Which of the following is an advantage of statistical forecasting methods?

A time series is a collection of observations in chronological order. These could be daily stock closing prices, weekly inventory figures, annual sales, or countless other things.

Time series analysis, then, is nothing more than analyzing—plotting, identifying patterns, etc.—the series.

Finally, a time series forecast is taking those past observations and making predictions about what will happen in the future if the same patterns continue to hold true.

Time series analysis and forecasting are among the most common quantitative techniques employed by businesses and researchers today. We will dive deeper into the three major advantages of performing time series analysis.

1. Time Series Analysis Helps You Identify Patterns

Memories are fragile and prone to error. You may think that your sales peak before Christmas and hit their bottom in February… but do they really?

The simplest and, in most cases, the most effective form of time series analysis is to simply plot the data on a line chart. With this step, there will no longer be any doubts as to whether or not sales truly peak before Christmas and dip in February.

Now that we have plotted our sales data, it becomes immediately clear what patterns we have. Sales are trending upwards year-over-year, and seem to follow a regularly yearly pattern. The months of January and February see the lowest sales figures and there is a major spike in November and December.

2. Time Series Analysis Creates the Opportunity to Clean Your Data

In the example above, we plotted actual sales figures for each month in the data set. If any observations were missing, the gap in the time series chart would show that right away. With any gaps in the data identified, it would be easy to impute those missing values (that is, fill in the gaps with some calculated value).

Furthermore, we would be able to identify outliers in the data. Perhaps instead of looking at actual sales, it would make more sense to plot the percentage difference between observations. This is a technique that can help smooth out very noisy data.

In this case, by plotting the percentage difference in sales from month to month we smoothed out much of the data—except for the enormous spike in March 2017. This is not necessarily a bad thing, however; without performing these analytic steps we may have been unaware that such a spike existed.

3. Time Series Forecasting Can Predict the Future

If we could look into a crystal ball to see the future, we would all be rich. Knowing when to expect a lull in sales, a slowdown in inventory levels, or a surge in demand would be incredibly valuable for any company.

Although not a crystal ball, time series forecasting methods can help us gain a useful glimpse of the future. While mathematically dense, the thrust of forecasting comes down to looking at past behavior and extending those patterns into the future.

In the example above, the forecast is given by the blue line and band. The forecast clearly continues the upward sales trend and even exhibits the seasonal dips and spikes that we have come to expect.

While you should not treat such a simple forecast as gospel, it can be a helpful indicator of what to expect in the near future. With this information in hand, you can more easily prepare for the times ahead.

Forecasting isn’t easy. But when done right, it can offer tremendous advantages to companies. And in today’s ultra-competitive business landscape, any advantage over the competition is positive. That said, there are a few disadvantages that are worth exploring. While we don’t believe they are obstacles to implementing a forecasting process, they should be weighed when considering which forecasting process is right for you.

 Three advantages of forecasting

 1. You’ll gain valuable insight

Forecasting gets you into the habit of looking at past and real-time data to predict future demand. And in doing so, you’ll be able to anticipate demand fluctuations more effectively. But more than that, it’ll give you insight into your company’s health and provide you with an opportunity to course-correct or make adjustments.

 2. You’ll learn from past mistakes

 You don’t start from scratch after each forecast. Even if your prediction was nowhere close to what ended up coming to pass, it gives you a starting point. It’s common to review where and why things didn’t happen the way you predicted. Your forecasts should eventually improve. But more than that, you’ll get into the habit of reflecting upon past performance as a whole. And self-reflection can be a powerful driver of company growth.

 3. It can decrease costs

 When done right, anticipating demand will help you tweak your processes to increase efficiency all along the supply chain. Because you’re better able to predict what customers will want and when they’ll want it, you may also be able to decrease excess inventory levels, thus increasing overall profitability.

Three disadvantages of forecasting

 1. Forecasts are never 100% accurate

 Let’s face it: it’s hard to predict the future. Even if you have a great process in place and forecasting experts on your payroll, your forecasts will never be spot on. Some products and markets simply have a high level of volatility. And in general, there is just an endless number of factors that influence demand.

 2. It can be time-consuming and resource-intensive

 Forecasting involves a lot of data gathering, data organizing, and coordination. Companies typically employ a team of demand planners who are responsible for coming up with the forecast. But in order to do this well, demand planners need substantial input from the sales and marketing teams. In addition, it’s not uncommon for processes to be manual and labor-intensive, thus taking up a lot of time. Fortunately, if you have the right technology in place, this is much less of an issue.

 3. It can also be costly

 On a related note, hiring a team of demand planners is a significant investment. When you add to that the cost of using good quality tools, upfront costs can add up. But investing in advanced software, high-quality talent and solid forecasting processes is just that: an investment. We’re confident you’ll see a return when all of that is done right. 

Forecasting is a business practice that every company engages in to one extent or another. And it can be hugely valuable, providing those companies who have implemented a solid forecasting process with a leg up on their competition. What’s more, even the disadvantages can be overcome with the right people, technology and processes. So learn how partnering with our Forecast Xperts and implementing our Atlas Suite can make a difference. Schedule a free consultation with us now.

Additional Reading

Guide to Evolve Your Demand Planning Maturity

Disruption has dominated supply chain agendas over the past two years as companies worked to accommodate some pretty dramatic shifts in the marketplace.

Read More

Share

Copy Link