PREDICTIVE ANALYTICS

AND BUSINESS
APPLICATIONS
Predictive analytics or Predictive
modelling

 It is the use of statistical techniques, modelling, machine learning and data

mining to analyse past and present data to make predictions about future
events.
 Eg. Predicting future Demand, Predicting if a loan will become default,
Predicting a possible Bank fraud etc.

MONITORING PREDICTIVE
DATA ANALYSIS THE MODELS ANALYTICS
Predictive Analytics Process

 DEFINE THE PROJECT

 DATA COLLECTION
 DATA ANALYSIS
 USE STATISTICS
 MODELLING
 DEPLOYMENT OF ANALYSIS RESULTS
 MODEL MONITORING
ADVANTAGES AND APPLICATIONS OF
PREDICTIVE ANALYTICS
 DETECTING FRAUD IN BANKING
 OPTIMISING MARKETING CAMPAIGNS (CROSS SELLING OPPORTUNITIES, PREDICT
CUSTOMER RESPONSE, CUSTOMER CHURN PREDICTION)
 IMPROVING OPERATIONS ( FORECAST DEMAND, INVENTORIES, PRICE FIXING,
NUMBER OF GUESTS ARRIVING, )
 REDUCING RISK ( CREDIT SCORES OF CUSTOMERS TO PREDICT DEFAULT, NUMBER
OF INSURANCE CLAIMS, DEFAULT POLICIES, BAD DEBTS)
 BANKING APPLICATIONS
 OIL AND GAS
 HEALTH INSURANCE
 RETAIL
 GOVT. ( POPULATION TRENDS, CYBER SECURITY, FRAUD DETECTION)
 MANUFACTURING ( IDENTIFY QUALITY PROBLEMS, PRODUCTION FAILURE,
WARRANTY CLAIMS)
TYPES OF PREDICTIVE ANALYTICS

TYPES OF PREDICTIVE
ANALYTICS

LOGIC DRIVEN MODELS

DATA DRIVEN MODELS
BASED ON EXPERIENCE,
Models used to predict future
KNOWLEDGE AND LOGICAL
quantitative outcomes based
RELATION OF VARIABLES
on past data available
Eg. Cause and effect diagram
Eg. Retail Price mark down
Permits the user to assume
model to predict timing and
relations between outcome and
amount of mark down
possible causes.
Logic Driven Predictive Models
 These Predictive models are built using the experience and logic of
researchers. Due to their experience, they are able to identify the possible
variables that cause the problem or Effect.
 The main problem could be Poor quality of output or poor customer
satisfaction or poor performance in sports. The researcher is able to identify
some variables that may cause this problem. The variables can be identified
as major variables, then broken down in to sub- variables.
 Eg. Suppose the Main Problem is Poor quality of products manufactured. We
can assume 4 major variables that may cause this problem. They are related
to materials, machines, labour an Technology.
 In Materials, we can identify sub-problems like quality of materials, delivery
delay, storage of materials etc. Like this we can go deep into the problem and
take corrective actions.
 Fish Bone Diagram or Cause – effect diagram is an example of Logic Driven
Predictive model. It shows the main problem, main causes, sub-causes etc.
Cause – Effect Diagram or Fish bone
diagram is a Logic Driven model
 Here, the EFFECT means the outcome or the problem. Eg. A company faces a
Quality problem. It is the Head of the Fish.
 CAUSE means the possible reasons that may lead to the problem or EFFECT. Eg.
Quality problem may be due to 4 main causes, Material related, Labour related,
Management related, Process related.
 The main bones of the fish are the main causes. Then we can further identify the
sub-causes or issues that lead to the main cause. The sub-causes are shown as the
small fish bones.( second level causes). Further we can identify the next lower
level of causes.( Third level causes)
 Eg. Second level problem related to Materials can be, poor raw material quality,
delay in delivery, poor finish etc
 Third level causes of Poor raw material quality can be Location, poor technology,
poor logistics
Cause-and-Effect Diagram to find a solution
to Missing throws in Basketball
Material Method
(ball) (shooting process)
Grain/Feel Aiming point
(grip)
Size of ball
Air pressure Bend knees
Hand position
Balance
Lopsidedness
Follow-through
Missed
Training
free-throws
Rim size

Conditioning Motivation Rim height

Consistency Rim alignment Backboard

stability
Concentration

Machine
Manpower
(hoop & Figure 6.7
(shooter)
backboard)
Single period Purchase problem is
another example for Logic driven model
 Decision to be taken on how much quantity of newspaper or Valatines cards to be purchased by a
retailer. It depends on the experience about Demand and discount rate. Some quantity can be
sold at normal price R and unsold quantity has to be sold at a Discount price.
 If Purchase Price is C
 Selling normal Price is R
 Selling Discount price is S
 Quantity purchased is Q
 Expected quantity demanded is D
 Then Profit = Sales value – Purchase cost
 Sales value = R x Quantity sold + S x Surplus quantity
 Purchase cost = Q x C
 Profits = Sales value – purchase cost.
 The seller uses his experience to fix a Demand and Discount rate.
 This model can predict profits for any given value of D and Q.
 This model can be implemented in Excel Spreadsheet.
DATA DRIVEN PREDICTIVE MODEL
 These models can predict future outcomes quantitatively using past data.
 Eg. Sales forecasting models where past data on Sales and Advertisement are
available. Regression model, Time series model.
 Eg. Retail Pricing Mark down model
 In Retail shops, new stocks are sold at a certain price. After some time the
demand comes down or becomes out of fashion. So the balance stocks are to
be sold at a mark down price or Discounted Price. This Mark down gradually
increases weekly or daily till all stocks are sold.
 The Retail Pricing Mark down model can predict the timing when the mark
down to be announced and what level of mark down to be offered each day or
week so that total stocks can be cleared over a particular time period. The
model uses past data of quantities sold at various price levels.
 Eg. A store has 1000 units of Umbrellas in stock. They want to clear the stock
in a time period of 1 year. Using past year sales data and price, the Model will
advise when to start the discount sale and how much discount to be offered
every week, till the end. It can also estimate the Profits earned.
MODELLING RELATIONSHIPS OR FORMULA
IN PREDICTIVE ANALYTICS
 LINEAR FUNCTION Y = A + BX.
 Eg. Linear Regression model where Sales Y can be predicted as a
Constant A + B x Advertisement budget. From past data on
advertisement and sales, we can predict the future sale in any
year, if the advertisement budget is given.
 Polynomial function- function with square or cube variables.
 Eg. Multiple regression model Y = a + bX + c z2 + d k3
 Logarithmic Function Y = log X
 Power function Y = axb
MODELS INVOLVING UNCERTAINTY

 WHAT IF ANALYSIS
 SENSITIVITY ANALYSIS
 GOAL SEEKING ANALYSIS
 OPTIMISATION ANALYSIS
WHAT IF ANALYSIS
 AN ANALYSIS THAT HELPS TO FIND OUT , HOW MUCH THE OUTCOME WILL
CHANGE IF ONE INPUT OF THE MODEL CHANGE BY CERTAIL %.
 Eg. A model that estimates how much the inventory cost change if the
carrying cost change by 2 %
 How much the total profit change if the Bank loan interest change by 2 %.
 How much the Sales will change if the advertisement budget increased by
10%. ( Advertisement elasticity)
 Tools in Excel for What – If analysis
 Scenarios. Excel saves each % or change in a variable as a scenario. We can
ask Excel to compute Sales for each scenario of Advertisement increase
10%, 15%, 20% etc.
Sensitivity analysis
 It is similar to What if analysis.
 It studies the change in output of a Model, for a very small change in input
variable.
 Automatic sensitivity analysis allows only one variable change at a time. It
provides quick results.
 Trial and error sensitivity analysis. It permits changes in more than one
parameters. By making several changes in variable values and estimating
the output, by trial and error, we get better and better solutions.
Goal seeking analysis
 It determines the value of inputs required to achieve a certain output or
achieve the goal
 Eg. To achieve 20% growth in Profits, how much advertisement budget is
required?
 To reduce Patient waiting time in a Hospital to 10 min, how many Doctors
should be available?
 Goal seeking analysis can be considered the reverse direction of What if
analysis.
 In What if analysis, an input is varied and its effect on the output is
studied. In Goal seeking analysis, the change in output required is decided
and the corresponding input required is studied.
 Both these can be done in Excel
Optimisation analysis

 This is an extension of the Goal seeking analysis. The

desired output is determined first. Eg. To get maximum
profit, The inputs like material, labor etc are decided
using optimization and constraints. Different
combinations of inputs are tried out considering the
constraints.
 Instead of setting a fixed value for output variable, the
optimum value is found varying the input combinations
many times, considering the constraints.
Application of analytics in other areas of
business
 TELECOM
 Objectives-
 Increase sales
 Reduce customer complaints
 Build customer relations
 Improve service quality
 Effectiveness of promotions
 Application of analytics in Telecom
 Customer data capturing, data mining to identify good customers
 Customer activity analysis , customer complaints analysis, Social media
analytics, segmentation, billing data analysis, churn prediction.
Location based intelligence in Marketing
 Retailing- to provide the right product at the right location. Suggest the
nearest store.
 Rearranging inventory between stores depending on fast moving/ slow
moving data.
 Geographical segmentation
 Combine instore data with web, social media data to understand new
customer trends.
 Location based apps( Uber)
 Tesco virtual ordering wall in a metro station.
 Nestle tracks location of Candy bar users and announces prize for lucky
customers.
Analytics in FMCG/ Packaged goods
 Direct consumer relations
 Mobile and location based services
 Demand forecasting
 SCM
 Product acceleration-Fast launching of new products, virtual prototypes,
virtual market tests
 Store clustering- making groups of stores with common characteristics
 Markdown pricing administration
 Shelf space allocation
 Retail planograms, color combination of mannequins
Analytics in utilities( Electricity, BSNL,
Water supply, Gas )
 Tariff fixing and changing periodically
 Quality monitoring of transmission and distribution lines
 Customer complaints analysis
 Down time and repair data analysis
 Billing cycle generation
 Connected load and overload monitoring
 Asset management
 Reduce fraud, wastage
 Ocean floor drilling data
 Operation management
Analytics in Retail
 Product assortment decisions
 Pricing and labels
 Markdown pricing management
 In store display arrangement
 SCM
 Billing, RFID
 Customer profiling, Data mining
 CRM
 Coupons and incentives management
 Operations management
 Credit checking and management
 Next best store, online messages, promotions
Analytics in Online Retailing
 Also called Click retailing, e-tailing, web retailing, internet retailing
 Firms like Amazon, Flipcart operates entirely through a website where customers
can shop, without going to a store.
 There are many types of Online Retailing like B2C retailing, B2B selling, C2B selling
, C2C etc
 Analytics can be applied in Online Retailing in the following areas
 Product assortment or Product mix decision. Optimising product Mix.
 Customised Product recommendations
 Material movement and SCM
 Predictive search utilizing past clickstream data analysis.
 Promotions
 Next Best Product suggestions ( inform about related products)
 Fraud management and security
 Business Intelligence, Competition analysis