Even though a lot of companies use analytical software, up to 93% of them will adjust any forecasts generated by it.

This statistic shows how unreliable people think this software is. However, you can still use it to predict the future of the market.

The problem is that forecasting errors can cloud a prediction’s accuracy, causing short term issues that can snowball into bad news for any business.

How do you tackle this issue?

We’ve got you covered there. We’ll tell you more about forecast bias, what causes a forecast error, and the best ways to avoid them.

What is Forecast Bias?

Forecast bias results from a forecast error. It’s essentially a continuous miscalculation of the future.

Whenever a predicted forecast outcome happens, the forecast is evaluated. It’s either considered perfect, relatively accurate, or incorrect. If it’s incorrect, then the business may label it as a forecast error.

On the other hand, when you have multiple incorrect predictions, it may be a sign of forecast bias.

Forecast bias can decrease the efficiency of any business. To prevent it, you have to find the cause of the error.

What Causes Forecasting Errors?

1. No Systematic Process

Some people don’t believe in the need for a systematic forecasting process. They couldn’t be more wrong.

In fact, according to AMR research, even a 3% increase in the accuracy of a sales forecasting will increase profit margins for a company by 2%.

Therefore, forecasting is not only critical to the profit margins, but also a highly systematic process.

2. Planning Around Goals, Not Reality

Ignoring reality during the planning process makes forecasting more difficult. For example, the business may base staffing on a handling time of four minutes when it’s actually closer to nine minutes. This is completely unreasonable.

There are ways to go about the planning process to make it more accurate, but it’s vital to plan around actual, achievable goals.

3. Assuming That Forecasting Software is Entirely Accurate

Forecasting software is a useful tool. It can collect and analyze data, run different scenarios, and predict potential outcomes. However, it has its limitations.

This software is unaware of what any department is doing, nor does it know any initiatives that have been put in place that may reshape answers.

In fact, according to statistics, there is a growing demand for forecasting software to have more and more accurate predictions. Thus, there is only limited amount of work a computer program can do, so it should not always be completely relied upon.

4. Taking the Forecast Lightly

So, there has been a forecast error or perhaps there have been several wildly inaccurate ones. If the business takes these errors lightly, there is a big chance that they will continue to occur.

Instead, taking these errors seriously can shape the profitability of the business significantly.

5. No Ongoing Communication with Other Departments

Without strong ties between departments (in any business), you can expect many forecast errors and biases.

This is because the lack of communication impedes the departments from keeping track of interdepartmental changes which may affect the business, and are essential to the forecasting.

6. No One is Being Held Accountable

There needs to be someone responsible for bringing various types of inputs together. They also need to ensure their integrations are included in the forecast, as well as discover what assumptions were off if there is a forecast error.

This effectively reduces the number of forecast errors.

7. Not Making Connections with Staffing

In the end, any forecast made means nothing unless it has a tie to the system resources and staff. This ensures that the results obtained are factual and closely tied to the business.

How Can Forecasting Errors Be Avoided?

1. Using Quality Forecasting Software

Time and time again businesses fail to utilize the best forecasting software when it comes to making accurate predictions. This, therefore, leads to catastrophic forecasting errors.

A quality forecasting software will provide you with unlimited forecasting scenarios that you can use to predict future outcomes. It should also be easy to use with simple input requirements, as well as show exactly what needs to be done to allow the business to improve.

2. Cleaning Up Bad Data

Often, a forecasting engine will use historical data in order to produce a forecast. Sometimes, this data can be terrible and wildly inaccurate. In fact, bad data is often considered to be one of the top causes of forecasting errors.

To avoid this, there needs to be a quality supply of clean data going into the forecasting software. That way, decent results will emerge.

The best way to get clean data is by correcting errors in historical data. The business can rectify these errors by using a second set of data to compare against it. This will allow you to get rid of the inaccurate data entries and replace them with correct values.

During this cleaning process, you shouldn’t make up data to fill in a missing cell, nor should you delete bad values. However, if the right value is known, you should correct it. If it isn’t known, the data should remain as is.

3. Use Special Days

Although data cleaning corrects errors, it doesn’t really do much for data anomalies.

Which raises the question, “What can be done to deal with this big issue?”

Well, they can’t be cleaned but they can be marked using a feature called special days or special events. This feature allows the user to mark specified calendar days as special.

By marking a day or multiple days as special, it can prompt one of two different responses from any forecasting software. In some cases, it can cause the forecasting engine to ignore the special day. In other cases, it can cause it to use other related special days to properly forecast the event.

Special days are fantastic tools that can often be misused, so it is vital that it is used correctly to get its full potential.

4. Change the Timing of the Forecast

The timing of when a forecast is done can actually have quite a big impact on the accuracy of the forecast. For example, creating a forecast one week from now will logically be much more accurate than one that is created a month from now.

Thus, it is important that forecasts are created as close to the date of the outcome as possible. In fact, it would be ideal to create them on the day of the outcome, but this is not practical.

Forecast timings need to coincide with the start of schedules and the time required for reviewing the forecast and editing the schedule. The shortest time between the finalization of a forecast and the dates it represents needs to be between 6 and 13 days.

So, the best way to avoid a forecast error is to consider generating forecasts as soon as possible.

5. Change the Granularity of the Forecast

It’s no surprise that statistics with bigger numbers will produce more accurate results than those with smaller numbers. Applying this to forecasting means that using larger numbers will allow any business to produce more accurate results.

Larger numbers can be created by changing the granularity of what is being forecasted. For example, forecast by product category rather than by product line and by the hour rather than the quarter hour.

Thus, every business should consider creating larger numbers to use in forecasting software.

6. Consider Making a Change to the Forecast Method

The last (but certainly not least!) important way to avoid a forecast error is to go beyond problems with the data and instead look at the method of forecasting that is being used.

This may feel like a backward step for some people due to the assumption that the forecasting method is the first aspect that should be considered. However, until you’re using clean data, there is no way to actually have accurate forecasts in the first place.

It’s important to note that this is not a request to completely change the forecasting method. This is just a suggestion. At this point, most businesses have a certain type of forecasting method they use.

If that is the case, consider validating any initial analysis of the various forecasting methods that were available to use to see if it is still correct.

Wrapping Up: Avoid Having Another Forecast Error in the Future

Quality forecasting practices and software can assist any business in not only keeping afloat, but also moving forward to their future goals. It’s important to go with software from a reliable company, which has a great deal of knowledge about accurate forecasting.

For more information, contact the forecasting experts here.

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