Forecasting when trend is not your friend

Forecasting is relatively easier in a boom, as they say the Trend is your friend. But not so during a recession, since we don’t want the trend to be persistent. This would result in a worsening economic situation.

We want an inflection point for the drop to stabilize and then we expect a bottoming up and a pick up so we are back on positive trend.  However, turning points are difficult to forecast.  There was a lot of talk about the V shaped recovery and its challenges for demand planning.  The drop was sudden and the demand fell off a cliff.  Then the pick up was sudden as well.

Companies had substantial drop in their demand earlier this year but the consequent inventory depletion and the sudden pick up in demand had resulted in businesses scrambling to ramp up production.  The decision to deplete inventories earlier this year had compounded the woes.  Companies through most of this year have been suffering from customer service issues and higher costs on expediting and execution.

Forecasting is indeed difficult when things are not business as usual.  You need extra information or additional insights to call these turns correctly.  However, when that additional driver is outside of your control, then it is scenario planning that you need to count on. Exponential smoothing will catch up with the new trend with a time lag.  The first few forecasts will be way off.  This depends on the smoothing parameter in the model.