Demand Forecasting for Managers

CHAPTER 5

Time Series Decomposition

5.1. Components of a Series

Decomposition is a management technique for complexity reduction. Separating a problem into its components and then solving the components separately before reassembling the components into a larger decision enables better decision making (e.g., Raiffa 1968). The key idea in our forecasting application is to “decompose” a time series into separate components that can be examined and estimated separately. These components can then be recombined to generate a forecast. Many forecasting methods either require data that has already been decomposed or incorporate a decomposition approach directly into the method.

The components usually examined in a time series analysis are the level ...