Can external data improve your forecast accuracy?

Getting a grip on your demand and your forecast accuracy is something which has proven not to be that easy for most companies. Better predicting what the future will bring, is the goal of a lot of companies out there. Today, we try to accomplish that by using forecasting techniques which mainly focus on historical data, qualitative input from marketing, sales, and customers to better account for future demand. The rapid evolving global environment we operate in, however, poses some extra challenges: How to capture the influence of what happens around you?

Over the years we have seen a certain trend persist: the value of having the best information in order to outperform competitors. Everybody can look to optimize their analytics, but not everybody is able to access and quantify market information. Analytics alone won’t make the difference. The capabilities of a Holt-Winters method or ARIMA will not measure for the macro-economic movements around us, which inevitably impact our businesses.

Thinking of that external impact, pushed us to look a bit further over the horizon: how do we make sure we account for these external influences? The market your business operates in, the products you sell, are all related to certain external indicators, which vary from business to business. The key is to identify those leading indicators, and start using them in your forecasting practice in order to improve forecast accuracy. This will help you to better identify certain inflection points in your sales. Instead of extrapolating certain trends, forecasting including external leading indicators, will better guide you into the future by looking at the movements of the business cycles of those leading indicators. Below graph shows you how this advanced statistical forecasting method differs from traditional forecasting techniques (here Holt-Winters).

In this graph we can clearly see the difference between the green, Holt Winters forecasting technique, and the blue, leading indicators forecasting technique. Where the HW technique doesn’t foresee the “turning point”, the leading indicator forecast, better takes the turn, resulting in a significant improvement of the forecast accuracy. Not only can these forecasts with leading indicators better predict inflection points in your sales, due to the fact that you know which indicators affect your business, it also helps you to better understand your sales.

At Solventure LIFe we firmly believe, that the shift towards having the right information, will be a key differentiator in the future. Analytics alone won’t make the difference. Having valuable input from outside and ability to quantify that data will help you outperform your competitors.