Q) During the current pandemic we are facing a very difficult time in preparing forecasts. Our forecast accuracy is far below what used to be. Can you suggest any way to improve it?
A.) We are certainly in a new economic phase, something we have never experienced before. In the past we had disruptions either in supply or demand—not in both as we are currently experiencing. This may be short-lived but we must make sure we deal with it. This means we need to change the way we forecast. Firstly, we should keep in mind that the sharp increases or decreases in sales data are not outliers but a reflection of new data patterns. When an outlier repeats itself again and again, it is no longer an outlier, but a part of new pattern. This means that old data is not relevant for future forecasts. Secondly, you need to know how the data pattern is changing. The data pattern of many products has drastically changed and the sooner we learn about it, the better. To learn about the change in patterns and to respond quickly enough, we need to work with not monthly or weekly data but with daily data. Compute the percentage change in cumulative sales from one day to the next, and then compute the average weekly change. If the weekly percentage change is rising, it means that the trend is upward; if it is falling, it is downward. We can use this trend to make a forecast for the next period. It may not be long before the pandemic is over. With that, the pattern will change again. The weekly percentage change in sales will quickly tell us which way the data is trending, and how strong it is.
I hope this helps.
Happy forecasting!
Dr. Chaman. L. Jain,
Editor-in-Chief,
Journal of Business Forecasting