Part 3 – Which Industries Leverage Intelligent Forecasting?
Before we consider a selection of industries who employ and realize value, let’s continue our breakdown of the practice of Intelligent Forecasting, and compare it to legacy/traditional forecasting. It will help to understand how a more evolutionary approach can augment existing forecasting practices and help to modernize the strategic planning function. Here is an overview, with a little explanation:
On the left is a list of challenges that are now very much evident with traditional forecasting approaches. Organizations are now either replacing or augmenting these predictions with Intelligent Forecasts. The 3 technical enablers are top center, including global data, machine learning and augmented/artificial intelligence. The deliverables are lower center and 4 business benefits are listed in the right column.
Intelligent Forecasting is a repeatable, scalable and systematic process that generates data-driven predictions that contain no guesswork, gut feel or bias. Where legacy forecasting delivers a limited tactical benefit, Intelligent Forecasting delivers a blend of tactical and strategic benefits:
Tactical: Intelligent Forecasting delivers accurate and timely predictions, based on a correlational neural network of external market drivers and the development of econometric models. The business scope of the forecast can be for total organization, for country, category, channel, brand or product. KPI metric examples are revenue, unit volume or inventory. Econometric models are typically more accurate than traditional models, and are frequently leveraged as an additional economic baseline for more cost effective and profitable planning.
Strategic: The Intelligent Forecasting process identifies the key leading external drivers of the customer’s business, often eye opening and always insightful for leadership. A more data-driven culture is supported and nurtured with this economic oriented intelligence.
Strategic: Executive management can be advised by the economists who drive the process, as to the big picture economic direction of their business, including headwinds and tailwinds. A major strategic goal is to eliminate blind spots and be in position to act on pending market changes before competition.
Five Industries That Benefit from Intelligent Forecasting
Intelligent Forecasting is a breakthrough that increases the accuracy, agility, and timeliness of planning and forecasting. Its impact is being felt across multiple industries, particularly those who are sensitive to external volatility that exposes limited demand planning. Here are 5 industries that Prevedere has delivered forecasting and economic intelligence solutions to over the last 8-9 years:
- Retail / CPG
The retail and CPG industries have many operating overlaps, although one may be regarded as a subset of the other. Retail refers to the sale of products to consumers whereas consumer packaged goods (CPG) refers to a broader spectrum of manufacturers, marketers and sellers of physical goods (typically packaged in some way) used by consumers and sold through a retailer. Regardless, the primary planning and forecasting activity employed by both is demand forecasting within the dynamics of the supply chain. Planning inefficiencies can be extremely costly, whether managing production, inventory, logistics or availability.
Intelligent forecasting quickly identifies the most influential economic and consumer behavior factors for each product/category as well as their lead times. By combining this with an internal promotion, product innovation, and merchandising activities, brand teams can gain deeper insight on past sales wins and misses. Intelligent forecasters can also generate retailer-specific long-term demand forecasts that incorporate the most predictive leading indicators. These are constantly updated as economic and consumer activity change, delivering competitive advantage of knowing when to expect downturns or upturns, allowing the ability to change course when necessary.
For manufacturers, inventory forecasting is critical to ensure that a business does not exceed demand for a product, or run out of necessary materials in the course of making it. Forecasting is the first step for all processes of the supply chain, whether material planning, procurement, inbound logistics, or production. An accurate and timely forecast helps to optimize inventory levels and to increase the usage of the factory capacity. If you don’t get the forecast right, you will end up with either too many products and high inventory, or being unable to fulfill demand with lost opportunity.
Bottom line, Intelligent Forecasting helps manufacturing leaders make better forecasting decisions by providing real-time insight on their industry, their markets, and the demand for their products. Using the most predictive leading indicators specific to a manufacturing company, an intelligent forecast identifies and monitors all the drivers of demand for that particular organization. Business leaders can use these insights to challenge or defend long held assumptions when planning for the future. By knowing all the factors that influence demand, manufacturing companies can be better prepared for future volatility.
- Travel and Hospitality
Due to widespread lockdowns and quarantine-related personal restrictions, US consumers significantly reduced spending on services and entertainment in 2020 and into 2021. This in turn led to an unexpectedly strong outcome for spending on certain retail goods, as households used the suddenly available cash to indulge in consumer electronics, home furnishings, groceries, and a range of other products. As travel and hospitality demand rebuilds throughout 2021, Intelligent Forecasts can incorporate all the drivers of travel behavior to enable the predictions of different types of bookings by region, with accuracy and confidence.
With insights into the leading indicators, Intelligent Forecasters can develop real-time predictive models across all markets and traveler segments. Global factors such as fuel price, search trends, and savings rate are known demand drivers of the travel industry. Marketing teams can plan with their agencies to shift spend to future down-markets, months before competition. With 6, 12, and 18-month booking forecasts by geography, consumer segment, destination, and trip type, planners can optimize marketing spend and improve geo-targeted advertising campaigns.
The global automotive industry faces real challenges, especially during COVID, as manufacturers cannot accurately predict demand by geography four to six months in advance. Car dealers’ forecasts are unreliable, resulting in cars sitting on lots or being reshipped, which is costly. Without an accurate plan, the ability to allocate resources and optimize working capital is at tremendous risk. Automotive manufacturers are facing tremendous pressure and must protect margins. Financial planners need to create forecasts to incorporate into the planning process and inform operations and finance in order to maximize manufacturing, distribution and inventory.
Intelligent Forecasting can identify an automotive manufacturer’s leading business drivers in days. By providing historical demand data, an econometric model can be built, tested and refined to create an economic based forecast to be injected into the sales, operations and planning process. For example, a recent Intelligent Forecasting engagement identified the following as highly predictive leading indicators for an automotive manufacturer:
Consumer Sentiment and Purchase IntentEssential Business Opens and Business ClosuresEconomic Policy Uncertainty by CountryImports – Major Global EconomiesCrude Oil Prices: West Texas Intermediate (WTI)Interest RatesCity Mobility IndicesUnemployment by MSALuxury Goods Purchases
The outcome of this engagement was a 97.2% forecast accuracy rate across models and geographies, a 75% reduction in time to identify and ready external data, and millions saved in excess inventory reduction. The Intelligent Forecasting team has also become a valuable partner to their executives, who are provided a quarterly update on the macro and micro-economic outlook.
- Private Equity
Over the years, Prevedere has worked with medium to large organizations in other industries, including financial services, logistics, transportation, energy & utilities, and pharma. A relatively new and growing industry for us is private equity.
2020 presented unprecedented challenges arising from the pandemic. Like many other industries, the private equity (PE) industry was not immune to the resulting market volatility and uncertainty. PE firms are starting to embrace their new reality by incorporating the use of external data sources in their planning processes, whether for their own investments, or to drive more data-driven performance of their portfolio companies.
Intelligent Forecasting can offer real value to PE firms, especially in our new era of market and economic volatility:
Due Diligence – Identify leading signals and correlations to predict outcomes of potential investments
Portfolio Performance – Create custom predictive models for portfolio companies to plan for risk, opportunity and competitive advantage
Volatility Monitoring – Create an always-on baseline econometric model for each portfolio company to alert PE firms of future volatility
Conclusion and Further Reading
All the industries mentioned above have the ability to positively change their future, to be more profitable, productive, risk averse and competitive.
With market certainty out of the window for the foreseeable future across almost all industries, accurate predictions of the future are no longer a luxury, but an absolute necessity. An organization that creates forecasts based only on internal data, is living on borrowed time.
We hope that this series will continue be of interest and value to you. Below is a list of the posts, and also a recommended piece of content that offers more insight into this topic.
- Part 1 – Introduction and Overview
- Part 2 – Who Benefits Most from Intelligent Forecasting
- Part 3 – Which Industries Leverage Intelligent Forecasting (this post)
- Part 4 – Data Scientist View of Intelligent Forecasting
- Finale – Conclusions, The Future, How to Get Started
- White Paper on Intelligent Forecasting and Economic Indicators
In this paper, Russ Banham, Pulitzer Prize-nominated ﬁnancial journalist and best-selling author, guides you through the big data challenges companies face today and the solution for navigating a sea of data and using it to strategically plan for the future. LINK
Thanks for your time today.
Watch out for Part 4 of the series: “Data Scientist View of Intelligent Forecasting”.