Forecasting

Forecasting is the process of making statements about events whose actual outcomes (typically) have not yet been observed. Prediction is a similar, but more general term. Both might refer to formal statistical methods employing time series, cross-sectional or longitudinal data, or alternatively to less formal udgemental methods. !sage can differ between areas of application" for e#ample in hydrology, the terms $forecast$ and $forecasting$ are sometimes reserved for estimates of values at certain specific future times, while the term $prediction$ is used for more general estimates, such as the number of times floods will occur over a long period. %isk and uncertainty are central to forecasting and prediction& it is generally considered good practice to indicate the degree of uncertainty attaching to forecasts Forecasting is used in the practice of 'ustomer (emand Planning in every day business forecasting for manufacturing companies. )he discipline of demand planning, also sometimes referred to as supply chain forecasting, embraces both statistical forecasting and a consensus process. *n important, albeit often ignored aspect of forecasting, is the relationship it holds with planning. Forecasting can be described as predicting what the future will look like, whereas planning predicts what the future should look like. )here is no single right forecasting method to use. +election of a method should be based on your ob ectives and your conditions (data etc.). 'ategories of forecasting method" o Time series methods use historical data as the basis of estimating future outcomes.

Causal / econometric methods" +ome forecasting methods use the assumption that it is possible to identify the underlying factors that might influence the variable that is being forecast. For e#ample, sales of umbrellas might be associated with weather conditions. ,f the causes are understood, pro ections of the influencing variables can be made and used in the forecast. o Judgmental forecasting methods incorporate intuitive udgements, opinions and sub ective probability estimates. )he forecast error is the difference between the actual value and the forecast value for the corresponding period. -t ./t 0 Ft, where - is the forecast error at period t, / is the actual value at period t, and F is the forecast for period t. Forecasting has application in many situations" o Supply chain management - Forecasting can be used in +upply 'hain 1anagement to make sure that the right product is at the right place at the right time. *ccurate forecasting will help retailers reduce e#cess inventory and therefore increase profit margin. *ccurate forecasting will also help them meet consumer demand. o Product forecasting is the science of predicting the degree of success a new product will en oy in the marketplace. )o do this, the forecasting model must take into account such things as product awareness, distribution, price, fulfilling unmet needs and competitive alternatives o Sales forecasting: )hese forecasts are generally based primarily on recent sales trends, competitive developments, and economic trends in the industry, region, and2or nation in which the organi3ation conducts business. +ales forecasting is management4s primary tool for predicting the volume of attainable
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sales. )herefore, the whole budget process hinges on an accurate, timely sales forecast.

Time series analysis ,n the conte#t of economic and business planning, we may obtain 5uite often data relating to some time period concerning a given phenomenon. +uch data is labeled as 6time series7. 1ore clearly, a series of successive observations of a given phenomenon over a period of time is referred to as time series. +uch series are usually the result of the effects of one or more of the following factors" 8. +ecular trend or long term trend that shows the direction of the series in a long period of time. )he effect of trend (whether it happens to be a growth factor or a decline factor) is gradual, but e#tends more or less consistently throughout the entire period of time under consideration. +ometimes, secular trend is simply stated as trend (or )) 9. +hort time oscillations i.e., changes taking place in the short period of time only and such changes can be the effect of the following factors a. 'yclical fluctuations (or ') are the fluctuations as a result of business cycles and are generally referred to as long term movements that represent consistently recurring rises and declines in an activity. b. +easonal fluctuations (or +) are of short duration occurring in a regular se5uence at specific intervals. +uch fluctuations are the result of changing seasons. !sually, these fluctuations involve patterns of change within a year that tend to be repeated from year to year. 'yclical fluctuations and seasonal fluctuations taken together constitute short period regular fluctuations. c. ,rregular fluctuations (or ,), also known as random fluctuations are variations which take place in a completely unpredictable fashion. *ll these factors stated above are termed as components of time series and when we try to analy3e time series, we try to isolate and measure the effects of various types of these factors on a series. )he analysis of time series is done to understand the dynamic conditions for achieving the short term and long term goals of business firms. )he past trends can be used to evaluate the success or failure of management policy or policies practiced hitherto. :n the basis of past trends, the future patterns can be predicted and policy or policies may accordingly be formulated. ;e can as well study properly the effects of factors causing changes in the short period of time only, once we have eliminated the effects of trend. By studying cyclical variations, we can keep in view the impact of cyclical changes while formulating various policies to make them as realistic as possible. )he knowledge of seasonal variation will be of great help to us in taking decisions regarding inventory, production, purchases and sales policies so as to optimi3e working results. )hus, analysis of time series is important in conte#t of long term as well as short term forecasting and is considered a very powerful tool in the hands of business analysis and researchers. Ref. <othari ' %, Research Methodology: Methods and Principles, =ew *ge Publishers, =ew (elhi, First edition (8>?@) , pp 8A?-A>