Beyond Probabilistic: The Advantages of Scenario-Based Demand Planning

Understanding Probabilistic Forecasting

Probabilistic forecasting offers a range of potential outcomes, each with a probability attached. This method recognizes the inherent uncertainty in forecasting, providing a spectrum of possible scenarios. However, its effectiveness hinges on historical data's availability and diversity. For instance, a probabilistic forecast might assign various likelihoods to different sales volumes for the upcoming month, based on historical trends and seasonal patterns. Yet, this approach has its limitations, particularly in operational application where a single concrete number is often required for planning.

The Role of Scenario-Based Planning

Scenario-based planning addresses these limitations. It goes beyond just presenting a range of outcomes; it delves into the drivers behind these scenarios. This approach involves understanding the real-world factors that could influence business outcomes, such as market trends, competitor actions, or seasonal events, and assessing their potential impacts on forecast numbers. In this case, the planner can determine what are some potential scenarios and which of those scenarios should be planned for.

Integrating Scenario-Based Planning with Business Strategy

Scenario-based planning allows businesses to make informed decisions by considering various potential risks and opportunities. For example, a company might choose a more conservative forecast in anticipation of a potential market risk, rather than simply relying on the most likely outcome suggested by probabilistic forecasting. This method aligns with the principles of explainable AI, as it offers clarity on why certain forecasts are made, helping businesses understand and prepare for a range of possible futures.

Conclusion: The Advantage of Scenario-Based Planning

While probabilistic forecasting is valuable for its statistical approach to decision-making, its real-world applicability is often limited. Scenario-based planning, in contrast, offers a more dynamic and practical framework. It enables organizations to explore a wider array of possibilities and prepare for uncertainties in a more holistic way. The adaptability and focus on critical real-world drivers make scenario-based forecasting a superior approach for navigating the complex and uncertain terrain of future business landscapes.

Both of these approaches are evolving and they are not mutually exclusive. It might very well be that these can be combined in a very useful way in some time. If you have any insights on this, feel free to share them with us so we can incorporate them in Horizon.