The two-minute guide to understanding and selecting the right Descriptive,

Predictive, and Prescriptive Analytics

With the flood of data available to businesses regarding their supply chain these days,
companies are turning to analytics solutions to extract meaning from the huge volumes
of data to help improve decision making

Companies that are attempting to optimize their S&OP efforts need capabilities to analyze
historical data, forecast what might happen in the future. The promise of doing it right and
becoming a data driven organization is great. Huge ROI’s can be enjoyed as evidenced
by companies that have optimized their supply chain, lowered operating costs, increased
revenues, or improved their customer service and product mix.

Looking at all the analytic options can be a daunting task. However, luckily these analytic
options can be categorized at a high level into three distinct types. No one type of analytic
is better than another, and in fact, they co-exist with, and complement each other. In order
for a business have a holistic view of the market and how a company competes efficiently
within that market requires a robust analytic environment which includes:

 Descriptive Analytics, which use data aggregation and data mining to provide insight into the
past and answer: “What has happened?”

 Predictive Analytics, which use statistical models and forecasts techniques to understand the
future and answer: “What could happen?”

 Prescriptive Analytics, which use optimization and simulation algorithms to advice on possible
outcomes and answer: “What should we do?”

Descriptive Analytics: Insight into the past

Descriptive analysis or statistics does exactly what the name implies they “Describe”, or
summarize raw data and make it something that is interpretable by humans. They are
analytics that describe the past. The past refers to any point of time that an event has
occurred, whether it is one minute ago, or one year ago. Descriptive analytics are useful
because they allow us to learn from past behaviors, and understand how they might
influence future outcomes.

The vast majority of the statistics we use fall into this category. (Think basic arithmetic
like sums, averages, percent changes). Usually, the underlying data is a count, or
aggregate of a filtered column of data to which basic math is applied. For all practical
purposes, there are an infinite number of these statistics. Descriptive statistics are useful
to show things like, total stock in inventory, average dollars spent per customer and Year
over year change in sales. Common examples of descriptive analytics are reports that
provide historical insights regarding the company’s production, financials, operations,
sales, finance, inventory and customers.
 Use Descriptive Analytics when you need to understand at an aggregate level what is
going on in your company, and when you want to summarize and describe different
aspects of your business.

Predictive Analytics: Understanding the future

Predictive analytics has its roots in the ability to “Predict” what might happen. These
analytics are about understanding the future. Predictive analytics provides companies
with actionable insights based on data. Predictive analytics provide estimates about the
likelihood of a future outcome. It is important to remember that no statistical algorithm can
“predict” the future with 100% certainty. Companies use these statistics to forecast what
might happen in the future. This is because the foundation of predictive analytics is based
on probabilities.

These statistics try to take the data that you have, and fill in the missing data with best
guesses. They combine historical data found in ERP, CRM, HR and POS systems to
identify patterns in the data and apply statistical models and algorithms to capture
relationships between various data sets. Companies use Predictive statistics and
analytics anytime they want to look into the future. Predictive analytics can be used
throughout the organization, from forecasting customer behavior and purchasing patterns
to identifying trends in sales activities. They also help forecast demand for inputs from
the supply chain, operations and inventory.

One common application most people are familiar with is the use of predictive analytics
to produce a credit score. These scores are used by financial services to determine the
probability of customers making future credit payments on time. Typical business uses
include, understanding how sales might close at the end of the year, predicting what items
customers will purchase together, or forecasting inventory levels based upon a myriad of
variables.

Use Predictive Analytics any time you need to know something about the future, or fill in
the information that you do not have.

Prescriptive Analytics: Advise on possible outcomes

The relatively new field of prescriptive analytics allows users to “prescribe” a number of
different possible actions to and guide them towards a solution. In a nut-shell, these
analytics are all about providing advice. Prescriptive analytics attempt to quantify the
effect of future decisions in order to advise on possible outcomes before the decisions
are actually made. At their best, prescriptive analytics predicts not only what will happen,
but also why it will happen providing recommendations regarding actions that will take
advantage of the predictions.

These analytics go beyond descriptive and predictive analytics by recommending one or

more possible courses of action. Essentially they predict multiple futures and allow
companies to assess a number of possible outcomes based upon their actions.
Prescriptive analytics use a combination of techniques and tools such as business rules,
algorithms, machine learning and computational modelling procedures. These techniques
are applied against input from many different data sets including historical and
transactional data, real-time data feeds, and big data.

Prescriptive analytics are relatively complex to administer, and most companies are not
yet using them in their daily course of business. When implemented correctly, they can
have a large impact on how businesses make decisions, and on the company’s bottom
line. Larger companies are successfully using prescriptive analytics to optimize
production, scheduling and inventory in the supply chain to make sure that are
delivering the right products at the right time and optimizing the customer experience.

Use Prescriptive Analytics anytime you need to provide users with advice on what action
to take.

The goal of Data Analytics (big and small) is to get actionable insights resulting
in smarter decisions and better business outcomes. How you architect business
technologies and design data analytics processes to get valuable, actionable insights
varies.

It is critical to design and build a data warehouse / business intelligence (BI)

architecture that provides a flexible, multi-faceted analytical ecosystem, optimized for
efficient ingestion and analysis of large and diverse datasets.

There are three types of data analysis:

Predictive (forecasting)
Descriptive (business intelligence and data mining)
Prescriptive (optimization and simulation)

Predictive Analytics

Predictive analytics turns data into valuable, actionable information. Predictive analytics
uses data to determine the probable future outcome of an event or a likelihood of a
situation occurring.

Predictive analytics encompasses a variety of statistical techniques from

modeling, machine learning, data mining and game theory that analyze current and
historical facts to make predictions about future events.

In business, predictive models exploit patterns found in historical and transactional data
to identify risks and opportunities. Models capture relationships among many factors to
allow assessment of risk or potential associated with a particular set of conditions,
guiding decision making for candidate transactions.

Three basic cornerstones of predictive analytics are:

Predictive modeling
Decision Analysis and Optimization
Transaction Profiling

An example of using predictive analytics is optimizing customer relationship

management systems. They can help enable an organization to analyze all customer
data therefore exposing patterns that predict customer behavior.

Another example is for an organization that offers multiple products, predictive analytics
can help analyze customers’ spending, usage and other behavior, leading to
efficient cross sales, or selling additional products to current customers. This directly
leads to higher profitability per customer and stronger customer relationships.

An organization must invest in a team of experts (data scientists) and create statistical
algorithms for finding and accessing relevant data. The data analytics team works with
business leaders to design a strategy for using predictive information.

Descriptive Analytics

Descriptive analytics looks at data and analyzes past events for insight as to how to
approach the future. Descriptive analytics looks at past performance and understands
that performance by mining historical data to look for the reasons behind past success
or failure. Almost all management reporting such as sales, marketing, operations, and
finance, uses this type of post-mortem analysis.

Descriptive models quantify relationships in data in a way that is often used to classify
customers or prospects into groups. Unlike predictive models that focus on predicting a
single customer behavior (such as credit risk), descriptive models identify many different
relationships between customers or products. Descriptive models do not rank-order
customers by their likelihood of taking a particular action the way predictive models do.

Descriptive models can be used, for example, to categorize customers by their product
preferences and life stage. Descriptive modeling tools can be utilized to develop further
models that can simulate large number of individualized agents and make predictions.
For example, descriptive analytics examines historical electricity usage data to help plan
power needs and allow electric companies to set optimal prices.

Prescriptive Analytics

Prescriptive analytics automatically synthesizes big data, mathematical

sciences, business rules, and machine learning to make predictions and then suggests
decision options to take advantage of the predictions.

Prescriptive analytics goes beyond predicting future outcomes by also suggesting

actions to benefit from the predictions and showing the decision maker the implications
of each decision option. Prescriptive analytics not only anticipates what will happen and
when it will happen, but also why it will happen.

Further, prescriptive analytics can suggest decision options on how to take advantage
of a future opportunity or mitigate a future risk and illustrate the implication of each
decision option. In practice, prescriptive analytics can continually and automatically
process new data to improve prediction accuracy and provide better decision options.

Prescriptive analytics synergistically combines data, business rules, and mathematical

models. The data inputs to prescriptive analytics may come from multiple sources,
internal (inside the organization) and external (social media, et al.). The data may also
be structured, which includes numerical and categorical data, as well as unstructured
data, such as text, images, audio, and video data, including big data. Business rules
define the business process and include constraints, preferences, policies, best
practices, and boundaries. Mathematical models are techniques derived from
mathematical sciences and related disciplines including applied statistics, machine
learning, operations research, and natural language processing.

For example, prescriptive analytics can benefit healthcare strategic planning by using
analytics to leverage operational and usage data combined with data of external factors
such as economic data, population demographic trends and population health trends, to
more accurately plan for future capital investments such as new facilities and equipment
utilization as well as understand the trade-offs between adding additional beds and
expanding an existing facility versus building a new one.

Another example is energy and utilities. Natural gas prices fluctuate dramatically
depending upon supply, demand, econometrics, geo-politics, and weather conditions.
Gas producers, transmission (pipeline) companies and utility firms have a keen interest
in more accurately predicting gas prices so that they can lock in favorable terms while
hedging downside risk. Prescriptive analytics can accurately predict prices by modeling
internal and external variables simultaneously and also provide decision options and
show the impact of each decision option.