Out of control (outlier) detection in business data using the ARMA (1,1) model

Abstract

Statistical Process Control (SPC) is an integral component of nearly every industrial process, and proper outlier (out of control point) detection is crucial if processes are to remain in statistical control. Control charting methods are widely used in SPC and outlier detection, especially in manufacturing settings, but can also be useful for non-production business data as well. However, these methods require that the data under study be Independent and Identically Normally Distributed (IIND). Unfortunately, much of the industrial data studied is time-series, not IIND, rendering standard control charting methods inappropriate. This study used an ARMA (1,1) model with the Chen and Liu (1993) JE outlier detection technique, and found it superior to control charting in identifying the position and type of potential outliers (out of control points) in nine sets of non-production business data.