Mother Nature can be fickle and her force relentless. The hurricanes that raged through the Carribean and the Southern part of the United States are proof of the devastating power nature can have on the land and its people. After the destruction, the time to rebuild has come in these areas. For businesses in this area and all over the world weather is clearly an influential factor. Its potential impact on your business is an important metric to consider in your business forecasts.
Mapping the damage
As Harvey caused a lot of damage to the inhabitants of Eastern Texas, it also hit the oil and refinery industry in the region. According to multiple agencies Hurricane Harvey is likely to be the second-most costly disaster in U.S. history. Texas is home to one of the most important energy states, providing crude oil and gasoline. Increasing the effects of the human sorrow, since energy is integral to modern lives. Also Irma has harmed personal lives and business.
So apart from the damage that is done, how can you prepare your lives and business for the effects of such weather conditions? An important step here is to look at how weather impacts your business. Regardless if you are selling weather dependent items like ice-cream or airconditioning, which have obvious influence of the weather, all types of business can have influences from weather conditions.
Defining the impact
Let’s first clear out what effects of weather impact could be relevant:
- Timing effect: The difference between an early and a late summer peak, what effect will this have on your sales?
- Volume effect: A hot summer will typically lead to more sales versus a wet summer.
Now, when we look at these effects, these could be subtle. Imagine you are selling airconditioning. There will be different effects between the product categories. Consumer products will typically be more affected by weather effects, industrial products or professional products which are used for hotels, shopping malls, or industry related purposes, are less affected by the weather, as they are always necessary. The latter types of products will have a greater impact of more macro-economic drivers. If economy is doing well, more hotels and shoppingmalls are visited and built, so there will be a higher need for these types of products.
Theory put to practice
When we analyze the impact of weather on your sales, there are different methods and parameters to take into account. Advanced predictive analytics can help you in this process, as differences in weather situations ask for specific modeling. How will you tackle this? Weather effects should not be approached out of a linear perspective (this on-demand webinar will give you more information).
Weather is a non-linear effect. Let’s illustrate with an example: Imagine you sell icecream. Temperature is one of the parameters to define the impact of weather. Now when we take a look at your sales, it could be that there is no difference in your icecream sales if the temperature is 0°C or 10°C. However we do see a great difference in sales if the temperature rises from 15°C to 25°C. This shows that weather should be treated as a non-linear effect.
There are various parameters to consider, depending on the business you are in, to define weather and the impact of it on your sales. Some of these parameters are listed below:
- Air Temperature and Heat Index
- Barometric Pressure
- Solar Radiation and Photosynthetically Active Radiation
- Wind Speed and Direction
Furthermore there is one important aspect, which is crucial when forecasting using the effects of weather: TIME. Unfortunately it is not possible to know what the weather will be in 3 years time. If it would be, you probably will never complain about bad weather on your holiday, cause you’d know when to plan your holiday… However, how exciting would that be? A little surprise never hurts!
Since you cannot predict the weather on a long term horizon, it is of detrimental importance to make scenarios. Scenarios will help you identify how specific weather conditions will impact your sales. That way you can better manage and plan your demand and inventories.
Worth the effort?
Hopefully the above example has showed that it is wise to take the effects of weather into account. How will you be able to properly forecast your demand and make planning decisions, if you are not taking these types of effects into account?
Learn more on how Solventure tackles these types of challenges with the Solventure LIFe predictive analytics. Watch our previous on demand webinar on the impact of weather on the sales.