sum of Square). In conclusion, data. The reason that it is called exponential smoothing is
ARMAV with linear trend method is the best that the weight of an observation is a geometric
benchmark model to forecast sales data for new product (exponential) function of the number of periods that the
with trend and with sales person’s inputs. observation extends into the past relative to the current
period [4]. The model for ES is:
Keywords-Forecast; Time-Series Forecasting; Causal ∞
Factor Forecasting; ARMA; ARMAV Ft +1 = ∑ α (1 − α ) jYt
j =0
(1)
Or
I. INTRODUCTION Ft +1 = αYt + (1 − α ) Ft (2)
In consumer electronics industry, the normal product
F Y
selling cycle is two to three years. During this selling Here, t is the predicted data at time t , and t is the
period, product goes through initial product introduction and actual data at time t .
matured selling period. Forecasting sales of consumer ES method can be easily implemented. With initial
electronics products faces challenges. First, in the new
product introduction stage, the demand may have upward F =Y
predicted data 1 1 , the prediction of all months can be
trend. Second, consumer electronics sales may experience generated by equation (2). α is a decision variable to
seasonal selling pattern. Third, short selling period restricts choose with the objective to minimize the RSS. The whole
the data set size, which is a big challenge in time series model ca be implemented in Excel, and solved by Excel
forecasting. Even at the end of 2nd year, monthly sales only solver.
have 24 data points, which is much smaller than the
traditional time series problem [1]. Min RSS
Prior research on sales data forecast is intensively By changing α ,
focusing on forecasting with large historical data. However, Subject to 0 ≤ α ≤ 1
new product sales forecast with limited data points remains
as new research area. In addition, prior paper on sales data The optimal α that minimize RSS is α * = 0.58 . The
forecast mostly uses time-series models with no input minimum RSS in ES method is
factors. This paper explores new method in forecasting new RSS = 3.012 ×106 RSS=3.012
product sales data using 24 months historical data, and

978-0-7695-4690-2/12 $26.00 © 2012 IEEE 577

DOI 10.1109/CSO.2012.132
 Lt −1 + bt −1 . The (4) gives the
weight of the predicted data
bt is also a
slope of the trend in each time period. The slope
weighted sum of actual slope and predicted slope.
Holt’s method can also be easily implemented. The
initial values can be given by 1 2b = Y −Y
1 and 1 1. L =Y
The prediction of all months can be generated by equation
Figure 1. Actual Sales and Forecast by ES Method (5), and in the equation (5),
Lt and bt are given by
Figure 1 shows the actual and forecasting data using β
ES method. We observe that ES method tends to under- equation (3) and (4). α and are the decision variables to
estimate in increasing trend. It consistently under estimates choose in order to minimize the RSS. The whole model ca
the data from February 2008 to October 2008 during the be implemented in Excel, and solved by Excel solver.
product introduction period. In fact, under-estimation in Min RSS
increasing trend and over-estimation in decreasing trend are
generally observed in ES algorithm. This is because that ES By changing α , β
algorithm does not considers the trend factors, and only
Subject to 0 ≤ α ≤ 1 , 0 ≤ β ≤1
smoothing previous data points to generate next data point.
This smoothing interpolation method cannot adjust to The optimal α and β that minimizes RSS are
increasing or decreasing trend, so the prediction always α * = 0.41, β * = 0 .
shows a lag behind the increasing or decreasing trend [5]. The minimum RSS in the Holt’s
The pros and cons of ES method are summarized as 6
follows: method is 2.638 × 10 , which is lower than the RSS in the
Pros: ES method.
Easy to understand and implement
Prediction is relatively accurate if the data is not too
complicated
Cons:
Purely based on historical time-series data, cannot
input explanatory factors, e.g. quotes, seasonality, etc.
Not good at handling data with trend: tends to under-
estimate in increasing trend; over-estimate in decreasing
trend.
Bad data in recent months can cause large errors in
forecast Figure2. Actual Sales and Forecast using Holt’s Linear Method
Figure 2 shows the actual and forecasting data using
B. Holt’s Method Holt’s method. We can see that the forecast can trace the
As mentioned in previous session, ES method tends to increasing trend much better than ES method. Since the new
under-estimate in increasing trend and over-estimate in introduced product has increasing trend in the data. Holt’s
decreasing trend. Holt’s linear method is introduced to method can fit the data better than ES method, thus
better estimate data with trend. Holt’s linear method decreases the RSS [6].
b
introduces a parameter t to estimate the slope of the trend.
The pros and cons of Holt’s method are summarized as
follows:
The algorithm of Holt’s method is given by the following Pros:
three equations: Incorporates trends in the forecast
Level: Lt = α Yt + (1 − α )( Lt −1 + bt −1 ) (3) Can be efficient compared to other methods even with
less data
Trend: bt = β ( Lt − Lt −1 ) + (1 − β )bt −1 (4)
Cons:
Forecast: Ft + m = Lt + mbt (5) Purely based on historical time-series data, cannot
input explanatory factors, e.g. quotes, seasonality, etc.
Highcast: Ft + m = Lt + mbt (6) Outliers can significantly impact the forecast
The equation (5) is used to forecast m step ahead
C .ARMA with Linear Trend
F L b
prediction t + m using level t and the slope t times the Since the data displays an increasing trend, ARMA model
number of period to predict m . The equation (3) gives the with linear trend is tested to see whether it can further
base level that forecast starts from. Similar as ES method, improve RSS. First, the original data is fitted into a linear
Lt is given by a certain weight of actual data Yt and certain trend line. The best fitted linear trend line is

578
523.975 + 73.279t . Figure 6 shows the original sales
data fitting the linear trend line.
After fitting the linear line, the data model becomes
Yt = 523.975 + 73.279t + X t . Next, the residual X t is
fitted into ARMA model. Using Matlab code, we found that
ARMA(4,2) is the adequate model.
X t = 1.251X t −1 − 0.5207 X t −2 + 0.6235 X t −3 − 0.5193 X t −4represent
The four characteristics roots are:
λ1,2 = 0.8901 ± 0.2561i,
λ3,4 = −0.2647 ± 0.7317i
No seasonality is observed in this model.
data)’s impact in the sales data forecasting. Causal factors
forecasting considers input factors, and uses them to
improve the forecasting accuracy.
A. Original data regression
In this method, we directly regress the actual sales data
with respect to quotes data (with 1, 2, 3, 4, 5 months prior to
the sales month) and seasonality index. The seasonality
index is implemented by giving dummy variables to
+ at − 1.799 1 + 0.8601
eachat −month. Theatresult
−2 proves that the only
significant factor is the quotes data 3 months prior to the
sales month), with t-stat=3.13. All other quotes data and
seasonality data are insignificant.
The regression forecasting model is
F t = − 8 2 9 .5 3 6 + 0 .7 9 5 × Q t − 3 ( 7 )
Q Q
Here, t is the quote data at time t , and t −3 is the
quotes data with 3 months prior to the sales month.
Figure 5 gives the actual data and forecast data using
6
forecasting model (7). The RSS is 3.401×10 , which is
higher than all the previous method. From Figure 8 we
observe that the forecast displays an over-forecast in the
earlier months and under-forecast in the later months. This
is because that the regression method does not consider the
increasing trend.
Original Data Regression Forecast vs. Actual Sales

3000

2500
Figure 3. Fit Actual Sales into a Trend Line
2000

Actual Sales
Units

Figure 4 gives the actual data and forecast data comparison 1500
Forecast

using ARMA(4,2) plus linear trend model, as described in 1000

6
Figure 3. The RSS is 2.691× 10 , which is lower than ES
500

0
method, but higher than Holt’s method and ARMA with no
Feb-08
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trend model. This result tells that the linear trend does not
help in the sales prediction for ARMA model [7]. Months

Figure 5 Actual Sales and Original Data Regression Forecast

B. Trend and residual regression

Figure 4. Actual Sales and Linear Trend + ARMA Model
Forecast
III. CAUSAL FACTORS FORECASTING
In above sessions, we forecast purely based on
historical data, but do not consider input factor (quotes
As we observed in the previous session, the regression
method gives the worst RSS, and one reason is that the
regression does not consider the increasing trend. In this
session, I first fit the data to a linear trend, as what has been
done in the ARMA + Linear Trend session. Then I take the
residual, and perform a regression of the residual with
respect to the quotes data and seasonality [8].
As mentioned, after fitting the linear trend line, the
model becomes
Yt = 523.975 + 73.279t + X t . Next,
X
regress t with respect to quotes data (with 1, 2, 3, 4, 5
months prior to the sales month) and seasonality index. The
result shows that the only significant factor is the quotes

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data 3 months prior to the sales month), with t-stat=7.0. All ARMAV + Linear Trend Forecast vs Actual Sales ARMAV+Trend Forecast
other quotes data and seasonality data are insignificant. Actual Sales

The residual regression forecasting model is

X t = −1413.74 + 0.495 × Qt −3
3000
So the complete residual regression plus linear trend 2500
model is 2000

Units
Yt = 523.975 + 73.279t − 1413.74 + 0.495 × Qt −3
1500
1000
500
Figure 6 shows the actual and forecast data using residual 0

regression plus linear trend method. The RSS is

Feb-08
Mar-08

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0.815 ×106 , which is much lower than all the previous Months

methods. This is because this method not only considers the

increasing trend, but also considers the input factors’ Figure 7. ARMAV + Linear Trend Forecast
impact.
Residual and Trend Forecast vs. Actual Sales Actual Sales
Residual+Trend Forecast
IV. METHODOLOGY AND RESULTS
In this paper, I collected 2-year monthly sales data for a
consumer electronics product. Using 10-20 data to forecast
2900 the future demand is very common to consumer electronics
1900
industry. Another set of data that I collected is the 27
Units

900

-100 months quote data. Quote data is the number of quotes that
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the sales people sent out each month. Some quote data end
Months
up with an actual sales event, but other quotes may be lost.
Therefore, quote data gives an indication of final sales data,
Figure 6. Linear Trend + Residual Forecast
but is not completely correlated to the sales data. In
C. ARMAV with Linear Trend addition, quotes data may not have immediate impact to
Since Trend + Residual Regression method can greatly sales data [11]. The market may demonstrates sales data be
improve the forecasting accuracy, my hypothesis is that impacted by the quotes data which sent out one or several
vector ARMA (ARMAV model) with Linear Trend may months ago. The purpose of this project is to identify the
work even better than Trend + Residual Regression model. best sales forecasting model considering historical sales data
The reasons are as follows: and quote data [12].
ARMAV with Linear Trend method considers the Figure 8 and 9 give the actual sales data and quote data.
increasing trend; Actual Sales
ARMAV has a more complicated algorithm than
regression, thus can capture more input factor impacts [9]. 2500

As mentioned, the model with linear trend is 2000

Yt = 523.975 + 73.279t + X t . Next, I model the residual 1500

Units

1000

Xt Qt
500

using ARMAV model, and make quotes data as 0

Oct-07
Nov -07
Dec -07
J an-08
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J un-08
J ul-08
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Feb-10
input factor. Due to the limitation of data sample size, I
cannot run full ARMAV model. Therefore I limited the Months

parameter of ARMAV to ARMAV(2,2,1) model. The

ARMAV model that I found is Figure 8. Actual Sales Data

Xt = 0.9232Xt−1 +0.1577Xt−2 +0.6039Qt−3 −0.6123Qt−4 +at −at−1

Figure 10 demonstrates the actual data and forecast
data using ARMAV plus linear trend model. The RSS is
0.676 ×106 , which is the lowest among all the methods.
This result aligns with our intuition that ARMAV + Linear
Trend method is the best method [10].

Figure 9. Quotes Data

In this paper, I would like to explore multiple
forecasting models, and compare the RSS of these models.

580
 Traditional forecasting methodologies can be divided
into two big categories: Time-Series Forecasting and Causal
Factors Forecasting. In this paper, I will introduce several
models in each category, and compare the forecasting
accuracies for those models. The following lists the models
that I am discussing in this paper [13]:
1. Time series forecasting
Exponential Smoothing (ES) Method
Holt’s Linear Method
ARMA
ARMA with linear trend
2. Causal factors forecasting
Original data regression
Trend and residual regression
ARMAV with linear trend
I extend this paper to the models beyond ARMA
model. This is because although ARMA may provide best
forecasting result because of its model complexity, the
model itself is not as intuitive as other methods, e.g. ES and
Holt’s method. In addition, ARMA model is difficult to
derive without programming and relevant software (e.g.
MATLAB) [14]. Compared to ARMA, other methods (e.g.
ES, Holt’s, Regression) can be easily implemented in Excel.
In this consideration, ARMA may be attractive if it shows
significantly advantage in improving forecasting accuracy
compared to other methods [15]. If ARMA only shows
slightly better result, companies may still prefer simple
methods (e.g. ES, Holt’s, Regression) because they are easy
to implement.
The RSS of different models are summarized in Table
Table 1. RSS of Multiple Models
Models RSS
Exponential Smoothing (ES)
3.012 ×106
Holt’s Linear Method
2.638 ×106
ARMA
2.567 × 106
ARMA + Linear Trend
2.691×106
Original Data Regression
3.401× 106
Residual Regression + Linear
Trend 0.815 ×106
ARMAV + Linear Trend
0.676 ×106
V. CONCLUSION
This paper studies different forecasting models, from
simple exponential smoothing model, Holt’s linear model,
to ARMA model, ARMAV + Trend model. Based on above
results, we can give the following 5 conclusions:
1. ARMAV + Linear Trend model and Residual
Regression + Linear Trend model consider both the trend of
the data and the input factor (quotes data). They give
significantly better forecasting accuracies.
2. ARMAV + Linear Trend model gives best
forecasting accuracy because ARMAV is a more
comprehensive way to model input output relationships than
multiple regression.
3. In the time-series model without input factors, both
ARMA model and Holt’s method give good results.
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However, Holt’s method is very simple to understand and
easier to implement.
4. The forecast accuracy may improve if we have more
data for ARMA model.
5. ARMA with linear trend does not improve the
forecasting accuracy.
In conclusion, to forecast new product sales with
limited past data points, ARMAV and linear trend model is
the best model. This is because this model can use input
factors to compensate for the less accurate forecast due to
limited data in new product sales forecasting.
ACKNOWLEDGMENT
This work is supported by computing Science by The
Communication of China (No.XNG1144), the National
Natural Science Foundation of P. R. China (No. 60970127)
and partly supported by Program for New Century Excellent
Talents in University (NCET-09-0709).
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