Probabilistic Forecasting - Forecasting In The Face Of Uncertainty - Multiple Items(Monte Carlo)

Multiple Item Forecasts

The rate at which stories get done, can help us figure out what the capacity of a team is for a given period of time. We need to make sure that we do not fall into the Flaw of Averages trap though. We have to model the inherent uncertainty in our processes in order to make sensible predictions for a team. Apart from how long it takes for things to get done, uncertainty also presents itself in the form of how many things get done on a given day. Using the historical trends of how many things are getting done on a daily basis we can model the future, assuming that the team will behave the way it has behaved in the past. This, in essence, is the Monte Carlo method. Monte Carlo uses data from the past to give us probabilistic capacity for a team. We assume that if, say in the past 30 days there have been 3 days when the team closed 2 stories, then there is a 10% (3 divided by 30) likelihood that any random day in the future, the team will close 2 stories.

Monte Carlo Method

The Monte Carlo method(One variation of it) as we use it, runs through the following steps -

1. We determine a past range to use and a future range to predict.
   1. The range we select is usually in the order of a few weeks.
   2. We use the latest few weeks as we believe that the latest data is the best representation of future performance.
2. For the first day in the future range that we are trying to predict, we randomly select a day from the past range.
   1. The throughput from the randomly selected day in the past is assigned to the day in the future range we are trying to predict.
3. Step 2 is repeated for all days in the future that we are trying to predict.
4. When all the days have been predicted using the past range, the total of all the throughputs assigned to the future days, gives us one answer for how many stories can the team get done.
   1. We record this throughput as one possible result, which can answer how much capacity thee team has for a given time period.
5. We repeat steps 2 through 4 a few thousand times and gather the results of each of those simulations.

The results of these simulations can be over a wide range, depending on the variability in the team's processes(i.e., fluctuations in number of stories closed on a daily basis) and the length of time we are trying to predict over. The numerous predictions though, all represent the possibilities available to us to choose from. Based on the distribution of these possibilities, we can start saying what is the probability that we can get at least x number of stories done. For example, if 85 percent of our simulations told us that over the next 60 days a team can do either 30 stories or more than 30 stories, we can say that we have an 85% confidence that the team can do 30 or more stories. The same set of simulations might have 50 percent of our results be 40 stories or more. This would give us a 50% confidence that the team can do 40 stories or more over the next 60 days. We can now plan according to the amount of risk we are willing to take. If we plan for more stories, at least we are aware of the amount of risk we are taking.

Next : Uncertainty And Predictions