Forecasting is the process of making statements about events whose actual outcomes (typically)

have not yet been observed. A commonplace example might be estimation for some variable of
interest at some specified future date. 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 judgemental methods. Usage can differ between areas of application:
for example 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. Risk and
uncertainty are central to forecasting and prediction; it is generally considered good practice to
indicate the degree of uncertainty attaching to forecasts. The process of climate change and
increasing energy prices has led to the usage of Egain Forecasting of buildings. The method uses
Forecasting to reduce the energy needed to heat the building, thus reducing the emission of
greenhouse gases. Forecasting is used in the practice of Customer Demand Planning in every day
business forecasting for manufacturing companies. The discipline of demand planning, also
sometimes referred to as supply chain forecasting, embraces both statistical forecasting and a
consensus process. An 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.[1] There is no single right forecasting
method to use. Selection of a method should be based on your objectives and your conditions
(data etc.).[2] A good place to find a method, is by visiting a selection tree. An example of a
selection tree can be found here.[3]

In statistics, signal processing, econometrics and mathematical finance, a time series is a

sequence of data points, measured typically at successive times spaced at uniform time intervals.
Examples of time series are the daily closing value of the Dow Jones index or the annual flow
volume of the Nile River at Aswan. Time series analysis comprises methods for analyzing time
series data in order to extract meaningful statistics and other characteristics of the data. Time
series forecasting is the use of a model to forecast future events based on known past events: to
predict data points before they are measured. An example of time series forecasting in
econometrics is predicting the opening price of a stock based on its past performance. Time
series are very frequently plotted via line charts.

Time series data have a natural temporal ordering. This makes time series analysis distinct from
other common data analysis problems, in which there is no natural ordering of the observations
(e.g. explaining people's wages by reference to their education level, where the individuals' data
could be entered in any order). Time series analysis is also distinct from spatial data analysis
where the observations typically relate to geographical locations (e.g. accounting for house
prices by the location as well as the intrinsic characteristics of the houses). A time series model
will generally reflect the fact that observations close together in time will be more closely related
than observations further apart. In addition, time series models will often make use of the natural
one-way ordering of time so that values for a given period will be expressed as deriving in some
way from past values, rather than from future values (see time reversibility.)

Methods for time series analysis may be divided into two classes: frequency-domain methods
and time-domain methods. The former include auto-correlation, cross-correlation analysis,
spectral analysis and recently wavelet analysis; auto-correlation and cross-correlation analysis
can also be completed in the time domain.

causual method

Some forecasting methods use the assumption that it is possible to identify the underlying factors
that might influence the variable that is being forecast. For example, including information about
weather conditions might improve the ability of a model to predict umbrella sales. Such methods
include:

 Regression analysis includes a large group of methods that can be used to predict future
values of a variable using information about other variables. These methods include both
parametric (linear or non-linear) and non-parametric techniques.

 Autoregressive moving average with exogenous inputs (ARMAX)

 In statistics, regression analysis includes any techniques for modelling and analyzing
several variables, when the focus is on the relationship between a dependent variable and
one or more independent variables. More specifically, regression analysis helps us
understand how the typical value of the dependent variable changes when any one of the
independent variables is varied, while the other independent variables are held fixed.
Most commonly, regression analysis estimates the conditional expectation of the
dependent variable given the independent variables — that is, the average value of the
dependent variable when the independent variables are held fixed. Less commonly, the
focus is on a quantile, or other location parameter of the conditional distribution of the
dependent variable given the independent variables. In all cases, the estimation target is a
function of the independent variables called the regression function. In regression
analysis, it is also of interest to characterize the variation of the dependent variable
around the regression function, which can be described by a probability distribution.

 Regression analysis is widely used for prediction and forecasting, where its use has
substantial overlap with the field of machine learning. Regression analysis is also used to
understand which among the independent variables are related to the dependent variable,
and to explore the forms of these relationships. In restricted circumstances, regression
analysis can be used to infer causal relationships between the independent and dependent
variables.

 A large body of techniques for carrying out regression analysis has been developed.
Familiar methods such as linear regression and ordinary least squares regression are
parametric, in that the regression function is defined in terms of a finite number of
unknown parameters that are estimated from the data. Nonparametric regression refers to
 techniques that allow the regression function to lie in a specified set of functions, which
may be infinite-dimensional.

 The performance of regression analysis methods in practice depends on the form of the
data-generating process, and how it relates to the regression approach being used. Since
the true form of the data-generating process is not known, regression analysis depends to
some extent on making assumptions about this process. These assumptions are sometimes
(but not always) testable if a large amount of data is available. Regression models for
prediction are often useful even when the assumptions are moderately violated, although
they may not perform optimally. However, in many applications, especially with small
effects or questions of causality based on observational data, regression methods give
misleading results.[1][2]

Demand forecasting is the activity of estimating the quantity of a product or service that consumers will
purchase. Demand forecasting involves techniques including both informal methods, such as educated
guesses, and quantitative methods, such as the use of historical sales data or current data from test
markets. Demand forecasting may be used in making pricing decisions, in assessing future capacity
requirements, or in making decisions on whether to enter a new market.

Necessity for forecasting demand

Often forecasting demand is confused with forecasting sales. But, failing to forecast demand
ignores two important phenomena.[1] There is a lot of debate in demand-planning literature about
how to measure and represent historical demand, since the historical demand forms the basis of
forecasting. The main question is whether we should use the history of outbound shipments or
customer orders or a combination of the two as proxy for the demand.

[edit] Stock effects

The effects that inventory levels have on sales. In the extreme case of stock-outs, demand
coming into your store is not converted to sales due to a lack of availability. Demand is also
untapped when sales for an item are decreased due to a poor display location, or because the
desired sizes are no longer available. For example, when a consumer electronics retailer does not
display a particular flat-screen TV, sales for that model are typically lower than the sales for
models on display. And in fashion retailing, once the stock level of a particular sweater falls to
the point where standard sizes are no longer available, sales of that item are diminished.

[edit] Market response effect

The effect of market events that are within and beyond a retailer’s control. Demand for an item
will likely rise if a competitor increases the price or if you promote the item in your weekly
circular. The resulting sales a change in demand as a result of consumers responding to stimuli
that potentially drive additional sales. Regardless of the stimuli, these forces need to be factored
into planning and managed within the demand forecast.

In this case demand forecasting uses techniques in causal modeling. Demand forecast modeling
considers the size of the market and the dynamics of market share versus competitors and its
effect on firm demand over a period of time. In the manufacturer to retailer model, promotional
events are an important causal factor in influencing demand. These promotions can be modeled
with intervention models or use a consensus to aggregate intelligence using internal collaboration
with the Sales and Marketing functions.

[edit] Methods
No demand forecasting method is 100% accurate. Combined forecasts improve accuracy and
reduce the likelihood of large errors. Reference class forecasting was developed to reduce error
and increase accuracy in forecasting, including in demand forecasting.[2][3]

[edit] Methods that rely on qualitative assessment

Delphi is based on the principle that forecasts (or decisions) from a structured group of individuals are
more accurate than those from unstructured groups. [6] This has been indicated with the term "collective
intelligence".[7] The technique can also be adapted for use in face-to-face meetings, and is then called
mini-Delphi or Estimate-Talk-Estimate (ETE). Delphi has been widely used for business forecasting and
has certain advantages over another structured forecasting approach, prediction markets.[8]

Data mining, a branch of computer science[1] and artificial intelligence,[2] is the process of
extracting patterns from data. Data mining is seen as an increasingly important tool by modern
business to transform data into business intelligence giving an informational advantage. It is
currently used in a wide range of profiling practices, such as marketing, surveillance, fraud
detection, and scientific discovery.

The related terms data dredging, data fishing and data snooping refer to the use of data mining
techniques to sample portions of the larger population data set that are (or may be) too small for
reliable statistical inferences to be made about the validity of any patterns discovered. These
techniques can, however, be used in the creation of new hypotheses to test against the larger data
populations.