International Journal of Management Science and En

ISSN1746-7233,England,UKInternationalJournalofManagementScienceandEngineeringManagementVol.1(2006)No.1,pp.17-36Anoverviewofshort-termstatisticalforecastingmethodsRussellJ.Elias,DouglasC.Montgomery∗,MuratKulahciDepartmentofIndustrialEngineering,ArizonaStateUniversity(ReceivedJune132006,AcceptedJuly102006)Abstract.Anoverviewofstatisticalforecastingmethodologyisgiven,focusingontechniquesappropriatetoshort-andmedium-termforecasts.Topicsincludebasicdefinitionsandterminology,smoothingmethods,ARIMAmodels,regressionmethods,dynamicregressionmodels,andtransferfunctions.Techniquesforevaluatingandmonitoringforecastperformancearealsosummarized.1IntroductionAchievingaccurateforecastsoffuturemarketdemandiscruciallyimportantfortoday’sglobalman-ufacturingenterprises.Increasinglycompetitivepressuresforcemanufacturerstocloselymatchproductioncapacitiesandmix-dependentrunvolumestohighlydynamicmarketconditions;excessivecapacityresultsinadepressedreturnonassets,whileinadequatecapacityleadstolostmarketshare.Resultingfromtheleanoperatingmarginstypicalintoday’shighlycompetitiveglobalbusinessenvironment,excessiveforecasterroronacontinuingbasisisanunacceptablemistakethatgobblesprofitsandcanpushotherwiseviablebusinessesintothenegativereturnscategory.Thecriticalimportanceofaccurateshort-tomedium-termbusinessforecastsisamplifiedtodayasaresultofseveralrevolutionarychangesinthenatureofinternationalcommerce.Forexample,considertherelativelyrecentemergenceandproliferationofnon-captivemanufacturingentities.Afundamentalshiftisoccurringthroughoutmanyindustrystructures,awayfromin-housemanufacturingbytheoriginalequipmentmanu-facturers(OEM’s)andtowardstheuseofsecondtier,merchantmarketmanufacturingconcernsknownasfoundries.Forexample,inthesemiconductorindustry,thecostofanewstate-of-the-artfabricationfacilitynowapproachestwobilliondollars,ascitedby[21].ManysemiconductorOEM’sarerespondingtothisincrediblecapitalrequirementbygoing“fabless”;outsourcingmuchifnotalloftheirwaferfabricationtonon-captive,merchantfoundariesthatareabletoservicemultipleOEMclientsfromhighvolumeintegratedmanufacturingcenters,asdescribedby[1].ThisshiftawayfromcaptivemanufacturingresourcestowardsmerchantfoundariesimpliesthattheOEM’swillnowbecompetingwitheachotherforlimitedfinitecapacityatthesefoundries.Thecompetitorthathassuperiormarketforecastingcancontractuallylock-intherequiredmanufacturingcapacityatthesefoundries,excludingtheircompetitors(whopotentiallyunderforecastedtruedemand)fromutilizingthisresourceagainsttheminthebattleformarketshare.Conversely,competitorswhooverestimatemarketdemandwouldsuffereitherincreasesinnon-performinginventoryorthepaymentofcancellationchargestothefoundries,bothofwhichrepresentcostlyerrors.Directlyrelatedtotheriseofmerchantmanufacturingistheemergenceofaglobaleconomy.Goodsandservicesarenowabletoflowmorefreelyacrossinternationalboundariesthanatanypointinhistory,permittingbothcustomersandOEM’stofulfillsourcingrequirementsanywhereintheworld.Whilethisnewbusinessmodelpermitstheutilizationofthemostefficientmanufacturingresources,italsoinherentlyin-troducesgreatervolatilityforallmarketparticipants.Moresothanever,amanufacturerhasgreaterupside∗E-mailaddress:[e-mail]Press,WorldAcademicUnion18R.J.Elias&D.C.Montgomery&M.Kulahci:Anoverviewofshort-termpotentialasitsproductsfreelytraversetheglobe,whilesufferinggreaterriskascompetitioncannowlikewiseemanatefromanywhereintheworld.World-classorganizationsmustbeabletoferretoutdecision-enabling,operationalinformationfromthejumbleofInformationSystem-provideddatainordertosurviveinthenewmarketparadigm.Thisenablesthecaptureofincreasingmarketopportunities,whilesimultaneouslyminimiz-ingtherisksofmakingunnecessarycapitaloutlaysinanincreasinglyunforgivingfinancialenvironment.Othernewrealitiesthatwreakhavoconglobalmanufacturersarethediametricallyopposingforcesofincreasingproductcomplexityanddecreasingproductlifecycle.Againtakinganexamplefromthesemicon-ductorindustry,considertheimplicationsofthedatapresentedinTab.1:Table1.Typicalproductparametersversuserayear]ofmarkstepsmfgcycletimehalf-lifeofproductsales196042w5y19801212w3y20003648w1yAsindicated,atypicalsemiconductorproductdesignfromthe1960’s(forexample,azenerrectifier,adevicewhichconvertsalternatingcurrenttodirectcurrent)requiredtwoweeksofmanufacturingcycletimeandwouldretainfiftypercentofitspeakproductsalesfiveyearshencefromthepeaksalesyear.Contrastthattoacurrentsemiconductorproduct(perhapsanadvancedmicroprocessor)thatrequires48weeksofmanufacturingcycletimeandloses50%ofitssalesvolumeyearonyear.Theimplicationsofthisdramaticshiftinmarketconditionsupontheneedforaccurateforecastingisobvious;overbuildinventoryby50%in1960,recoverbysellingitin1961···overbuildinventoryby50%today,prepareforreceivership.2ForecastingterminologyThetermtoforecastisofSaxonorigin,meaningliterallytothrowahead,assharedby[11].Thisisamostappropriatemetaphorfortheblendofartandsciencethatisstatisticalforecasting,foronedoesattempttothrowaheadintothefutureastreamofpreviouslyobservedvalues,with