Demand Forecasting in the Presence of Systematic Events: Cases in Capturing Sales Promotions

TL;DR

This paper introduces a regime-switching model that effectively incorporates systematic events like sales promotions into demand forecasting, reducing reliance on human judgment and improving accuracy in supply chain management.

Contribution

A novel regime-switching approach that quantifies and models systematic events to enhance demand forecast accuracy with minimal human intervention.

Findings

Model improves forecast accuracy over industry practice.

Validated with sales and promotional data from Australian companies.

Reduces need for manual forecast adjustments.

Abstract

Reliable demand forecasts are critical for the effective supply chain management. Several endogenous and exogenous variables can influence the dynamics of demand, and hence a single statistical model that only consists of historical sales data is often insufficient to produce accurate forecasts. In practice, the forecasts generated by baseline statistical models are often judgmentally adjusted by forecasters to incorporate factors and information that are not incorporated in the baseline models. There are however systematic events whose effect can be effectively quantified and modeled to help minimize human intervention in adjusting the baseline forecasts. In this paper, we develop and test a novel regime-switching approach to quantify systematic information/events and objectively incorporate them into the baseline statistical model. Our simple yet practical and effective model can help limit forecast adjustments to only focus on the impact of less systematic events such as sudden climate change or dynamic market activities. The proposed model and approach is validated empirically using sales and promotional data from two Australian companies. Discussions focus on a thorough analysis of the forecasting and benchmarking results. Our analysis indicates that the proposed model can successfully improve the forecast accuracy when compared to the current industry practice which heavily relies on human judgment to factor in all types of information/events.