RETAIL GLOSSARY

Artificial Intelligence (AI) Forecasting

The use of machine learning algorithms and advanced analytics techniques to process large datasets and generate demand forecasts with improved accuracy.

What is Artificial Intelligence (AI) Forecasting?

AI forecasting uses machine learning algorithms to analyse historical data and generate accurate predictions. It automates the forecasting process, saving time and improving efficiency. It provides real-time and adaptive forecasts that can be used for demand forecasting, inventory planning, pricing optimisation, and more. However, it relies on high-quality data and may be affected by unforeseen events or outliers. Human expertise is still necessary to interpret and validate the forecasts.

How AI Forecasting works

Data collection: AI forecasting starts by collecting relevant historical data, such as sales data, customer behaviour, market trends, and other relevant variables. The quality and quantity of data are crucial for accurate predictions.

Data preprocessing: The collected data is preprocessed to remove outliers, handle missing values, and normalise the data for consistency. This step ensures that the data is in a suitable format for analysis.

Model training: Machine learning algorithms are applied to the preprocessed data to train predictive models. These models learn from the historical data to identify patterns, relationships, and dependencies that can be used to make predictions.

Model evaluation and selection: The trained models are evaluated using appropriate performance metrics and validation techniques. This step helps in selecting the best-performing model for forecasting purposes.

Forecast generation: Once a suitable model is selected, it is used to generate forecasts for future periods. The model takes into account the historical patterns and trends identified during the training phase to make predictions about future outcomes.

Monitoring and adjustment: AI forecasting systems are typically monitored to assess the accuracy and reliability of the generated forecasts. If necessary, adjustments can be made to the models or input data to improve the accuracy of the predictions.

Integration and decision-making: The generated forecasts are integrated into decision-making processes, such as demand planning, inventory management, pricing, and resource allocation. These forecasts provide valuable insights to guide business strategies and optimise operations.

It's important to note that AI forecasting is not infallible and can be influenced by various factors, including data quality, model limitations, and unforeseen events. Human expertise and domain knowledge are still crucial for interpreting and validating the forecasts before making critical business decisions.

Pros of AI Forecasting

Improved accuracy: AI forecasting leverages advanced machine learning algorithms to analyse large volumes of data and identify complex patterns that may not be easily discernible to humans. This can result in more accurate and reliable forecasts compared to traditional methods. AI models can handle a wide range of variables and consider their interactions, leading to improved prediction accuracy.
Time and resource savings: AI forecasting automates the process of data analysis and forecasting, reducing the time and effort required for manual calculations and analysis. It can quickly process vast amounts of data, identify patterns, and generate forecasts in a fraction of the time it would take for humans. This enables businesses to make timely decisions and allocate resources more efficiently.
Adaptability and scalability: AI forecasting models can adapt and learn from new data, allowing them to continually improve their accuracy over time. They can also handle large and complex datasets, making them scalable for organisations dealing with high-volume data. AI models can be trained to incorporate new variables or adjust to changing market conditions, providing flexibility in forecasting.

Cons of AI Forecasting

Data quality and availability: AI forecasting heavily relies on the availability and quality of data. If the data used for training the AI model is incomplete, inaccurate, or biased, it can affect the accuracy and reliability of the forecasts. Ensuring data quality and availability can be a challenge, especially when dealing with diverse and disparate data sources.
Interpretability and explainability: AI forecasting models, particularly deep learning models, can be highly complex and operate as "black boxes." This means that it may be difficult to understand and interpret the underlying reasoning behind the forecasts generated by the AI model. Lack of interpretability and explainability can be a concern, especially in regulated industries or when human decision-makers need to understand the rationale behind the forecasts.
Overreliance on historical data: AI forecasting models are trained on historical data, which means they may struggle to accurately predict unforeseen events or significant shifts in market dynamics. If the future deviates significantly from historical patterns, AI models may fail to capture and adapt to these changes. It's important to consider that AI forecasting is not foolproof and should be complemented with human judgment and expertise.

FAQ

Below you will find answers to common questions

How can AI forecasting help improve inventory management?

AI forecasting can improve inventory management by providing more accurate demand predictions. By analysing historical sales data, market trends, seasonality, and other relevant factors, AI models can generate forecasts that help businesses optimise their inventory levels. This ensures that they have sufficient stock to meet customer demand while minimising excess inventory and associated costs.

What are the potential limitations of AI forecasting in financial markets?

While AI forecasting can be beneficial in financial markets, there are certain limitations to consider. One limitation is the reliance on historical data, which may not fully capture unforeseen events or market disruptions. Additionally, AI models may struggle to interpret and incorporate qualitative factors or changing investor sentiments. Therefore, human judgment and expertise remain crucial in financial decision-making, and AI forecasts should be used as a tool to augment rather than replace human insights.