The value of forecasting using leading indicators when you are early in the supply chain

The value of forecasting using leading indicators when you are early in the supply chain

Read time
5 mins
Published on
June 8, 2023

Is your company an early player in the supply chain? This issue might be familiar to you.

Many companies run projects with the aim to identify leading indicators as a way to get early signals ahead of market trend shifts. Often times, companies look at how sales or market development correlates to eg. GDP development with a certain lag. They then use this as a KPI in order to incorporate the economic environment into their planning.  

But you might be missing a huge piece of the forecasting puzzle. 

Here's what to consider:

When you are at the beginning of the supply chain, it essentially means you are one of the first people involved in making and selling a product. When this happens, the big economic indicators that show how the economy is doing tend to be slower in showing the effects on your sales or market. 

This means that it becomes even more important to find and use indicators that give you early signals about what might happen. These indicators are called leading indicators because they show you what might happen in the future. So, being early in the supply chain means you need to pay extra attention to finding indicators that tell you what will happen early on, before the big economic indicators catch up.

A quick explanation

Leading indicators: They typically react prior to your sales or market.

Lagging indicators: They react after your sales or market.

Let's look at how to uncover the indicators that are leading for companies at this stage:

In order to detect the indicators that are still leading, we need to take a look at the methodologies we apply to identify leading indicators: 

A common methodology

#1 Correlation tells you how two time-series vary in conjunction with each other. It however exposes you to the risk of spurious correlations.

#2 Partial correlation using Lasso shrinkage: Identifies causal relationships by penalising the coefficients.

The benefit of exploring advanced methodologies to identify your leading indicators

When you are applying more advanced methodologies for identifying your leading indicators, you’ll notice that the indicators deemed relevant will tend to vary more than when you’re using correlation. This is natural because the criteria for an indicator to be deemed contributing with information is stricter. This is because the variable needs to contain unique information that is not available in other indicators.

What's recommended?

#1 It's recommended to use a pool of indicators and let the indicators used vary over time. 

#2 When selecting indicators to join your pool, it is important to select indicators that provide the earliest signals, especially if you are in the early stage of the supply chain.

What indicators to use will vary depending on the market you are forecasting and the frequency of the data you are forecasting etc. 

With Indicio, you can easily detect the early leading signals and its impact of your sales.

How to choose identify and select the early market signals for your company

Selecting the right forecasting tool for your company is essential to ensure that you're identifying the right leading indicators. It’s important to take the time to evaluate your specific needs and invest in a tool that best fits your business.  

If you’re interested in discovering the early market signals for your industry, book a spot to find out which indicators you should pay attention to.

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