Abstract for: Pushing the Limits – Using System Dynamics to Forecast Short-Term Commodity Price Movements
Information derived from forecasts forms the basis for companies’ strategic decision-making processes. Forecast accuracy can thus have a significant impact on the bottom line. While scholars discuss the usefulness of System Dynamics for carrying out forecasts in general, it is recognized that it should mainly be applied to provide insight into long-term developments, and not for short-term forecasts. In this paper we challenge these assumptions and propose that when expertly and rigorously wielded it can produce valuable results. To illustrate our point we provide the example of a short-term price forecasting model developed for a large global petrochemical company. We first portray limitations and benefits of forecasts in general and System Dynamics-based forecasts in particular. We then present the challenge posed by the company, and how a somewhat unorthodox yet still rigorous process based on System Dynamics tools, methods and insights delivered value to the client – even if the eventual forecasting model used to do so contained no significant feedback loops. We conclude by discussing the benefits of using System Dynamics outside of what can be considered its typical field of application, and by stressing the extensive and varied use of data that permeated the whole process.