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Forecasting; An Overview

Diversity of forecasting applications

Business,Finance,Economy,Governments
Predicting future/Predicting change
Basis for planning and decision makings
Allows one to profit from advanced knowledge
Link between internal controllables and external
uncontrollables
Always being not too wrong is better than mostly
being right

Operational planning and control;


Sales forecasts,inventory management, sales
force management,production
planning,strategic planning,what,
when,how, where, decisions

Marketing
Pricing decisions
Distribution path decisions
Advertising expenditure decisions

Financial speculation

Stock market
Interest rates
Exchange rates
Commodity prices

Economics

GDP
Consumption levels
Investment levels
Price levels
Unemployment
Business cycles
Foreign exchange rates
Interest rates
Stock market
Governments use these to guide monetary and fiscal policy
Firms use these forecasts for planning

Financial risk management


Asset return volatility forecasts
For evaluating risks and insurance
Pricing options,derivatives

Capacity planning

Demand/supply projections
Trends
Market share
Cycles, seasons
PLC

Demography
Population
by age, sex, religion, birth rates, death rates.
Crucial for
healthcare,education,nutrition,poverty
alleviation programmes etc
These are used by businesses to make their
own forecasts and strategic decisions

Others

Weather
Climate
Rain fall
Droughts
Floods

Business/Govt budgeting
Revenue forecasts
Governments; tax revenue
Business; sales revenue
Both are required for budgets
Budget is the basis for plan implementation

Crisis management
Probabilistic forecasts by banks to assess
risks
Defaults, currency devaluations, political
uncertainties

Depth and breath of the field


Enormous
One need not master all methods
because relatively a small number of tools
form the core of almost all forecasting
methods

Choice of method

Context
Relevance, availability of historical data
Degree of accuracy required
Time frame/ period of forecast
Cost benefit trade-off
Time available

Our interests

Methods
Qualitative; expert opinion, information about events-used
when data is scarce, for pioneering projects etc
Time series; historical data-trends, seasonality, cycles,
growth, irregularities
Turning points are difficult to estimate
Causal models; past is important, relationships are what
determine the future, Best for projecting turning points and
long range forecasts

Qualitative methods

Simple Average
Moving average
Exponential smoothing
Trend projections
Consumption level coefficients or end use
Growth rates

Delphi technique
Market research
Panel consensus
Visionary forecasts
Historical analogy
Relation to Govt development plans
Used at initial stages of PLC

Causal models

Time series analysis

Needs assessment
Demand forecasting
Sales forecasting
Capacity and production planning
Inventory, purchases
Distribution

Regression
Econometric models
Input-output models
Leading indicator
Life cycle analysis

Experimentation
Test marketing
Used before launch of a product new to the
market
Local manufacturers test the market with
imported products before decidiong to
manufacture locally
The result is used to forecast demand

Applicable methods
Surveys-demographic data, consumption
patterns, consumer surveys
Demand assessment through end use
Demand projections; national
regional ( basis?)
Relationship to Govt plans

Some typical business projects

Cement blocks
Roofing sheets
Timber
fishing boats
Handicrafts
Fishing nets
Workshops
Light engineering

Present context
Stages of relief, recovory and reconstruction
Standard methods may be inapplicable
Available demographic data may be
inaccurate
Forecasting is mostly for the short and
medium term
Re-establishment of business and
establishing new businesses are required

Some examples
Bakery project; geographical area/location
population
consumption patterns
future projections
Competition
Target market share
Capacity determination

Forecasting Needs
Needs for relief, recovery and
reconstruction
Potential for business development of new
businesses and re establishment of new
businesses
Forecasting is the main pre-requisite for
planning these activities