Our tradition from Foresight’s birth in 2005 has been to feature a particular topic of interest and value to practicing forecasters. These feature sections have covered a wide range of areas: the politics of forecasting, how and when to judgmentally adjust statistical forecasts, forecasting support systems, why we should (or shouldn’t) place our trust in the forecasts, and guiding principles for managing the forecasting process, to name a selection.
This 34th issue of Foresight presents the first of a two-part feature section on forecasting by aggregation, the use of product aggregates to generate forecasts and then reconcile the forecasts across the product hierarchy. Aggregation is commonly done for product and geographic hierarchies but less frequently implemented for temporal hierarchies, which depict each product’s history in data of different frequencies: daily, weekly, monthly, and so forth.
The entire section has been organized by Aris Syntetos, Foresight’s Supply Chain Forecasting Editor, who is interviewed as this issue's Forecaster in the Field. In his introduction to the feature section, Aris writes that forecasting by aggregation can provide dramatic benefits to an organization, and that its merits need to be more fully recognized and supported by commercially available forecasting software.
The two articles in this section address temporal aggregation. In his own piece, Forecasting by Temporal Aggregation, Aris provides a primer on the key issues in deciding which data frequencies to forecast and how to aggregate/disaggregate from these to meet organizational requirements. Then, in Improving Forecasting via Multiple Temporal Aggregation, Fotios Petropoulos and Nikolaos Kourentzes offer a provocative new way to achieve reconciliation of daily through yearly forecasts while increasing the accuracy with which each frequency is forecast.
Also in this issue, we review two new books that will interest those who take the long-range view of forecasting, both of its history and professionally: Fortune Tellers: The Story of America’s First Economic Forecasters by Walter A. Friedman, and In 100 Years: Leading Economists Predict the Future, edited by Ignacio Palacios-Huerta.
The first book, writes reviewer Ira Sohn, Foresight’s Editor for Long-Range Forecasting, provides a “historical overview of the pioneers of forecasting, of the economic environments in which they worked, and of the tool sets and methodologies they used to generate their forecasts.” These trailblazers include familiar names and some not so well known: Roger Babson, John Moody, Irving Fisher, C. J. Bullock, Warren Persons, Wesley Clair Mitchell, and, surprisingly, Herbert Hoover. Why these? According to Friedman, they were the first to envision the possibility that economic forecasting could be a field, or even a profession; that the systematic study of a vast range of statistical data could yield insights into future business conditions; and that a market existed in business and government for weekly economic forecasts.
For the second book, editor Palacios-Huerta invited some of the “best brains in economics” – three of them already awarded Nobel prizes – to speculate on the state of the world and material well-being in 2113. Here they address some big issues: how will population, climate, social and economic inequality, strife, work, and education change in the next 100 years, and what are our prospects for being better off then than we are now?
Our section on Forecasting Principles and Methods turns to Walt Disney Resorts’ revenue managers McKay Curtis and Frederick Zahrn for a primer on Forecasting for Revenue Management. The essential objective, they write, is to adjust prices and product/service availability to maximize firm revenue from a given set of resources. We see revenue management in operation most personally when we watch airline ticket-price movements and need to know hotel room availability. It is the forecasts that drive these systems, and the authors show how they are used in revenue management.
Our concluding article is the fourth and final piece in Steve Morlidge’s series of discussions on forecast quality, a term Steve defines as forecast accuracy in relation to the accuracy of naïve forecasts, which he measures by the Relative Absolute Error (RAE). The previous articles demonstrated realistic boundaries to the RAE: an RAE above 1.0 is a cause for change since the method employed is no more accurate than a naïve – no change from last period – forecast, while an RAE below 0.5 occurred very rarely and thus represented a practical lower limit to forecast error.
Steve now deals with the natural follow-up question of how we should be Using Relative Error Metrics to Improve Forecast Quality in the Supply Chain. What actions should the business take in response to particular values for the RAE? His protocols will help identify those items that form a “sweet spot” for efforts to upgrade forecasting performance.
Meet us in Columbus, Ohio in October
The lively learning environment, easy camaraderie among the presenters and delegates, and very practical program made last year's Foresight Practitioner Conference at Ohio State University’s Fisher College of Business a great success. We're looking forward to this year's event, From S&OP to Demand-Supply Integration: Collaboration Across the Supply Chain. The FPC offers a unique blend of practitioner experience and scholarly research within a vendor-free environment — I hope we'll see you there!
Find more information on the program at www.forecasters.org/foresight/sop-2014-conference/. Registration is discounted $100 (to $1295) for Foresight subscribers and IIF members (use registration code 2014FORESIGHT when you register).