Compositional Data Analysis: a business case application to … · 2019-09-23 · Sommario In...
Transcript of Compositional Data Analysis: a business case application to … · 2019-09-23 · Sommario In...
POLITECNICO DI MILANO
Scuola di Ingegneria dei Sistemi
Corso di Laurea Specialistica in Ingegneria Matematica
Dipartimento di Matematica
Compositional Data Analysis: a business caseapplication to Cross Selling
Relatore: Prof. Simone VANTINICorrelatrice: Dott.ssa Alessandra MENAFOGLIO
Tesi di Laurea di:
Luca FACCHETTI
Matr. 755105
Anno Accademico 2015–2016
Sommario
In questo lavoro si presentano le principali caratteristiche della Compositio-
nal Data Analysis, soffermandosi sul problema dell’applicazione di tecniche
classiche di statistica multivariata su dati composizionali.
Successivamente i metodi di analisi e trasformazione di dati composizionali
vengono applicati ad un dataset inerente a un caso aziendale di Cross Sel-
ling relativo alle quantità di macro famiglie di prodotti acquistate dai clienti
della società di automazione industriale Festo S.p.A. (ed alle relazioni che in-
tercorrono tra le varie famiglie), cercando di capire, tramite l’applicazione di
analisi di statistica multivariata come PCA, Clustering, K-means e Classifica-
zione Supervisionata, se le strategie aziendali per lo sviluppo di campagne di
marketing relative al Cross Selling abbiano evidenza statistica.
PAROLE CHIAVE: Compositional Data Analysis, Cross Selling, PCA, Cluste-
ring, K-means, Festo.
Abstract
In this work main characteristics of Compositional Data Analysis are pre-
sented, specially focusing on issue of application of classical multivariate sta-
tistical techniques to compositional data.
Afterwards methods of compositional data transformation are applied to a
dataset inherent to a Cross Selling business case related to product macro-
families purchased by customers of Industrial Automation company Festo Ltd
(and related to relations between product families) with the aim, through the
application of multivariate statistical methods such PCA, Clustering, K-means
and Supervised Classification, to understand if company strategies regarding
the development of marketing campaigns related to Cross Selling are sup-
ported by statistical results.
KEYWORDS: Compositional Data Analysis, Cross Selling, PCA, Clustering,
K-means, Festo
Contents
1 Introduction 2
1.1 Framework and motivation . . . . . . . . . . . . . . . . . . . . . 2
1.2 Case study: application of Composition Data Analysis to Cross
Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2.1 Cross Selling in a nutshell . . . . . . . . . . . . . . . . . . 3
1.2.2 Cross Selling: from heuristic to quantitative approach . . 4
1.3 Chapters description . . . . . . . . . . . . . . . . . . . . . . . . . 4
2 Business case: Festo and Cross Selling analysis 6
2.1 Introduction of Festo . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2 Festo Italy and Industry Automation Italian market . . . . . . . 7
2.2.1 Festo Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2.2 F-IT market: Festo products . . . . . . . . . . . . . . . . . 8
2.2.3 F-IT customer segmentation . . . . . . . . . . . . . . . . . 9
2.3 Cross Selling as marketing and statistical approach . . . . . . . . 12
2.3.1 Cross and Up Selling . . . . . . . . . . . . . . . . . . . . . 12
2.3.2 Why Cross Selling in Festo? . . . . . . . . . . . . . . . . . 14
2.3.3 Festo first steps in Cross Selling . . . . . . . . . . . . . . . 15
2.4 Festo analytics and Status Quo . . . . . . . . . . . . . . . . . . . 16
2.4.1 Level 1: total amounts . . . . . . . . . . . . . . . . . . . . 16
2.4.2 Pros and Cons of Level 1 analysis . . . . . . . . . . . . . . 19
2.4.3 Level 2 analysis: Ratios between product families . . . . 21
2.4.4 Level 2 Ratios logic: Pneumatic Drives as family basis . . 22
2.4.5 Level 2 problems: the dependence from Drives trend . . 24
3 Compositional Data Analysis and the Aitchison Simplex 26
3.1 D-compositions and Simplex SD . . . . . . . . . . . . . . . . . . 26
3.2 Compositional analysis principles . . . . . . . . . . . . . . . . . . 30
3.2.1 Scale invariance . . . . . . . . . . . . . . . . . . . . . . . . 30
3.2.2 Permutation invariance . . . . . . . . . . . . . . . . . . . 31
3.2.3 Subcompositional coherence . . . . . . . . . . . . . . . . . 32
3.3 The Aitchison geometry . . . . . . . . . . . . . . . . . . . . . . . 32
3.3.1 Defining a vector space structure . . . . . . . . . . . . . . 34
3.3.2 Aitchison inner product, norm, and distance . . . . . . . 36
3.3.3 Geometry on S3: figures on ternary diagrams . . . . . . . 38
4 Business case: Compositional data analysis of Cross Selling data 42
4.1 F-IT Customer dataset as Compositional dataset . . . . . . . . . 42
4.1.1 Considering Customer as compositional observations . . 43
4.2 Simplification of Dataset . . . . . . . . . . . . . . . . . . . . . . . 43
4.2.1 Variables taken into consideration . . . . . . . . . . . . . 43
4.3 Dataset representation . . . . . . . . . . . . . . . . . . . . . . . . 45
4.4 Compositional Principal Components Analysis . . . . . . . . . . 47
4.4.1 Visualizing and interpreting Biplot of compositional PCA
scores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
4.4.2 Visualizing and interpreting compositional PCA loadings 51
4.5 Classification and grouping with Aitchison distance . . . . . . . 55
4.5.1 Hierarchical Cluster Analysis in S5 and S3 . . . . . . . . 55
4.6 Compositional K-means Cluster Analysis . . . . . . . . . . . . . 61
4.6.1 K-means with k=6 . . . . . . . . . . . . . . . . . . . . . . . 61
4.7 Compositional Discriminant Analysis . . . . . . . . . . . . . . . 66
4.7.1 LDA to classify customers by ISM . . . . . . . . . . . . . 66
4.7.2 QDA analysis . . . . . . . . . . . . . . . . . . . . . . . . . 69
5 Conclusions 72
5.1 Targets achieved . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
5.2 Possible future developments . . . . . . . . . . . . . . . . . . . . 73
List of Figures
2.1 Festo TC in Esslingen . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2 Example of typical Festo products and the final result, an indus-
try machine where these products are applied . . . . . . . . . . . 9
2.3 Two typical Customer Solutions composed by standard prod-
ucts; in general these are not serial projects. . . . . . . . . . . . . 10
2.4 F-IT market, in NTO and number of customers, split by cus-
tomer typology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.5 F-IT market proportion, in NTO (blue) and number of customers
(grey), split by Industry Sector . . . . . . . . . . . . . . . . . . . . 11
2.6 Related items suggested by Amazon website . . . . . . . . . . . 14
2.7 Bundling on Amazon website . . . . . . . . . . . . . . . . . . . . 14
2.8 Proposal based on customer purchasing choices. . . . . . . . . . 15
2.9 Specific section that show related products: a first Cross Selling
approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.10 Example of how products have been aggregated into bigger fam-
ilies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.11 Final macro categories taken into account for Level 1 analysis
(Customer Solutions have been excluded). . . . . . . . . . . . . . 18
2.12 YTD Result, on NTO and Volumes, of all product families for F-IT 18
2.13 Template Excel Analysis for Level 1 in Food & Beverage sector . 19
2.14 Relations between Drives and other product families . . . . . . 23
2.15 After the analysis, the resume sheet shows us the ratios for each
F-IT customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.1 Simplex inR3+ and its representation as ternary diagram (Source:
[6]) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.2 Example of distance in S3 . . . . . . . . . . . . . . . . . . . . . . 33
3.3 Previous example with customers perturbed by y = [5, 30, 80]
and y = [10, 100, 10] . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.4 Previous example with powering applied to customers withα =
0.5 andα = 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.5 Template for ternary diagrams and importance of amount com-
ponents proportion in S3. . . . . . . . . . . . . . . . . . . . . . . 39
3.6 Similar customers (by shape or colour) lying on same proportion
lines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
3.7 Parallel lines, circles and ellipses on ternary diagram. Source: [6] 41
4.1 Final macro families taken into analysis . . . . . . . . . . . . . . 45
4.2 Example of dataset . . . . . . . . . . . . . . . . . . . . . . . . . . 46
4.3 Representation of dataset as absolute amounts . . . . . . . . . . 47
4.4 Representation of dataset on simplex . . . . . . . . . . . . . . . . 48
4.5 Results summary applied to all 5 components . . . . . . . . . . . 49
4.6 Proportion of variance on 4 Principal Components . . . . . . . . 49
4.7 Biplot of first 2 principal components . . . . . . . . . . . . . . . . 50
4.8 Loadings on first 2 Principal Components . . . . . . . . . . . . . 52
4.9 Barplot representing loadings value on all 4 principal components 52
4.10 Dataset with first (solid line) and second (dashed line) PCs . . . 53
4.11 Representation of first (solid line) and second (dashed line) PCs
on subcompositions for Sensors, Pneumatic Drives and Cylinder
Mountings coloured by ISM . . . . . . . . . . . . . . . . . . . . . 54
4.12 Dendograms for Euclidean and Manhattan distances . . . . . . 56
4.13 Dendograms for Euclidean and Manhattan distances with Ward 57
4.14 Cophenetic correlations for Euclidean and Manhattan distances 57
4.15 Data grouped in 3 clusters . . . . . . . . . . . . . . . . . . . . . . 58
4.16 Data grouped in 6 clusters . . . . . . . . . . . . . . . . . . . . . . 59
4.17 Subcompositions data grouped in 3 clusters for average, com-
plete and Ward linkage: first row Euclidean distance, second
row Manhattan distance . . . . . . . . . . . . . . . . . . . . . . . 59
4.18 Subcompositions data grouped in 6 clusters for average, com-
plete and Ward linkage: first row Euclidean distance, second
row Manhattan distance . . . . . . . . . . . . . . . . . . . . . . . 60
4.19 Results for k-means algorithm with 6 clusters and starting cen-
tres from hierarchical clustering . . . . . . . . . . . . . . . . . . . 62
4.20 Ternary diagrams for k-means with 6 clusters, purple squares
represent centres of the clusters . . . . . . . . . . . . . . . . . . . 62
4.21 Subcompositions’ original data coloured by ISM and coloured
by k-means clusters . . . . . . . . . . . . . . . . . . . . . . . . . . 63
4.22 Extreme centres applied to k-means algorithm . . . . . . . . . . 64
4.23 Comparing results of k-means with 5 clusters . . . . . . . . . . . 64
4.24 Variance explained percentage in function of k . . . . . . . . . . 65
4.25 Comparing with k=3 and different initial centres . . . . . . . . . 65
4.26 Values of final clusters’ centres in both cases . . . . . . . . . . . . 65
4.27 Results for lda analysis using proportional priors . . . . . . . . . 67
4.28 Scalings of lda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
4.29 Dataset with new classification for ISM . . . . . . . . . . . . . . . 70
4.30 Dataset with new classification computed with LDA and QDA
algorithms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
List of Tables
2.1 Example table: which Ratio is the correct one? . . . . . . . . . . 21
2.2 Opposite effect on ratios generated by Drives . . . . . . . . . . . 24
3.1 Euclidean Distance between customers on S3 . . . . . . . . . . . 33
3.2 Aitchison Distance between customers on S3 . . . . . . . . . . . 37
4.1 Extreme centres applied to k-means algorithm . . . . . . . . . . 63
4.2 Number of customers per ISM . . . . . . . . . . . . . . . . . . . . 66
4.3 ISM included in analysis . . . . . . . . . . . . . . . . . . . . . . . 66
4.4 Confusion matrix of dataset: on rows original classes, on column
predicted classes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
4.5 Confusion matrix for LDA using uniform priors for groups . . . 68
4.6 Confusion matrix related to QDA with uniform priors . . . . . . 69
1
Chapter 1
Introduction
1.1 Framework and motivation
This work aims to present the basic theory behind the branch of statistics
called Compositional Data Analysis, that is the set of statistical techniques de-
veloped to analyse multivariate dataset as compositional data, so as they are
quantitative descriptions of the parts of some whole, conveying exclusively
relative information.
The basics concepts that lead to the formulation of principles beyond these
techniques has ancients origins since in a paper of Karl Pearson (1897) [7] that
begin with the words "On a form of spurious correlation ..." he wrote about the
awareness of problems related to the analysis of data from their relative point
of view instead of their standard quantitative approach.
After a long period where most of statisticians community focused on devel-
opment of multivariate statistical analysis (in the classic meaning of the term),
in last decades these techniques have been developed specially thanks to the
work of John Aitchison and his working team that first in 1986 defined princi-
ples beyond analysis of data treated as compositions and second developed a
dedicated geometry and data transformation in order to be able to apply most
of classics multivariate statistical techniques (such as Principal Components
2
1.2. CASE STUDY: APPLICATION OF COMPOSITION DATA ANALYSIS TOCROSS SELLING
Analysis, Cluster Analysis, Data sampling, Classification etc).
Nowadays Compositional Data Analysis found its deserved space in statisti-
cal techniques since literature is full of quantities and data where it is more
interesting to focus on the relations between components instead of absolute
quantities. Fields with most applications are such as biosciences, geosciences,
chemistry (think about the proportion of elements in a chemical compound or
in the relations between parts of different material in an earth sample).
1.2 Case study: application of Composition DataAnalysis to Cross Selling
1.2.1 Cross Selling in a nutshell
One of the most important fields in developing in marketing analyses for
industrial and sales companies is the so-called Cross Selling, its specific con-
cepts and applications will be described in depth in next chapter: we can de-
scribe Cross Selling in a nutshell as the set of practices related to the opti-
mization of the sale of products or accessories belonging to a specific basket
of products related each others. These analyses are of critical importance as
gives to the company the latent information about the missing potential mar-
ket relying on sales data of its customers’ basket of purchased products.
Let’s make a simple example of Cross Selling logic: company Festo sells
two product families, Pneumatic Drives and Sensors: it is well-known that in
almost all application cases it is necessary to mount a Sensor on a Pneumatic
Drive, so quantities sold from Festo of these two product families are corre-
lated: if Customer A is buying only Pneumatic Drives from Festo it means
that it is potentially buying Positioning Sensors from a Festo competitor, and
3
1.3. CHAPTERS DESCRIPTION
the amount of Sensors that it is buying from the competitor is also quantified
(in relation to Pneumatic Drives quantities sold to Customer A by Festo).
We can generalize the concept to more than two product families, in this case
we are interested in the relation between a sold product family quantity with
respect to the whole components’ quantity.
1.2.2 Cross Selling: from heuristic to quantitative approach
Unfortunately Cross Selling is generally used in a heuristic way: data are
analysed from a qualitative point of view and only absolute quantities of sin-
gle product families are taken into account.
The target of this work is to develop propose the proper mathematical en-
vironment and the set of quantitative (and formally correct) methods for the
Cross Selling analysis applied to a business case related to Cross Selling data
for customers of Italian subsidiary of Festo, a German company worldwide
leader in Industry Automation.
After the definition of the right analysis environment for dataset composed
by Festo customers, some classical multivariate techniques are applied to the
dataset in order to verify if company strategy related to Cross Selling cam-
paigns definition is supported by statistical analysis of data.
1.3 Chapters description
In first part of Chapter 2 Festo’s brief history and company structure is de-
scribed, after that there is the description of the market where the company
operates, the strategical attributes for customers defined by the company and
a general description of products sold by Festo. In the second part of the chap-
4
1.3. CHAPTERS DESCRIPTION
ter it is described the status quo of Cross Selling analysis developed in the
company: issues and crucial points of weakness of the analysis are defined.
Chapter 3 is the one concerning the description of Compositional Data Anal-
ysis theory: after the formal description of basic principles of Composition
Data Analysis enunciated by John Aitchison and after verifying on a part of
dataset of compositions the issues related to the application of standard statis-
tical techniques, a proper data transformation using Aitchison Geometry is
developed.
In last part, considering the difference geometry rules of compositional data on
the simplex with respect to standard Euclidean spaces geometry rules, geome-
try on the simplex is described with examples of parallel lines, curves, circles
and ellipses .
Chapter 4 Is the joint between second and third chapter: Festo Cross Selling
data is transformed into compositional data and some multivariate analysis
techniques (such Principal Components Analysis, Hierarchic Cluster Anal-
ysis, K-means Clustering and Linear and Quadratic Discriminant Analysis)
have been developed in order to understand if company’s strategies are sup-
ported by data analysis.
For each type of analysis conclusions on the nature of Festo customers’ pur-
chasing attitudes are drawn and differences between the conclusions coming
from a standard approach are described.
5
Chapter 2
Business case: Festo and CrossSelling analysis
2.1 Introduction of Festo
Festo is worldwide leader in Industrial Automation sector, in training and
updating of industrial systems for its customers. Its Head Quarter is placed in
Esslingen am Neckar, near Stuttgart 1; it is also present almost worldwide with
61 abroad subsidiaries and almost 18700 employees.
Figure 2.1 – Festo Technology Centre in Esslingen
1. one of the most important European areas for industry development, for this motivationits region, Baden-Württemberg, is called one of the Four Motors for Europe together withItalian region Lombardia, Spanish Catalunya and French Rhône-Alpes
6
2.2. FESTO ITALY AND INDUSTRY AUTOMATION ITALIAN MARKET
Founded in 1925 as a wood working machines’ builder, Festo is now both a
global player and an independent family-run company that covers its financial
needs by their own means.
For such a motivation the company is not dependent by any kind of capital
market but it’s linked to its relations with customers, employees and business
partners. This allowed the company to define a long term planning even in
highly dynamic and competitive markets, often different by their starting spe-
cific market. The company is synonymous with innovation in industrial and
process automation, from individual single products up to customer solutions
ready for installation.
Festo’s innovative strength is demonstrated by the introduction of about 100
new products every year, the investment of 9% of its total turnover in Research
and Development and by the deposition of over 2900 patents worldwide.
With a total turnover of 2.64 billion Euros in 2015, Festo supplies pneumatic
and electrical automation technology for 300,000 customers in over 35 different
industry fields.
2.2 Festo Italy and Industry Automation Italian mar-ket
2.2.1 Festo Italy
Festo SpA, from now on F-IT, was born in 1956 as the first Festo abroad sub-
sidiary, after only one year since Festo started to spread in Germany pneu-
matic technology applied to industrial sectors different from its specific one,
the wood working sector.
It is from Italy that its vocation of international company started to become a
reality. Contributing to the affirmation of industrial development, Festo Italy
7
2.2. FESTO ITALY AND INDUSTRY AUTOMATION ITALIAN MARKET
witnessed the birth of small, medium and large enterprises that arose during
the post-war period, and using simple technology, progressively reach more
complex and efficient working models.
With an approximate number of 240 employees and an established net-
work of authorized distributors F-IT successfully underpins the group’s mis-
sion. The flagship of Assago company offices is the Application Center, an ex-
clusive operating environment with full availability for F-IT customers: a func-
tional technological space divided into four application areas and with training
classrooms where customers can test solutions and simulate real-world appli-
cations.
In the headquarters of Assago also operational Festo C.T.E. Srl can be found.
Festo C.T.E. is part of international Festo Didactic, one of the world-leading
providers of equipment and solutions for technical education. The product
and service portfolio offers customers holistic education solutions for all ar-
eas of technology in factory and process automation, such as pneumatics, hy-
draulics, electrical engineering, production technology, mechanical engineer-
ing, mechatronics, CNC, HVAC and telecommunications.
2.2.2 F-IT market: Festo products
As mentioned before, F-IT is a leading company on the Italian manufactur-
ing market in industrial automation. The core business of F-IT is characterized
by the sale of almost all components for material handling, mainly pneumatic
(i.e. all you need to build an industrial machine such as valves, valve termi-
nals, cylinders and related accessories, positioning sensors, flow regulators,
cables, wires, tubes, pipes and fittings etc) and to a lesser extent but in big de-
velopment, for electric movement (electric drives, brushless motors, etc.) and
Process Automation (products related to the process industry market for the
8
2.2. FESTO ITALY AND INDUSTRY AUTOMATION ITALIAN MARKET
Figure 2.2 – Example of typical Festo products and the final result, an industrymachine where these products are applied
Pharma, the Oil & Gas and for wastewater treatment). Figure 2.2 depicts some
examples of Festo products and one typical final application of them.
The most important part of Festo market is composed by standard prod-
ucts, or single products that could be used as components for a more complex
system. A smaller part of its market is also composed by the so-called Cus-
tomer Solutions, that are single projects specifically assembled with both Festo
and external products and customized for our customers (see two examples in
Figure 2.3).
2.2.3 F-IT customer segmentation
Excluding Distributors channel, Italian market is mainly composed by OEMs
(Original Equipment Manufacturers) or industrial machine manufacturers for
handling, production and packaging of products of all manufacturing sectors.
These represent about 80% of F-IT market; the residual part is made by End
Users, i.e., final users that purchase products only related to their actual busi-
9
2.2. FESTO ITALY AND INDUSTRY AUTOMATION ITALIAN MARKET
Figure 2.3 – Two typical Customer Solutions composed by standard products;in general these are not serial projects.
ness requirements (these companies, for example, are in most cases customers
of OEM companies from whom they buy one or more machines and which
require only single products for personal needs such as replacing a Festo dam-
aged component or a modification of a machine project).
Customer Structure
Market Sales [LC] /# Customer by OEM/EU/DEALER
Market Sales [LC] # Customer
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
IT
16,1%
6,6%
77,3%
23,1%
72,6%
Color by
OEM_End U
Dealer
End us
OEM
Figure 2.4 – F-IT market, in NTO and number of customers, split by customertypology.
10
2.2. FESTO ITALY AND INDUSTRY AUTOMATION ITALIAN MARKET
An important additional segmentation in F-IT (and in a similar way in Festo
total market) is the allocation of its customers to a specific industry sector.
This classification is crucial since the market in which F-IT operates is vast
and eclectic. Therefore the business is divided in different industry sectors,
among which the most significant for F-IT are:
— Food & Beverage
— Packaging
— Automotive
— Electronic-Light Assembly
— Printing & Plastic
— Machine Tool & Handling
— Process Automation
Customer Structure
Market Sales [LC] /# Customer by ISM
ISM Desc. [short]
Ma
rke
tS
ale
s[L
C]
#C
ust
om
er
AC
AG
RI
AM
I
BIO
PH
A
BU
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EM
DE
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UC
ELA
ELP
EN
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GY
FLU
ID
FOO
D
FOO
DP
R
FOO
T
GE
NP
A
GLC
ER
HE
AV
Y
HY
PN
EU
ME
DLA
B
MP
MTO
OL
OTH
ER
PLA
ST
PR
INT
PR
VA
LV
PTR
AN
S
PU
LPA
P
RA
S
SP
CIA
L
STO
LI
TES
T
TEX
TIL
TYR
E
WA
TER
WE
LD
WO
OD
IT Color by
Market Sales [LC]
# Customer
Figure 2.5 – F-IT market proportion, in NTO (blue) and number of customers(grey), split by Industry Sector
11
2.3. CROSS SELLING AS MARKETING AND STATISTICAL APPROACH
This classification is essential as the market in which F-IT operates is so dif-
ferentiated that reducing everything to a single action strategy would not be
only simplistic than ever misleading. In fact, in the European market Italy is
second only to Germany for the manufacture of industry machines, and our
market is also recognized as the one with the most innovative and creative so-
lutions.
Every sector is different and has particular industrial applications of its mar-
ket. By way of example consider the machinery market for Food & Beverage
where there are much more stringent sanitary certifications than other mar-
kets. In a market like this there will be specific products, waterproof or totally
aseptic for the treatment of the food or beverage compared to a market such
as the Automotive one that has different applications and standards in force
(think about bending machines of metal sheets of vehicle bodies).
2.3 Cross Selling as marketing and statistical ap-proach
2.3.1 Cross and Up Selling
For the varied composition of its market, Festo implements and supports
analytically different marketing campaigns that are placed on different planes
of action: there are campaigns related to specific industry sectors and cam-
paigns related to individual specific products or to macro-families of products.
Here is where comes into play the Cross Selling concept.
The term Cross Selling defines the set of practices, marketing actions, sta-
tistical analyses and business KPIs 2 related to the optimization of the sale of
2. Key Performance Indicators: a type of performance measurements calculated to evalu-ate the success of an organization or an activity with respect to a particular business need.
12
2.3. CROSS SELLING AS MARKETING AND STATISTICAL APPROACH
products or accessories belonging to a specific basket of products related each
others. This tool is necessarily linked to a partially loyal customers that are
already buying from Festo a basket of consolidated products.
The practice of Cross Selling is widely used as part of B2C 3 markets, where
the buyer is characterized mainly by End Users and the logic of the market is
mainly characterized by direct marketing 4.
A classic and simple example of this practice is the one implemented by
major e-commerce companies like Amazon: once a buyer has completed a pur-
chase on their site, the same service provider shows to the buyer some deals
related to the products of his latest purchase: this practice not only allows
one to bypass all the logic related to indirect marketing campaigns or the field
studies to understand the purchasing logics of a particular customer segment,
but also enables one to directly use the purchasing information of a customer
and to use other sales techniques. A classic example is the formulation of a
spot price of a given bundle of different products with a further saving for the
customers in case they decide to buy the entire package instead of the single
individual products.
Figure 2.6 shows an example of Cross Selling implemented by Amazon,
the largest e-commerce site on the European market. In Figure 2.7 we can see
how Cross Selling could be applied to bundling campaigns.
The first image shows how, after a careful categorization of products and
3. Business to Consumer (B2C) is business or transactions conducted directly between acompany and consumers who are the end-users of its products or services
4. from Wikipedia: Direct Marketing is a form of advertising which allows businesses andnonprofit organizations to communicate directly to customers through a variety of media in-cluding cell phone text messaging, email, websites, online adverts, database marketing, fliers,catalogue distribution, promotional letters and targeted television, newspaper and magazineadvertisements as well as outdoor advertising. Among practitioners, it is also known as directresponse.
13
2.3. CROSS SELLING AS MARKETING AND STATISTICAL APPROACH
Figure 2.6 – Related items suggested by Amazon website
Figure 2.7 – Bundling on Amazon website
links between them, the management and proposal of related products is im-
plemented almost automatically. In the second image we have an example of
the next automatic step for a cumulated offer.
2.3.2 Why Cross Selling in Festo?
As we explained in the first section of this chapter, F-IT market is mainly
composed by OEMs (Original Equipment Manufacturers).
It is easily understood that a practice like Cross Selling in Festo market is
much more suited to the market constituted by the so-called industry machine
manufacturers (OEMs) as they require almost all of the products and compo-
14
2.3. CROSS SELLING AS MARKETING AND STATISTICAL APPROACH
nents sold by Festo for the manufacture of their final products, as opposed
to End Users that will purchase only the necessary products to the resolution
of his momentary need, or buy products from Festo because "forced" by the
composition of its industrial plant (e.g. buy pneumatic components for re-
placement).
The ability to examine the basket of goods purchased by an OEM customer,
therefore, gives important information about what he is purchasing from Festo
and what is necessarily buying from its direct competitors.
2.3.3 Festo first steps in Cross Selling
Festo has already activated strategies of Cross Selling as part of its shares
trading. An example of this is a service similar to that described in the first
part of this chapter from Amazon. In fact, when customers decide to use our
Online Shop, they have also the ability to view in few clicks a series of acces-
sories products related to the product that they have just bought.
Figure 2.8 – Proposal based on customer purchasing choices.
However, this happens only when the indirect acquisition channel is used
by customers, not when, as often happens, the customer is followed directly
by a Sales Engineer. The target was to identify and develope the right tools to
15
2.4. FESTO ANALYTICS AND STATUS QUO
Figure 2.9 – Specific section that show related products: a first Cross Sellingapproach.
support and monitoring Sale Force Cross Selling actions in the best way.
There was also the problem of a lack of specific statistical analysis of Cross Sell-
ing monitoring for direct customers and to develop specific campaigns related
to this topic.
2.4 Festo analytics and Status Quo
2.4.1 Level 1: total amounts
Festo decided to start a centralized analysis few years ago by forming a
global team that was in charge to set and develop some KPIs and some mea-
surements in order to identify and positioning customers from Cross Selling
point of view.
The first step has been to aggregate all Festo products’ basket into macro-
families of products that could be compared between them (e.g. all the Pneu-
matic Drives, all the Sensors etc.), so Cross Selling works on the comparison of
absolute amounts from these different product families between them.
16
2.4. FESTO ANALYTICS AND STATUS QUO
Figure 2.10 – Example of how products have been aggregated into bigger fam-ilies
The result has been the possibility to compute, for each Festo customer,
sector, or country (depending on the analysis level) the amount for a certain
analysis period, generally a moving year, of all macro-families and to compute
the total amount for every single product family: this concept was already
present in the past for main product families (such Drives, Sensors or Valves)
but with the new analysis we have the full view of F-IT split by all product
categories and for every single customer (see Figure 2.11). This allowed us to
make specific and strategic campaigns based on the information coming from
this analysis and would allow us to make specific statical analysis on them.
We remind that we exclude from the analysis the product category called Cus-
tomer Solutions as they don’t represent a serial product (except in specific
cases) but single customization made by the aggregation of single products.
We now have the possibility to aggregate yearly Market Sales or Volumes
generated for every product family for F-IT customers and start making some
assumption that will explain some strategic choices in the Cross Selling Level
17
2.4. FESTO ANALYTICS AND STATUS QUO
Figure 2.11 – Final macro categories taken into account for Level 1 analysis(Customer Solutions have been excluded).
2 analysis.
In Figure 2.12 F-IT yearly market sales and volumes in quantity are shown.
CHART Cross Selling Basic Analysis (LEV 1) - only OEM (I) (GREEN)
Proportion of Market Sales [LC] into defined cluster - only OEMs!
Air supply Pneumatic Drives
Valves Valve Terminals
Throttles Tubings Fittings Sensors Electric Drives
Connecting cables
Other products
Pneumatic Drives Acc.
Valve Accessoiries
Other Accessoiries
Customer Solutions (VCC 3-13)
not classified
EW
IT
Proportion of Quantities into defined cluster - only OEMs!
Air supply Pneumatic Drives
Valves Valve Terminals
Throttles Tubings Fittings Sensors Electric Drives
Connecting cables
Other products
Pneumatic Drives Acc.
Valve Accessoiries
Other Accessoiries
Customer Solutions (VCC 3-13)
not classified
EW
IT
Figure 2.12 – YTD Result, on NTO and Volumes, of all product families for F-IT
It’s easy to understand from this picture that Pneumatic Drives is the most
profitable family (from NTO point of view) and it is quite known as Festo
is worldwide leader in production of Pneumatic Drives, Valves and Valves
Terminals. This information will be important in the next paragraphs.
Another thing to be understood and that is not visible in Figure 2.4 is that there
18
2.4. FESTO ANALYTICS AND STATUS QUO
is a lot of variability in the relation between total amounts of product families
in different customers. This could be due to a lack of sales action in a customer
for a certain product families or it could be a pathological situation, due to the
incompatibility of a customer’s final product with a particular product family.
2.4.2 Pros and Cons of Level 1 analysis
Level 1 of Cross Selling analysis is therefore useful to make a rough anal-
ysis on amounts of all macro categories for all customers and to find where
the amount of particular product family is completely null or very small. An
example of this comparison is made in the template of Figure 2.13 for a partic-
ular F-IT industry sector’s customers (Food & Beverage). We can immediately
see which customerrs are not buying a particular product family. Every Sales
Engineer of F-IT receives an Excel file with data for his own customers every
quarter.
Figure 2.13 – Template Excel Analysis for Level 1 in Food & Beverage sector
The main benefit from Level 1 analysis is to identify in a fast and easy way
the customers with which F-IT can choose to start a marketing campaign rely-
ing on the information of null (red cells on Excel Table) or very small amount
19
2.4. FESTO ANALYTICS AND STATUS QUO
for a certain product family.
There are two big problems with Level 1 analysis:
1. It doesn’t take in account the relation between different product fami-
lies: for a particular customer (a row in the Excel file), we cannot work
on the distribution of the composition of a product basket for a cus-
tomer: we can just act on single product families (such Drives, Valves,
Sensors etc.) but not on the relation between this family with the other
ones.
2. The second one is even more crucial: since it works on absolute quan-
tities of each product family, it doesn’t allow us to compare in the right
way customers with different dimensions (both from Volumes or NTO
point of view). What is the benefit of comparing customers with several
differences in the absolute amount on the same product families?
As we already understood, the relation between different families allow us
to understand the customer fidelity level, because if we know that 2 product fam-
ilies are positively correlated (e.g. if I buy a Pneumatic Drive I will need some
accessories for this Drive such Positioning Sensors, a Valve or a Valve Termi-
nal to let it move, a Cylinder Mounting etc.) and we note that this relation
is not satisfied for some customers, it means the latter are necessarily buying
some products form our competitors. Hence if we were able to define a sta-
tistically significant relation between correlated product families, we would be
able to make exploratory analysis and to cluster customers with methods that
are supported by statistical instruments.
20
2.4. FESTO ANALYTICS AND STATUS QUO
2.4.3 Level 2 analysis: Ratios between product families
The way to build specific analysis to compare amounts of different product
families for a customer has been developed in the most feasible and easy to be
implemented method: Festo decided to calculate ratios between the amounts
of related macro families taken in pairs and decide, after defining which fam-
ilies were related together, and to study the distance of this ratio from 1 in
order to understand if this distance was a motivation for marketing actions or
if it was related to technical motivation (e.g. ratio Sensors/Drives could not
be ideally 1 for each industry application, in some case we need 2 Sensors for
each pneumatic drive to be controlled, in other cases, less frequent, we won’t
need any Sensor for a Pneumatic Drive). For this kind of analysis Festo needed
to limit data taken into account, as we could set a ratio between products only
for the ones whose technical relation we were sure about.
The first issue to be managed with ratios was to set which product family
between the two taken into account for each ratios was the one leading the
ratio meaning: to make a simple example, let’s have dummy values for the 3
Customers in Table 2.1
Table 2.1 – Example table: which Ratio is the correct one?
Name Pneumatic Drives Sensors Sens./Drives Drives/Sens.CUST 1 3500 2800 0,8 1,25CUST 2 23459 27021 1,15 0,87CUST 3 (perfect) 5500 5500 1,00 1,00
Let’s look to Customer 1 ratio between Sensors Vs Drives equal to 0.8: it
means that this customer is buying 80 sensors every 100 purchased drives;
does it means that Festo is not good selling Sensors to this customer or that it
is very good in selling Drives to it?
21
2.4. FESTO ANALYTICS AND STATUS QUO
So how do we manage ratios with value >1? Do we leave them out from cam-
paigns or do we have to deal with them in another way?
2.4.4 Level 2 Ratios logic: Pneumatic Drives as family basis
We understand that to use ratios between two product families we have to
fix one of the values that are composing the ratio, in this way we are able to
create a feasible positioning for our customers by relating them to their ratios
(and in this way we give meanings to ratios higher than 1). We also under-
stand that this decision is completely strategic and will draw the direction of
the future campaigns to be done related to Cross Selling analysis.
As we already explained in the second section of this chapter, F-IT (and
generally Festo worldwide) core business is historically constituted by Pneu-
matic Drives product family. This is due to historic technical competence of
the company and to the quality of these products. Pneumatic Drives are also
the products with the highest number of other product families correlated with
them: it means that, by fixing these product families, we have the possibility
to set a good number of ratios with other product families or with product that
are accessories for Pneumatic Drives (necessarily correlated with the quantity
of Drives sold).
The final result are 6 main ratios all based on drives quantities, 4 of these
with a 1 by 1 relation with the number of drives, 2 ratios composed by for-
mulas with more than 2 different components (see Figure 2.14). The result
is an analysis with information about drives that allows us to compare cus-
tomers with different volumes generated, but this time comparable between
them with ratios: this enables us to identify groups of customers with the same
ratios positioning and to define specific strategies for them.
22
2.4. FESTO ANALYTICS AND STATUS QUO
Figure 2.14 – Relations between Drives and other product families
Figure 2.15 – After the analysis, the resume sheet shows us the ratios for eachF-IT customer
In the right side of Figure 2.15, the Analysis Area, we can note all 6 ratios
amount for some F-IT customer and the logic (or at least the simplest logic) to
define an action or not with a customer on the basis of ratios’ values.
The header of Analysis Area shows us also the fact that all ratios (with the
exception of the last one) are defined by taking fixed in the denominator the
amount of Pneumatic Drives, in order to treat all customers in the same way,
23
2.4. FESTO ANALYTICS AND STATUS QUO
thinking of Pneumatic Drives as the leading product family and trying to study
differences between all the other macro families.
2.4.5 Level 2 problems: the dependence from Drives trend
As we explained, all Ratio Analysis is based on the amount of Pneumatic
Drives, this means that if this family suffers from some specific trend, this will
affect all Ratios in the opposite way of its trend (as for all ratios the amount of
Drives is set as denominator). To make a simple example look at Table 2.2 and
study the case where F-IT Pneumatic Drives total amount decreases instead of
being the leading product family and at the same time all the other families’
amount remains the same: what will happen to first 2 Ratios?
Name Pneumatic Drives Sensors Mountings Sens./Drives Mount./DrivesCUST 1 3500 2800 2600 0,80 0,74CUST 1b 2500 2800 2600 1,12 1,04
Table 2.2 – Opposite effect on ratios generated by Drives
For the nature of ratios, this would be taken as good effect on all ratios in-
stead of a loss of market share on Pneumatic Drives family. This is something
very misleading and counter-intuitive and makes us unable to set specific sta-
tistical analysis on our dataset with coherent logics.
The solution to this issue is a middle way between Level 1 and Level 2 anal-
yses, that is to reconsider the total amounts of macro-families (so retake in
account the trend of Pneumatic Drives) and to study all customers as a com-
position (in the statistic meaning of the term) of the amounts of single families.
In this way we are able to avoid the Pneumatic Drives trend problem and we
also have a complete view of how a customer is positioned with respect to its
ideal situation.
In order to develop the right statistic environment for our dataset we will use
24
2.4. FESTO ANALYTICS AND STATUS QUO
Compositional Data Analysis. We will also see that we have to define the right
geometry (and so the right basis transformation) for our case study in order
to obtain results coherent with our scope, namely to study the relation be-
tween the single components of a customer and not just the size of the abso-
lute amounts of a particular product family.
25
Chapter 3
Compositional Data Analysis andthe Aitchison Simplex
3.1 D-compositions and Simplex SD
As we introduced at the end of the last chapter we are more interested in the
study, for each F-IT customer, of the relation between the amounts of product
families than their absolute size.
By treating customers on an absolute scale we can run into misleading situa-
tions as we can deal with spurious correlations between components of a com-
position and also because most of standard multivariate statistical methods are
not applicable to this type of data.
This is a problem that was known since the end of nineteenth century: Karl
Pearson in a paper in 1897 [7] pointed out the problems arising from the use
of standard statistical methods with proportions. Nowadays some different
schools of thought arose and there are different approach to Compositional
Data Analysis, some of them seem to meet our needs. Before introducing
these techniques first of all let’s define what a composition is from a statistical
point of view.
Definition 1. A vector x = [x1, x2, . . . , xD] is a D-part composition when all its
components are strictly positive real numbers and carry only relative information.
26
3.1. D-COMPOSITIONS AND SIMPLEX SD
In our study case we are more interested in the relation between the com-
ponents of customer product basket than on the amount of a single product
family. Thus it seems to be reasonable to treat our data as compositions instead
of considering them as a standard multivariate dataset (with every customer
as a single observation of the dataset) with the absolute amounts of product
families as a variable.
Generally a composition has the intrinsic propriety that all its components sum
to a constant k (in this case we are talking about closed data), with k = 1 if we are
dealing with compositions that represent proportions (i.e. every components
will describe the part per unit of a component) or k = 100 if we are dealing
with percentages. In our case most of our observations will sum up to a total
different every time since we are dealing with customers with different total
amounts. In this case a kind of normalization or a transformation of data is
essential in order to have the possibility to manage the data in the proper way.
We will see different approaches to obtain our purpose that involve different
schools of thought. First of all we have to fix the concept that no matters if we
are dealing with compositions with different total sum of their components as
what we need is to study the ratios between them respect to the total.
Definition 2. Two vectors of D positive real components x, y ∈ RD+ (xi, yi > 0, ∀i =
1, 2, . . . , D) are compositionally equivalent if exists a positive constant number
c ∈ R+ such that x = c · y.
This definition allows us to begin to think that this statistical approach
is feasible for our purpose as it treats two customers (vectors) with same ra-
tios between components but different total amount (so with the components
that differ two by two only for a constant c) as compositionally equivalent, so
they would represent the same composition even if they had different total
27
3.1. D-COMPOSITIONS AND SIMPLEX SD
amounts. This fact allows to understand that, with the appropriate scaling fac-
tor for each composition, we can represent all our customers’ D− composition
as elements of the hyperplane containing the vectors whose components sum
up to a given constant κ. To make this we need to define the closure operation,
that allows to assign a costant sum to all our D-compostions.
Definition 3. For any vector of D strictly positive real components,
z = [z1, z2, . . . , zD] ∈ RD+, zi > 0 ∀i = 1, 2, . . . , D,
the closure of z to κ > 0 is defined as
C(z) =
[κ · z1
∑Di=1 zi
,κ · z2
∑Di=1 zi
, . . . ,κ · zD
∑Di=1 zi
]. (3.1)
So we can rewrite the compositional equivalence in the next way: two vec-
tors x, y ∈ RD+ are compositionally equivalent if C(x) = C(y) for all κ closure
constant chosen.
With Closure operation we represent all our D-compositions (as customers’
components of all product families taken in analysis) rescaled to sum up to the
same constant. From now on we will considerκ = 1, as we are familiar to treat
Cross Selling ratios that are ideally close to 1.
With this operation we will be able to define the sample space for our composi-
tions.
Definition 4. The sample space of compositional data is the simplex,
SD =
{x = [x1, x2, . . . , xD]
∣∣∣∣∣xi > 0, i = 1, 2, . . . , D;D
∑i=1
xi = κ
}(3.2)
In Figure 3.1 it is shown the simplex SD of constant sum k relative to R3+:
vectors P and P’ are treated as equivalent in the simplex.
28
3.1. D-COMPOSITIONS AND SIMPLEX SD
Figure 3.1 – Simplex in R3+ and its representation as ternary diagram (Source:
[6])
Now that the sample space for compositions is defined, we can also intro-
duce the concept of subcomposition.
Definition 5. Given a composition x and a selection of indices S = i1, i2, . . . , is, a
subcomposition xS, with s parts, is obtained by applying the closure operation to the
subvector [xi1 , xi2 , . . . , xis ] of x.
The set of subscripts S indicates which parts are selected in the subcomposition, not
necessarily the first s ones.
It is essential to remark that in most situations we are just able to measure
only subcompositions (let’s think, for instance, to measurements of basic com-
ponents of a chemical compost where there will be components not measured
because of their real absence but there will be also components that are not
measured because of instrument errors or other external factors). This happens
generally in analyses in biologic fields. We will see in Chapter 4 the importance
of how to treat subcompositions in relation to the whole compositions of the
same dataset. In our specific case we will make some analysis on subcomposi-
tions of our initial customers to obtain results on 3 components, even because
it will be more intuitive and it will help us to draw some graphical conclusions.
Subcompositions are one way to reduce the dimensionality of a compositional
29
3.2. COMPOSITIONAL ANALYSIS PRINCIPLES
data set: another quite commonly used way is to amalgamate some compo-
nents, that is, to sum them into one new part.
Property 1. Amalgamation: Given a composition x ∈ SD, and a selection of indices
A = {i1, . . . , ia} (not necessarily the first ones), D− a ≥ 1, and the set of remaining
indices A the value
xA = ∑j∈A
xi
is called amalgamated part or amalgamated component. The vector x’ = [xA, xA],
containing the components with subscript in A grouped in xA and the amalgamated
component xA, is called amalgamated composition which is in SD−a+1. Note that
using a fill-up or residual value is equivalent to using an amalgamated composition.
3.2 Compositional analysis principles
As it’s nature based on the relation between components with the whole
unit, it’s clear that compositions (as statical tool) must meet certain needed
requirements (or principles). Aitchison in 1986 defined three principles that
induce geometric transformations for the dataset allowing for the use of classic
statistical tools on the transformed dataset.
3.2.1 Scale invariance
As we mentioned, compositions carry only relative information. In our
business case no matter if are comparing a customer with generated volumes
much larger than another one, we want to analyse them for the relative rela-
tions between the different product families that they are buying, so we need
to define the concept of scale invariance.
Definition 6. A function f (·) defined on RD+ is scale invariant if, for any positive
real value λ ∈ R and for any composition x ∈ SD, it satisfies f (λ x) = f (x), so if it
30
3.2. COMPOSITIONAL ANALYSIS PRINCIPLES
returns the same result for all compositionally equivalent compositions.
There are a lot of functions that satisfy this principle, an example is the
simple ratio function as, given compositions x = [x1, x2, . . . , xD] and y = λ x is
easy to understand that f (x) = x1/x2 = (λ x1)/(λ x2) = f (y) = f (λx). In our
business case it means that if ratio between the first 2 product families was the
same (even with different amounts) we would treat them as compositionally
equivalent.
However, ratios on compositions, as we define them, are strictly positive and
depend on the ordering of parts, in fact x1/x2 and x2/x1 would return us two
completely different results. A convenient transformation of ratios is the cor-
responding logratio, f (x) = ln(x1/x2).
In this way the inversion of the ratio only produces a change of sign and de-
fines a symmetry in the function with respect to the ordering of composition’s
parts.
3.2.2 Permutation invariance
Another crucial point is that results of the analysis must not depend on the
sequence of the components our dataset.
Definition 7. A function f (·) of a vector argument x = [x1, x2, . . . , xD] is permu-
tation invariant if the value of f (·) do not change if we permute the components of
x
If we think to the log-ratio approach, this is a very important principle
when we ask which methods can be meaningfully applied to coordinates of
compositional data. A naive Euclidean distance of alr 1 transformed data is
not permutation invariant and is not the proper tool for cluster analysis. We
1. Additive Log-Ratio Transformation: alr(x) = (ln(x1/xD), . . . , ln(xD−1/xD))
31
3.3. THE AITCHISON GEOMETRY
would risk to have different clusterings depending on which was the last vari-
able in the dataset. An alternative transformation will be discussed below.
3.2.3 Subcompositional coherence
The final principle we need is subcompositional coherence: subcomposi-
tions behave as the equivalent in real analysis of orthogonal projections of their
original compositions. This led us to two important consequence:
— The distance (whatever the way in which we define it) between two
compositions must be greater or equal to the distance between them
when we are considering any subcompositions. This is called subcom-
positional dominance. It could be easily demonstrated that Euclidean
distance between compositional vectors does not fulfil this condition.
— If a non-informative part is removed, results should not change: it means
that measures of association or measures of dissimilarity between com-
ponents, for example correlations or distances are unaffected by consid-
ering subcompositions instead of the whole composition.
Scale invariance of the results is preserved within arbitrary subcompositions,
that is, the ratios between any parts in the subcomposition are equal to the
corresponding ratios in the original composition.
3.3 The Aitchison geometry
To work with our dataset and to treat it as a set of observations we need to
build a proper environment for it and, in the same time, we have to preserve
the principles defined above.
If we were working in the real space, we could add vectors, multiply them
by scalar values and look for properties such as orthogonality, or compute the
distance between two points.
32
3.3. THE AITCHISON GEOMETRY
Drives Sensors MountingsCust1 115 25 5Cust2 90 45 10Cust3 60 15 15Cust4 35 35 10
Drives Sensors
Mountings
●●
●●
Figure 3.2 – Example of representation of 4 Customers on S3
Cust1 Cust2 Cust3Cust2 32.40370Cust3 56.78908 42.72002Cust4 80.77747 55.90170 32.40370
Table 3.1 – Euclidean Distance between customers on S3
All of this, and much more, is possible because the real space is a linear vec-
tor space with a metric structure. We are familiar with its geometric structure,
the Euclidean geometry, and we are used to represent observations within this
geometry. But this geometry is generally not a proper geometry for composi-
tional data, because it is not able to capture relations between the components
of a composition. Let’s take as an example the simple case of 4 customers rep-
resentation in Figure 3.2.
If we treat the simplex as a standard Euclidean space we would come to
the (graphical) conclusion that Cust1 and Cust2 have different distance than
Cust3 and Cust4. Results given by Euclidean Distance are in Table 3.1.
The Euclidean distance between them is certainly the same, as there is a dif-
ference of 25, 20 and 5 units between the three respective components. But in
the second case, the proportion in the first component is almost doubled, while
in the second case the difference is lower; we have a similar situation also in
the third component. An approach that takes into account relative differences
seems more adequate to describe compositional variability.
33
3.3. THE AITCHISON GEOMETRY
This is not the only reason for discarding the usual Euclidean geometry as a
proper tool for analysing compositional data. Problems might appear in other
situations, such as those where results end up outside the sample space, for ex-
ample, when translating compositional vectors or computing joint confidence
regions for random compositions under assumptions of normality, ellipses and
lines. So we need to build a geometry to work with compositional data in the
simplex, as there things appear not as simple as they are in real space.
To make this we have to define two operations equip the simplex with a vector
space structure. The first one is perturbation, which is analogous to addition
in real space; the second one is powering, the analogous to multiplication by
a scalar in real space. Moreover, it is possible to obtain an Euclidean vector
space structure on the simplex adding an inner product, a norm, and a dis-
tance to the previous definitions. With all these definitions we can operate in
the simplex in the same way as one operates in real space.
3.3.1 Defining a vector space structure
We thus have to define the analogous operations to addition and multipli-
cation by a scalar in real space, using closure operation defined in Definition
3:
Definition 8. Perturbation of x ∈ SD by y ∈ SD,
x⊕
x = C[x1y1, x2y2, . . . , xD yD] ∈ SD
Definition 9. Power transformation or powering of x ∈ SD by a constantα ∈ R,
α⊙
x = C[xα1 , xα2 , . . . , xαD] ∈ SD
Now we can say that the triple (S ,⊕
,⊙) with perturbation and powering
is a vector space. This means that these properties are analogous to translation
and scalar multiplication in real space.
34
3.3. THE AITCHISON GEOMETRY
Drives Sensors
Mountings
●●
●●
Drives Sensors
Mountings
●●
●
●
Drives Sensors
Mountings
● ●●
●
Figure 3.3 – Previous example with customers perturbed by y = [5, 30, 80] andy = [10, 100, 10]
Drives Sensors
Mountings
●●
●●
Drives Sensors
Mountings
●●
●●
Drives Sensors
Mountings
● ●● ●
Figure 3.4 – Previous example with powering applied to customers with α =0.5 andα = 2
Property 2. (SD,⊕) is a commutative group structure; that is, for x, y, z ∈ SD, it
holds:
1. commutative property: x⊕
y = y⊕
x;
2. associative property: (x⊕
y)⊕
z = x⊕(y⊕
z);
3. neutral element:
n = C[1, 1, . . . , 1] =
[1D
,1D
, . . . ,1D
];
n is the barycentre of the simplex and is unique;
4. inverse of x : x-1 = C[x−11 , x−1
2 , . . . , x−1D ]: thus, x
⊕x-1 = n
By analogy with standard operations in real space, for the perturbation differ-
ence, we will write: x⊕
y-1 = x y
35
3.3. THE AITCHISON GEOMETRY
Property 3. Powering satisfies the properties of an external product. For x, y ∈
SD,α,β ∈ R, it holds:
1. associative property: α⊙(β⊙
x) = (α ·β)⊙ x;
2. distributive property 1: α⊙(x⊕
y) = (α⊙
x)⊕
(α⊙
y);
3. distributive property 2: (α +β)⊙
x = (α⊙
x)⊕
(β⊙
x);
4. neutral element: 1⊙
x = x; the neutral element is unique.
Note that the closure operation cancels out any constant and, thus, the closure
constant itself is not important from a mathematical point of view. This fact
allows us to omit the closure in intermediate steps of any computation without
problem.
It has also significant implications for practical reasons, as shall be seen during
simplicial principal component analysis. We can express this property for z ∈
RD+ and x ∈ SD as
x ⊕ (α� z) = x ⊕ (α� C(z))
Nevertheless, one should be always aware that the closure constant is very
important for the interpretation of the units of the problem at hand. Therefore,
controlling for the right units should be the last step in any analysis.
3.3.2 Aitchison inner product, norm, and distance
To obtain a Euclidean vector space structure, we take the following inner
product, with associated norm and distance (the subindex A stands for Aitchi-
son).
Definition 10. Aitchison scalar product for compositions x, y ∈ SD,
〈x, y〉A = 1D
D
∑i> j
lnxi
x jln
yi
y j
36
3.3. THE AITCHISON GEOMETRY
Definition 11. Aitchison norm for composition x ∈ SD,
‖x‖A =
√√√√ 12D
D
∑i=1
D
∑j=1
(ln
xi
x j
)2
Now we are also able to define a proper distance that will allow us to work
on our compositional dataset as in real space.
Definition 12. Aitchison distance: the distance between compositions x, y ∈ SD is
defined in the next way,
dA(x, y) = ‖x y‖A =
√√√√ 12D
D
∑i=1
D
∑j=1
(ln
xi
x j− ln
yi
y j
)2
With this new definition of distance let’s consider again the example of
4 customers in Figure 3.2 and now compute the Aitchison distance between
Customers 1 and 2 and between Customers 3 and 4, considering that these
distance were identical using Euclidean distance (although this conclusion was
misleading from a logic point of view):
Cust1 Cust2 Cust3Cust2 0.7269086Cust3 1.3747150 1.0646298Cust4 1.4143010 0.6917658 1.0815202
Table 3.2 – Aitchison Distance between customers on S3
We can see that now the two distances are different, as in this definition we
are considering also the relation between components on our customers. We
thus understand that geometry on the simplex has logics that differs from our
standard geometric conceptions: even in ternary diagram the two distances
seem to be different (contradicting the results of Euclidean distance between
customers).
37
3.3. THE AITCHISON GEOMETRY
Transformations
Different log-ratio transformations could be applied to compositional data,
each one that gives different results: most used are Centered log-ratio transfor-
mation (clr) and Isometric log-ratio transformation (ilr):
— Centered log-ratio transform (g(x) = D√
x1 · · · xD)
clr(x) = z =
[ln
x1
g(x); . . . ; ln
xD
g(x)
]
=ln (x)
D·
D− 1 −1 . . . −1−1 D− 1 . . . −1
...... . . . ...
−1 −1 . . . D− 1
clr−1(z) = C[exp(z)]
— Isometric log-ratio transform
ilrV(x) = clr(x) ·V = ln (x) ·V
For a given matrix V of D rows and (D-1) columns such that V · V t =
ID−1 (Identity matrix of D-1 elements) and V · V t = ID + a1, where a
may be any value and 1 is a matrix full of ones.
The inverse is:
ilr−1V (x) = C[exp (x · V t)]
3.3.3 Geometry on S3: figures on ternary diagrams
Ternary diagrams interpretation
Now that we have a well-defined geometry, it is useful to show how some
geometric figures are represented on the simplex S3 using ternary diagrams.
This short explication is due as we will need to know how these geometric
38
3.3. THE AITCHISON GEOMETRY
elements have to be interpreted in order to understand results of our statical
analyses, for instance for PCA analysis to understand the meaning of Principal
Components directions, for the interpretation of the position on ternary dia-
gram of our customers and understand the meaning of clusters derived from
classification.
Figure 3.5 – Template for ternary diagrams and importance of amount compo-nents proportion in S3.
In Figure 3.6 some customers are represented on ternary diagrams in order
to show how they act on ternary diagrams: customers with same shape are
similar. The more a customer is near a vertex, the more the proportion of the
components of this vertex is important in the compositions (Figure 3.5): this
means that if a point is lying near the opposite side of a certain vertex, the
component related the vertex is very weak.
Shapes on ternary diagrams
As we are working on simplex, in ternary diagrams geometric shapes will
behave in different way from real space. In left ternary diagram of Figure 3.7
we show how parallel lines are represented and in right ternary diagram of
39
3.3. THE AITCHISON GEOMETRY
Drives Sensors
Mountings
●●
●
●
Figure 3.6 – Similar customers (by shape or colour) lying on same proportionlines.
circles and ellipses change respect to real space.
For some characteristics of ternary diagram interpretation is intuitive, for in-
stance the positioning of a point on ternary diagram and the relation with its
distance from the vertex is intuitive, for others is not so common: lines’ direc-
tion and shape together with translation of elements on ternary diagram has
to be treated with proper attention to not mislead data interpretation.
Now we have a proper mathematical environment to work on simplex
with F-IT customers’ data and we have also a proper representation tool such
ternary diagrams to support analysis results.
40
3.3. THE AITCHISON GEOMETRY
Figure 3.7 – Parallel lines, circles and ellipses on ternary diagram. Source: [6]
41
Chapter 4
Business case: Compositional dataanalysis of Cross Selling data
Now with Aithcison geometry we have the sample space for our compo-
sitional data that is the 5-part simplex. The latter is the 4-dimensional subset
of RD−1 that contains all 5-part compositions that sum up to a prescribed con-
stant, in our case to 1.
For all the analyses of this chapter it has been used a specific R package named
compositions [8], that already provides some operations on compositional
data (such Aitchison distance and Compositional PCA). For analyses like K-
means clustering, Linear and Quadratic Discriminant Analysis specific opera-
tions have been defined using ilr and clr transformations.
4.1 F-IT Customer dataset as Compositional dataset
We already introduced the Festo approach to Cross Selling with the defini-
tion of its Ratios and also with its weaknesses and we also denoted importance
in analysis of Industry Sector variable, we want to define our data in order to
be able to be coherent with Company’s strategies and also in order to be able
to make statistical analysis on it.
42
4.2. SIMPLIFICATION OF DATASET
4.1.1 Considering Customer as compositional observations
As explained in Chapter 1, regarding Cross Selling, by now customers have
been analysed on Level 1 as observations of absolute amounts for each product
family (but from the relation between these macro-families) and on Level 2 by
ratios for some product families (the one we are have relations with Drives).
We can indeed take all macro-families that we are sure have relations between
them (i.e. all the macro families used on Level 2 ratios and also the amount of
Pneumatic Drives).
Our aim is to be able to use classic statistical procedures such as PCA,
Cluster Analysis, Linear and Quadratic Discriminant Analysis in order to con-
firm or not the direction that Festo wants to tread for next marketing cam-
paigns, and which variable is better to take as guide. For the theory describ-
ing the above mentioned classical statistical methods we refer to (ref Johnson-
Wichern).
Our first target is to reduce the variables of our dataset.
4.2 Simplification of Dataset
4.2.1 Variables taken into consideration
The focus is to reduce dataset variables in order to keep only the ones that
we want to use for our analyses. We split the data reduction based on their
nature.
In our final dataset every observation will corresponds to a single customer
with some categorical and some numerical variables.
43
4.2. SIMPLIFICATION OF DATASET
Categorical variables
To be able to interpret our final results we will maintain Customer Num-
ber and Customer Name variables, even if they show unique values for each
observation. Another variable we will keep is the one referring to the code
of the F-IT Sales Engineer of each customer. As we explained in first chapter,
our aim is to make analysis on the Industry Sector of F-IT customers, it is cru-
cial as we want to understand if the idea of F-IT to make specific Cross Selling
campaigns differentiated by ISM, is reflected by results that come out from our
classification analyses.
Numerical variables: macro-families amounts taken into account
Not all macro families are perfectly related to each other. Ratios of Level
2 analysis are just six and two of them (last two) are stand-alone ratios not
related to the other one. Thus we decided to take into account only strictly re-
lated macro families: Pneumatic Drives, Proximity Sensors, Throttles, Cylin-
der Mountings and Piston Rod Attachment. We stated in Chapter 3 that neu-
tral element n of a perturbation is the one with uniform amounts in each part,
i.e., for our dataset it would be
n = C[k, k, k, k, k] =
[15
,15
,15
,15
,15
]We will also find some issues in interpreting graphical results for some analy-
ses applied to the complete dataset with compositions of 5 components, since
we are not able to represent data in S5 but we will need to represent data on
the S3 subspace. In these cases we will repeat some analyses on subcomposi-
tions of three components where results are more clearly explicable.
In Figure 4.1 we have some examples of products composing the selected
macro families.
44
4.3. DATASET REPRESENTATION
Figure 4.1 – Final macro families taken into analysis
4.3 Dataset representation
The final dataset is composed by 595 observations of 10 variables (six of
which are numerical, one for total Market Sales of customers and five for the
product quantities which form our compositions).
In Figure 4.2 a template of a part of final dataset is shown: we can immediately
see that there is a lot of variability between the amounts of the five components
of observations (last five columns).
Graphical representation: RD Vs SD
A first graphical and exploratory analysis approach reveals issues related
to analysing compositions as standard data. In Figure 4.3 observations are
shown with absolute amounts and coloured by ISM: the analysis is misleading
and shows how customers dimension affects the view.
As we are more interested in the relation between components than in di-
mension of families’ amounts, we apply Closure to 1 for our compositions and
represent them on the simplex S5: Figure 4.4 shows data projected on S3 sub-
45
4.3. DATASET REPRESENTATION
Figure 4.2 – Example of dataset
space by placing on the vertex couples of components and on the opposite
vertex the amalgamation of remaining components.
In this representation it becomes evident something that was already no-
ticed in Chapter 2: Pneumatic Drives (first row or column of ternary diagrams)
is the predominant component, as the observations are generally concentrated
toward the Drives vertex. The simplex representation shows that proportions
of Sensors and Throttles seem to be balanced (see on specific ternary diagram
for these two components) while Cylinder Mountings and Piston Rod Attach-
ments are less relevant components. From a "chromatic" point of view it seems
not evident a relation between colors of ISM and positioning of customers in
the simplex.
46
4.4. COMPOSITIONAL PRINCIPAL COMPONENTS ANALYSIS
Pneumatic_Drives
0 2000 5000
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Pist_Rod
Figure 4.3 – Representation of dataset as absolute amounts
4.4 Compositional Principal Components Analysis
After the definition of dataset, data reduction and a first graphical analysis,
let us start with first statistical exploratory analysis: PCA.
We have to remind that Aitchison geometry, as it is defined, performs a data
reduction in the equivalent working space, so as we pass from SD to a RD−1
47
4.4. COMPOSITIONAL PRINCIPAL COMPONENTS ANALYSIS
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Pist_Rod
Figure 4.4 – Representation of dataset on simplex
equivalent space, we expect to have informations on four principal compo-
nents, fifth component is present but it is not shown because it is obviously
null (due to the constraint of definition of composition).
First of all, let us give a look to scree plot in Figure 4.5, where we can see the
first results of this first exploratory method in terms of amount of variability
explained by the different Principal Components.
Thanks to Figure 4.6 we can clearly see how the first principal component
already explains a great part of the phenomenon variability, that is almost
42%. With the second principal component, accounting for 33% of the vari-
ability, we reach an acceptable level of approximation in explaining the model
(74.6%).
48
4.4. COMPOSITIONAL PRINCIPAL COMPONENTS ANALYSIS
●
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a_princ
Var
ianc
es
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Comp.1 Comp.2 Comp.3 Comp.4
Figure 4.5 – Results summary applied to all 5 components
Figure 4.6 – Proportion of variance on 4 Principal Components
4.4.1 Visualizing and interpreting Biplot of compositional PCAscores
We can then represent our Scores, taking in consideration Biplot of the first
two principal components. Origin of plot represents the centre of the compo-
sitional dataset (in Aitchison mean sense).
It must be clear that the fundamental elements of a compositional biplot are
the links, not the rays as in the case of variation diagrams for unconstrained
multivariate data. Links specify all the relative variances, informs us about
the compositional covariance structure and provides hints about subcomposi-
49
4.4. COMPOSITIONAL PRINCIPAL COMPONENTS ANALYSIS
−0.15 −0.10 −0.05 0.00 0.05 0.10 0.15
−0.
15−
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100.
15
Comp.1
Com
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−30 −20 −10 0 10 20
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Pneumatic_Drives
Sensors
ThrottlesCil_Mountings
Pist_Rod
Figure 4.7 – Biplot of first 2 principal components
tional variability and independence. If distance between two vertex of com-
ponents’ vectors is high, it means that variance of ratio between these two
components is high in our dataset. In our case it would mean that we have a
very varied percentage of purchasing for these components in our customers.
For instance some customers are buying more component 1 and almost noth-
ing of component 2, some customers the opposite and some other customers
are buying similar quantities of two components.
On the contrary when link between two vertex is very low it means that varia-
tion in ratio of these two components is low, so inside the dataset ratio between
proportion of the two components remain almost constant.
50
4.4. COMPOSITIONAL PRINCIPAL COMPONENTS ANALYSIS
In our case we have that length of segment linking vertex on Cylinder Mount-
ings and Piston Rod Attachments is very low. We can thus assume that more
or less all customers have similar ratios between these two product families.
On the contrary length of segment linking Throttles and Sensors (same expla-
nation for Throttles and Mountings) is high so in our customers there is more
variability in the ratios of these two product families. This in fact contradicts
our first simple graphical interpretation of data.
Results on Biplot reveal different information with respect to graphical con-
clusions given in the first exploratory analysis: for example the variability on
ratios between Throttles and Sensors was not easy to be identified directly
from ternary diagrams. This is due to the fact that analysing and interpret-
ing ternary diagrams could sometimes be not so easy and statistical analyses
results could help us.
4.4.2 Visualizing and interpreting compositional PCA loadings
Unlike a classical Principal Components Analysis applied to a standard
dataset lying in a Euclidean space, in this case, given that we are dealing with
compositional data, we must pay attention in the interpretation phase of the
results of such analysis, mostly in the meaning that the final loadings have.
The first following line returns their coefficients (Figure 4.8), whose sum is
checked to be zero in the second line.
These coefficients are not free to vary in a five-dimensional space, but linked
to each other through this null sum. We cannot interpret a low value as an ab-
sence of dependence. For instance, in our case, we should not think that the
first PC is not affected by Pneumatic Drives, in spite of having a very low load-
ing (0.09): we can nevertheless say that the Cylinder Mountings vs. Sensors log
ratio increases along the first PC with a slope of 0.417 - 0.030 = 0.387.
51
4.4. COMPOSITIONAL PRINCIPAL COMPONENTS ANALYSIS
Figure 4.8 – Loadings on first 2 Principal Components
We may also say that along the first PC the ratio Sensors/Pneumatic Drives is
almost unchanged, because their loadings difference is almost zero, whereas
along the second PC, this log ratio increases with a slope of 0.765.
We can represent our loadings as in Figure 4.9.
Comp.1 Comp.2 Comp.3 Comp.4
Pist_RodCil_MountingsThrottlesSensorsPneumatic_Drives
Loadings
01
23
45
Figure 4.9 – Barplot representing loadings value on all 4 principal components
A correct way to interpret the values of the loadings is the following: if a bar
has a unitary height for a given PC, along that PC the ratio of the two parts
52
4.4. COMPOSITIONAL PRINCIPAL COMPONENTS ANALYSIS
involved is not modified; otherwise, if the bar is significantly lower (higher)
than 1, along that specific PC the ratio is reduced (increased).
Based on this way of thinking, we can see, for example, that Throttles variable
has a bar significantly lower than 1 for the first component. Along the 1st pc
the ratio is reduced.
Let us represent now the whole dataset together with the direction of the
direction of the first two principal components in Figure 4.10.
Pneumatic_Drives
Pneumatic_Drives Sensors
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Figure 4.10 – Dataset with first (solid line) and second (dashed line) PCs
In order to better understand this type of picture, let us simplify the repre-
sentation, using only three parts and drawing Cylinders, Mountings and Sen-
sors together with the direction of the first two principal components. The red
53
4.4. COMPOSITIONAL PRINCIPAL COMPONENTS ANALYSIS
line is an ellipse representing a 2σ predictive region of the simplex.
Pneumatic_Drives Sensors
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Figure 4.11 – Representation of first (solid line) and second (dashed line) PCson subcompositions for Sensors, Pneumatic Drives and Cylinder Mountingscoloured by ISM
On this basis we can try to interpret the first two principal components.
As we see from Figure 4.11 the first PC (solid line), having its extreme points
in Cylinder Mountings and Sensors, suggests that the quantity of Pneumatic
Drives represents an influential part of the composition. The second PC, (dashed
line), being similar to a straight line, shows that the ratio between Cylinder
Mountings and Sensors is not far from being constant in the dataset, no matter
the amount of Pneumatic Drives.
54
4.5. CLASSIFICATION AND GROUPING WITH AITCHISON DISTANCE
4.5 Classification and grouping with Aitchison dis-tance
Next analyses are crucial to know if strategies of Festo are going in the right
direction: the use of Industry Sector as a driving attribute to develop specific
marketing campaigns (because of the differentiation of products between dif-
ferent ISMs) instead of using groups of customers with similar purchasing be-
haviours (regarding positioning related to components).
We will develop a series of analysis in order to see if ISM is a significant at-
tribute to drive a marketing campaign based on compositions dataset.
4.5.1 Hierarchical Cluster Analysis in S5 and S3
Hierarchical clustering has been applied on the dataset to see if it is possi-
ble to identify groups related on ISM variable: hierarchical clustering will be
applied after a preliminary part where different metrics (Euclidean and Man-
hattan) and linkage methods (single, average, complete and then Ward) effec-
tiveness will be evaluated.
Dendogram analysis
We remark that when we talk about Euclidean and Manhattan distances
we refer to their equivalence in Aitchison Geometry transformed data.
First of all in Figure 4.12 dendograms for the two distances and for first two
methods are compared.
Average linkage shows us the presence of two clusters with both distances
considered, one of them composed by only one customer.
Complete linkage shows us two or at maximum three clusters in both dis-
tances. We can easily remove cases where Single Linkage is applied as it
55
4.5. CLASSIFICATION AND GROUPING WITH AITCHISON DISTANCE0
12
34
56
7
Average linkage
Euc
lidea
n di
stan
ce
01
23
Single linkage
Hei
ght
02
46
810
Complete linkage
Hei
ght
02
46
810
12
Average linkage
Man
hatta
n di
stan
ce
01
23
45
67
Single linkageH
eigh
t
05
1015
20
Complete linkage
Hei
ght
Figure 4.12 – Dendograms for Euclidean and Manhattan distances
doesn’t seem to be appropriate to agglomerate data in significant clusters and
also distance between clusters’ levels has small values.
In Figure 4.13 Ward linkage is considered in the analysis: it seems to be the
best way to cluster data as it has clearly both separate cluster and high value
for distance between them. The right choice for number of cluster seems to be
3 or at maximum 6 clusters.
Before choosing which method is the best to cluster our compositions a
check on correlation between distances and their own cophenetic indexes has
to be done to measure how faithfully the methods preserve the pairwise dis-
tances between the original compositions.
For both distance methods highest values are related to average linkage,
other linkage methods have lower values and no cophenetic correlation gives
us the certainty to be the best (as all correlation indexes have values < 0.8).
Dendograms suggests to use Manhattan distance with Ward linkage.
56
4.5. CLASSIFICATION AND GROUPING WITH AITCHISON DISTANCE0
12
34
56
7
Average linkage
Euc
lidea
n di
stan
ce
02
46
810
Complete linkage
Hei
ght
050
100
150
Ward linkage
Hei
ght
02
46
810
12
Average linkage
Man
hatta
n di
stan
ce
05
1015
20
Complete linkageH
eigh
t
010
020
030
0
Ward linkage
Hei
ght
Figure 4.13 – Dendograms for Euclidean and Manhattan distances with Ward
Figure 4.14 – Cophenetic correlations for Euclidean and Manhattan distances
Graphical representation for clusters
In Figure 4.15 data are shown coloured by 3 clusters calculated with Eu-
clidean Distance and complete linkage.
In Figure 4.16 data are shown coloured by 6 clusters calculated with Man-
hattan Distance and Ward linkage. In both cases we are able to identify quite
well differentiated clusters with a clear meaning: customers are grouped with
57
4.5. CLASSIFICATION AND GROUPING WITH AITCHISON DISTANCE
Pneumatic_Drives
Pneumatic_Drives Sensors
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Pneumatic_Drives Throttles
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Manhattan, Ward linkage with 3 clusters
Figure 4.15 – Data grouped in 3 clusters
respect to their attitude to buy product families.
It is noticed a problem of overlapping between clusters but this is due to a
technical motivation: representing our 5-compositions as projection in the sub-
space S3 doesn’t allow us to see the real separation between clusters. To have
a better view of different clusters let’s repeat the analysis but on a subcompo-
sition that take into account only 3 components.
Data reduction
Let’s take in analysis only subcomposition of Pneumatic Drives, Proximity
Sensors and Throttles and check if customers are clustered with the same logics
of the complete compositions case. First row of each picture represents data
clustered using euclidean distance, second row using manhattan distance.
58
4.5. CLASSIFICATION AND GROUPING WITH AITCHISON DISTANCE
Pneumatic_Drives
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Figure 4.16 – Data grouped in 6 clusters
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Figure 4.17 – Subcompositions data grouped in 3 clusters for average, com-plete and Ward linkage: first row Euclidean distance, second row Manhattandistance
59
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Figure 4.18 – Subcompositions data grouped in 6 clusters for average, com-plete and Ward linkage: first row Euclidean distance, second row Manhattandistance
Operating on 3 components’ subcompositions, cluster are perfectly distin-
guishable and there is no sign of overlapping.
We repeat the interpretation already given on complete case: in case of choice
of 3 clusters, we can distinguish a central cluster composed by customers that
have proportions balanced (so they are buying homogeneously all product
families) and two marginal clusters composed by customers that are not buy-
ing respectively Sensors (cluster blue) and Throttles (cluster green).
In case of 6 clusters with Ward linkage three other groups are identified, one
regarding customers with a strong values of proportion of Pneumatic Drives
component, one in the opposite position of the simplex and another one posi-
tioned in the middle between cluster of customers near the center of simplex
and cluster of customers with a weak proportion on Throttles component.
It seems that hierarchical cluster analysis gives us the information that cus-
tomer should have to be treated in the way of how they approach market and
60
4.6. COMPOSITIONAL K-MEANS CLUSTER ANALYSIS
not only about their reference Industry Sector.
Last doubt that remains is the correct number of clusters to be chosen between
6 and 3: K-means clustering could help us discover it.
4.6 Compositional K-means Cluster Analysis
We understand from hierarchical cluster analysis that the customers group
together in terms of their purchasing behaviours but, since cophenetic corre-
lation values are too low to have certainty dendograms describe well our data,
we are not sure of which number of clusters is optimal to group our customers
in therms of their purchasing attitudes on our components.
4.6.1 K-means with k=6
K-means clustering is a method of vector quantization that can help us dis-
covering the optimal number of clusters for our compositional dataset. It aims
to partition n observations into k clusters in which each observation belongs to
the cluster with the nearest mean, serving as a prototype of the cluster.
As we studied in Section 4.5.1, it seems from hierarchical clustering that
a proper number of clusters for our dataset would be 3 or 6: we start analy-
sis with 6 clusters and using as starting centres for k-means algorithm values
coming from hierarchical clustering using Manhattan distance (in Aitchison
geometry) with Ward linkage.
In Figure 4.19 we can see results for k-means algorithm applied to transformed
data for 6 clusters with the final centres of algorithm computed in 3 iterations.
Motivation to the overlapping in single ternary diagrams has been explained
in previous section, we can repeat the simplified analysis as in the previous
61
4.6. COMPOSITIONAL K-MEANS CLUSTER ANALYSIS
Figure 4.19 – Results for k-means algorithm with 6 clusters and starting centresfrom hierarchical clustering
Pneumatic_Drives
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Figure 4.20 – Ternary diagrams for k-means with 6 clusters, purple squaresrepresent centres of the clusters
case to see at the result on the subcomposition of Pneumatic Drives, Proximity
Sensors and Throttles, results are shown in Figure 4.21: now data are visibly
62
4.6. COMPOSITIONAL K-MEANS CLUSTER ANALYSIS
separated into 6 clusters that seem to respond to a similar interpretation of hi-
erarchical clustering.
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Figure 4.21 – Subcompositions’ original data coloured by ISM and coloured byk-means clusters
Before drawing conclusions it is necessary to understand if 6, 5 or 3 is the
right number of clusters as this number is not so easy to be identified: for in-
stance if we choose rerun the algorithm with 5 cluster with same initial centres
and also with new centres positioned in the extreme cases (5 near simplex ver-
texes and 1 near the neutral element, the centre of simplex), we obtain results
in in Figure 4.22.
Centres Pneumatic_Drives Sensors Throttles
C1 800 50 200
C2 40 5000 40
C3 45 25 5000
C4 35 200 700
C5 501 499 502
Table 4.1 – Extreme centres applied to k-means algorithm
Results between first case and second one are graphically represented in
Figure 4.23: it is clearly evident that algorithm generates very different clusters
from the previous one, this allow us to understand that 5 could not be the
appropriate number of clusters.
63
4.6. COMPOSITIONAL K-MEANS CLUSTER ANALYSIS
Pneumatic_Drives Sensors
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Figure 4.23 – Comparing results of k-means with 5 clusters
Let’s study the cumulative variance explained (in both between cluster
an within clusters) as a function of the number of clusters using the elbow
method:
Right value of k seems to be 3 as for k with higher values we lose slope in
cumulative chart lines.
If we rerun k-means algorithm with k=3 and check if results are similar with
different choice of initial centres we note a big improvement in results and now
algorithm gives us robust results: in Figures 4.25 and 4.26.
We can conclude that results from k-means clustering suggest us to choose
3 as number of clusters, but the most important result is that it returns us a sim-
64
4.6. COMPOSITIONAL K-MEANS CLUSTER ANALYSIS
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Figure 4.25 – Comparing with k=3 and different initial centres
Figure 4.26 – Values of final clusters’ centres in both cases
ilar result of hierarchical clustering: customers have to be treated in function
of their purchasing attitude (described by their positioning on the simplex)
instead of their industry sector natures.
65
4.7. COMPOSITIONAL DISCRIMINANT ANALYSIS
4.7 Compositional Discriminant Analysis
4.7.1 LDA to classify customers by ISM
In order to check statement produced by results in Section 4.6 it is appropri-
ate to compute a supervised classification analysis to know if Industry Sector
is a label that could drive classification of our customers or if it would be better
to consider it in other purposes different from Cross Selling campaigns.
It is important to remark that we are not interested in implementation and
creation of a classifier for Industry Sector as this information is strategically
defined by Festo sales department but this analysis could be useful to look
how classifier works on the generation of classes.
Before starting test we have to execute a further data reduction as Industry
Sectors with small amount of customers could drive analysis to misleading
conclusions, in Table 4.2 there is a resume of numerosity by ISM.
ISM AC AMI BIOPHA BUILD CHEM ELA ELP FOOD FOODPR FOOT GENPA GLCER HEAVY
freq 3 35 12 2 2 52 95 99 2 1 2 5 21
ISM HYPNEU MTOOL OTHER PLAST PRINT PULPAP SPCIAL STOLI TEST TEXTIL TYRE WELD WOOD
freq 1 51 8 30 47 2 93 8 3 4 5 1 11
Table 4.2 – Number of customers per ISM
We need to exclude from analysis all ISM with a numerosity too low to be
statistical significant as label, final result is shown in Table 4.3 where only 8 ISM
with total amount of customers higher than 25 are considered (95 customers
have been excluded from analysis):
ISM AMI ELA ELP FOOD MTOOL PLAST PRINT SPCIALfreq 35 52 95 99 51 30 47 93
Table 4.3 – ISM included in analysis
We take a part of our compositions (a sample of 70% of our dataset) as
training set and, by performing a Discriminant Linear Analysis, we want to
66
4.7. COMPOSITIONAL DISCRIMINANT ANALYSIS
find a good predictor for the class ISM for our customers and look if we will be
able to use such classifier in the future. First we will assume that proportion of
customers in each ISM is relevant so we will use it as prior to group belonging
probability.
In Figure 4.27 We can check results for discriminant linear analysis.
Figure 4.27 – Results for lda analysis using proportional priors
Confusion matrix of our dataset is shown in Table 4.4: we can see how some
classes are cut off the analysis (we would expect a good amount of customers
to remain on diagonal of the matrix as it shown the combination between pre-
dicted and real Industry Sector of our customers) and that there are four pre-
dominant Industry Sectors in which customer are classified.
Looking to values of priors used to perform the analysis it seems that In-
dustry Sectors with higher values on prior are the ones where customers are
classified with more frequency, so there is a strong dependence between prior
and final classification for customers: we can perform a LDA using as prior for
Industry Sector affiliation a uniform distribution P(xi ∈ c j) =( 1
8
)∀c j classes
67
4.7. COMPOSITIONAL DISCRIMINANT ANALYSIS
ISM AMI ELA ELP FOOD MTOOL PLAST PRINT SPCIALAMI 0 3 5 6 0 0 0 21ELA 0 18 8 10 0 0 0 16ELP 0 7 29 32 3 0 2 22FOOD 0 9 30 46 1 0 2 11MTOOL 0 5 14 15 5 0 1 11PLAST 0 3 8 5 3 0 0 11PRINT 0 2 9 21 1 0 2 12SPCIAL 0 9 16 20 1 0 5 42
Table 4.4 – Confusion matrix of dataset: on rows original classes, on columnpredicted classes
considered in the analysis and see if we obtain a better classifier for our data.
Results for confusion matrix in this case are shown in Table 4.5:
ISM AMI ELA ELP FOOD MTOOL PLAST PRINT SPCIALAMI 12 5 0 2 0 3 2 0ELA 2 18 0 2 0 5 4 1ELP 9 11 8 15 9 13 11 2FOOD 1 8 5 21 6 14 15 0MTOOL 5 6 1 3 3 3 9 0PLAST 4 3 1 2 4 6 2 0PRINT 3 3 2 3 1 8 9 1SPCIAL 12 12 5 6 6 11 11 2
Table 4.5 – Confusion matrix for LDA using uniform priors for groups
Results obtained are very different with first LDA analysis but classification
remains real distant from our target, so that classifier mislead in classifying a
customer in its own Industry Sector.
We can visualize discrimination functions in term of their scalings on a barplot
in Figure 4.28: it’s really not that easy to interpret scalings in compositional
data but variables with large absolute values in scalings are more likely to
influence the classification process made by LDA algorithm. In our case, for
instance Cylinder Mountings macro family is affecting the definition of first
discriminant more than the other components.
We can draw our dataset coloured in function of new industry classification
as shown in Figure 4.29.
68
4.7. COMPOSITIONAL DISCRIMINANT ANALYSIS
LD1 LD2 LD3 LD4
Pist_RodCil_MountingsThrottlesSensorsPneumatic_Drives
0.0
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Figure 4.28 – Scalings of lda
4.7.2 QDA analysis
Last analysis done is a Quadratic Discriminant Analysis in order to under-
stand if customers would be classified in a better way respect to LDA. In Table
4.6 is represented confusion matrix for Quadratic Discriminant Analysis using
uniform priors for our data:
ISM AMI ELA ELP FOOD MTOOL PLAST PRINT SPCIALAMI 22 1 2 2 0 5 2 1ELA 25 6 2 6 1 8 3 1ELP 31 10 10 21 1 18 3 1FOOD 23 10 3 41 1 17 3 1MTOOL 22 4 3 10 0 10 2 0PLAST 15 2 1 2 1 9 0 0PRINT 13 4 0 14 0 13 2 1SPCIAL 47 6 2 15 2 12 3 6
Table 4.6 – Confusion matrix related to QDA with uniform priors
Even classifier built with QDA is not satisfactory to group our dataset cus-
69
4.7. COMPOSITIONAL DISCRIMINANT ANALYSIS
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Pneumatic_Drives Cil_Mountings
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Sensors Pist_Rod
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Pist_Rod
Figure 4.29 – Dataset with new classification for ISM
tomers in the proper Industry Sector.
We can conclude that discriminant analysis doesn’t lead to desired results:
both LDA algorithms and QDA algorithm, with proportional and uniform pri-
ors, give different results but, in both cases, very misleading in term of data
classification.
If we observe data on the simplex with new classifications we denote that
even in LDA and QDA analysis graphically seems to tend on the definition
of classes based on the proportion on compositions, this would be a further
confirmation that nature of data for our customers is strictly related to their
purchasing attitudes and to their positioning on the Simplex instead of their
70
4.7. COMPOSITIONAL DISCRIMINANT ANALYSIS
categorical characteristics such Industry Sector belonging.
Figure 4.30 shows us the comparison between data classified with LDA (first
column of charts) and QDA methods (second column) for sucbcompositions
already taken into account in previous analyses: first row results obtained us-
ing proportional priors second row with uniform priors. R package composi-
tions
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Figure 4.30 – Dataset with new classification computed with LDA and QDAalgorithms.
71
Chapter 5
Conclusions
5.1 Targets achieved
Cross Selling is a very interesting field in marketing but by now there are
not mathematical developments to support in the proper way information
coming from its data: now we defined the proper mathematical environment
to front a Cross Selling business case and Festo customers’ compositions have
been analysed. In this way we have been able to study not only which Cross
Selling product families our customer purchased by Festo but how this prod-
uct families are statistically related together.
This approach satisfies the original aim of Cross Selling analysis for Festo and
let us develop some multivariate analysis on our customers.
Results on these analyses drove us to the conclusion that some customers’
categorical attributes, such Industry Sector, should not be taken as leading
variable to define Cross Selling marketing campaigns, since all multivari-
ate analyses developed in this work showed that most important elements of
Cross Selling data are strictly related to customers’ positioning on the sim-
plex, that it means that it could be more profitable to analyse customers from
their purchasing attitudes point of view.
72
5.2. POSSIBLE FUTURE DEVELOPMENTS
Another good result has been the development of ternary diagrams as a new
visualization tool.
Though the analysis on ternary diagrams could be sometimes very hard to be
interpreted, after the definition of how data are positioned on the Simplex, it
provides the possibility to analyse customers’ positioning in a very intuitive
way by using a bidimensional tool with information about the proportion of
three product families.
Beyond the analysis of specific Festo business case, we have to remark that
this Thesis work provides a modeling framework for the analysis of Cross
Selling data, applicable on the most varied business and sales fields: no mat-
ters which type of products have to be analysed, what matters is to be able to
analyse product quantities sold from the point of view of their inner relations.
5.2 Possible future developments
Now that a proper geometric space for compositions of customers it has
been developed, it is possible to apply to Cross Selling dataset most of statisti-
cal techniques.
A further development would be to study customers on the simplex and to
identify Sales Engineer Barycentres (computed by the application of Aitchi-
son mean to customers assigned to the same Sales Engineer) and study mean
differences between groups in order to understand if there are Sales Engineers
with peculiar selling attitudes.
Another further interesting approach would be to develop a Composi-
tional Times Series Analysis on customers: studying the evolution of cus-
tomers’ positioning on the simplex and their compositions development, we
73
5.2. POSSIBLE FUTURE DEVELOPMENTS
would be able to identify how a marketing campaign could be effective by
studying how customers involved moves on the simplex before and after the
campaigns in different periods. By studying the evolution of customers posi-
tioning in different time steps we could also try to define customers’ specific
paths on the simplex and identify specific purchasing behaviours related to
these specific paths. (for more information see [5])
Several and fancy statistical analysis could be developed as now data have
been studied from compositional point of view: so almost all standard anal-
yses already developed for classic statistics could be applied, but this time
taking into count the relations between components of compositions.
74
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[1] Aitchison, J.P. (1973). Principal component analysis of compositional data.
Biometrika 70
[2] Aitchison, J. (1986) The Statistical Analysis of Compositional Data. Mono-
graphs on Statistics and Applied Probability, Chapman & Hall Ltd.,
London, (Reprinted in 2003 with additional material by The Blackburn
Press)
[3] J. A. Martin-Fernandez, C.Barcelo-Vidal, V. Pawlowsky-Glahn Measures
Of Difference For Compositional Data And Hierarchical Clustering Methods
[4] R. A. Johnson, D. W. Wichern, Applied Multivariate Statistical Analysis,
6th Edition, 2008 Pearson
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