AI is Changing Everything We Thought About Forecasting Demand

The rise of cloud computing, smart devices and IoT have all resulted in a massive data explosion. By 2025, the amount of data will double every 12 hours. AI now has the ability to consume data far more efficiently than humans, delivering on the possibility of insights and predictions never before imagined. But McKinsey reports that only 33% of organizations are effectively using internal and external data to take advantage of AI capabilities.

Predicting future demand with traditional methods in the face of a shifting market can become a serious barrier to visibility into what lies ahead. Many sources reinforce that the number one obstacle to achieving supply chain goals and objectives continues to be forecast accuracy and demand variability. This trend continues despite the investment many have made in technology to better predict customer demand.

The Convergence of Data and Technology for Demand Insights

AI

Image Excerpt from LLamasoft Supersonic Demand Modeling eBook

Why does this challenge continue to be so prevalent? One of LLamasoft’s demand solution customers, Donald Anderson, Assistant Director of Analysis, Air Mobility Command – U.S. Air Force, made a very poignant statement, “Our past methodology was time-series trend forecasting. This works great … until the world changes.”

This is then the crux of the issue for many. Traditional time-series trend forecasting typically means taking an inside-out approach, often relying on an organization’s historical, internal data to predict demand. The danger is it doesn’t take into account external factors that continually impact the market. Change is accelerating faster than inside the four walls of today’s enterprises. Data is growing exponentially, technology continues to disrupt, customers demand an omnichannel buying experience and business are constantly grappling with macroeconomic conditions and industry complexities. While historical performance may offer helpful insights toward what the future holds, change is happening far too rapidly to rely on internal rear-view mirror metrics.

“These inside-out approaches leave plenty of blind spots and companies are caught flatfooted when things turn rapidly,” Dr. Madhav Durbha, LLamasoft Group Vice President of Industry Strategy, explains.

Effectively responding to complexity and volatility is increasingly dependent on organizations’ ability to absorb data — internal and external — and process the data into intelligent insights driving decisions in a timely manner. In the world of data and AI, most organizations are operating with a mixed bag of legacy technologies into which they invested millions of dollars that they simply can’t turn off. However, they are forced to compete in their respective industries with the digital natives that are building business models completely embracing the power of data and algorithms.

How can organization harness the promise of powerful insights for better demand predictions with data and technology?  Enter the practical adoption of digital transformation via platforms, applications and predictive models, fed by a foundational data layer, powered by AI and enabled with real-world scenario testing.

  1. AI-Powered Pattern Recognition

Here, AI is applied to a company’s historical demand signal to demystify it in an unbiased way. The technology self-learns from complex demand patterns (e.g., multiple seasonality signals, non-linear trends, lags, level shifts, etc.) and finds common groups for segmentation to prescribe the appropriate model. AI-powered demand models are essentially closed loop systems. As they drive decisions, they monitor and adapt from changes in the data.

  1. Internal and External Causals

Once complex patterns from historical data are identified, the next step is to bring in the effects of internal and external causal factors to enhance the demand signal and quantify key demand drivers. Internal variables may include price, promotions, product lifecycles and point-of-sale data. There’s a wealth of external data that can be incorporated, such as macroeconomic indicators like GDP and Consumer Price Index, regional weather data, market share data, consumer sentiment, demographic trends and much more.

  1. What-If Scenarios

The ability to model what-if scenarios for more accurate predictions is the lynchpin to next-generation demand modeling. This is the pivotal point where organizations can conquer cause and effect by testing demand scenarios and sensitivities at varying levels of granularity. Factoring these scenarios into demand models with greater depth and predictiveness prepares decision makers for changing conditions.

  1. Near-Term Probabilistic Forecasting

AI can also play a strong role in discerning patterns and delivering insights for short term forecasts.  Predicting actual orders using data like page-views and current inventory positions from vendor portals, companies can set up recommendations on inventory positioning by weighing the tradeoff of stockouts vs excess inventory, also significantly improving service levels.

Organizations are seeing that they can reinvent how they forecast with the latest AI technologies.  Cloud computing is bringing scale forecasting . AutoML (automated machine learning) helps build more effective models. Hierarchical forecasting allows for better reconciled top-down and bottom up forecasting.  And, algorithms that take advantage of deep learning are delivering improvements through cross-learning, using internal and external data inputs to detect patterns.  The resulting insights provide organizations with the ability to adapt to shifting external dynamics and accelerate enterprise-wide decisions about supply chain scalability, sourcing strategies, product portfolio roadmaps and capacity planning can mean the difference between competitive dominance and obsolescence.

With never normal being the new normal, now is the time for market leaders to take an AI-powered, outside-in approach to predicting demand. To learn more about AI-powered demand modeling, get your complimentary eBook here.

AIVikram Srinivasan, Senior Director of Product Management at LLamasoft, leads demand forecasting and insights solutions. He is primarily responsible for the overall product strategy of these offerings and manages a business plan to expand customer usage, increase customer penetration and grow product revenue. He also engages with market analysts and industry thought leaders to raise awareness of these solutions. Prior to his current role, Vikram worked as a Senior Consultant at LLamasoft on multiple projects solving various supply chain design problems. He received his M.S. in Industrial Engineering (Major: Operations Research) at The Ohio State University.

 

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