FORECASTING

What is the Role of Forecasting?

• Forecasting is the process of estimating the relevant events of the future, based on the
analysis of their past and present behavior.
• The past and present analysis of events provides the base helpful for collecting information
about their future occurrence
Elements of Forecasting
1. Developing the groundwork, It carries out an orderly investigation of products, companies,
and industry
2. Estimating the future of the business
3. Comparing actual with estimated results
4. Refining the forecast
Three Basic Types of Forecasting
1. Qualitative techniques
2. Time Series Analysis and Projection
3. And Causal Models
Each type has different uses so it is important to pick the one that will help you meet your
goals
Six Steps in Business Forecasting
1. Identify the Problem 4. Choose the Forecasting Model
2. Collect Information 5. Data Analysis
3. Perform a Preliminary Analysis 6. Verify Model Performance
Forecasting pertains to planning future sales, earnings, revenue, cost, and other variables that can
be used to help the firm’s operation.
It is the starting point of the planning stage of an organization in whatever industry they belong
to, the primary objectives and goals are to reduce the risk of uncertainty that the firm may face
and match the demand and supply of the industry.
2 Aspects of Forecasting
1. Expected Level of Demand 2. Degree of Accuracy

It has reference to time horizon, which can be in a short time, (an hour, a day, a week, or a
month) or sometimes longer (six months, next year, or the entire life of the product or service.
Short-term forecast- pertains to ongoing operations
Long Range Forecasts - is one of the important strategic tools that one’s organization can use,
particularly for innovative product and services, new equipment, new facility, or anything that
requires a long period to develop or implement
Forecasts are normally the basis of the following areas in the business organization;
1. Budgeting 4. Production and Inventory
2. Planning Capacity 5. Personnel
3. Sales 6. Purchasing
• Accounting- New products and services cost estimation, projection of profits, and cash
management
• Human Resources- Hiring activities, which include recruitment, interview, learning, and
development, layoff, and outplacement counseling
• Marketing- Pricing and promotional strategies for local and global scale
• Management Information System - new information system as well as internet providers
• Operations - Scheduling, capacity planning, workloads, and assignments, inventory planning,
purchasing, outsourcing, and project management.
• Production and Service Design - modification of current features, new design of products
and services.
• Yield Management - pertains to the percentage of the capacity being used by the organization
to stock goods and products.
Two Uses of Forecasts
1. To plan the system- involves long-range forecasts wherein it tackles the innovation of
products and services, what are the equipment and facilities needed, and the location
2. Plan the use of the system- Pertains to the short-range forecasts such as inventory, and
purchasing, as well as the workloads and assignments, production, budgeting, and
scheduling.
8 Benefits of Forecasting Revenue
1. Brings in more investors 6. Helps you know your customers better
2. Budgets business expenses 7. Manages cash flow credits
3. Justifies hiring decisions 8. Contributes to sales and product
4. Executes strategic planning analysis
5. Improves production scheduling

Three disadvantages of Forecasting

1. Forecasts are never 100% accurate
2. It can be time-consuming and resource intensive
3. It can be costly
What are the factors affecting forecasting?
• Economic,
• Social,
• Climate is a factor that could be circumstantial in any profound change. Technology
directly influences consumer habits in a very special way.
What are the different forecast models?
• North American Model (NAM (formally ETA)
• Global Forecast System (GFS)
• Nested Grid Model (NGM)

The DELPHI Method is very commonly used in forecasting, where a panel of experts is
questioned about a situation, and based on their written opinions, analysis is up with a forecast.
Human Resource Forecasting, Its Benefits
• HR Forecasting and analysis help you predict turnover related to retirement or market
competition. It can help you analyze how business strategy changes will impact your
workforce including the production of a new product. Change in target audience, or the
introduction of new employment.
Sales forecasting techniques
• Survey of buyers intentions • Products in use analysis
• Opinion poll of sales force • Industry forecast and share of the sales
• Expert opinion of the industry
• Market test method • Statistical demand analysis
• Projection of past sales

7 Elements of Good Forecasting Techniques

• The forecast must be timely • The forecast must be in writing
• The forecast must be accurate • The forecast and technique to be used
• The forecast must be reliable must be simple to understand and use
• The forecast must be conveyed in • The forecast must be cost efficient
meaningful units

Importance of Forecast in Supply Chain Management

• Inaccurate forecast has a great impact on the supply chain and can lead to shortages and/or
excesses in the entire supply chain
• Shortages can lead to work disruption, and a shortage of deliveries, which will somehow
affect the satisfaction of the customers, which will affect the whole operation of the
business.
• Inaccurate forecasts lead to an excess of raw materials and other products
• It will take time to store the inventory and will occupy the capacity much longer than the
usual time.
How to reduce these occurrences?
1. Develop the best forecast to be used
2. Collaborative planning and forecasting with major players in the supply chain
3. Information sharing among partners and increasing the visibility of real-time information
access among them
4. Rapid communication for accurate forecasts as well as the occurrences of unfortunate
events or any changes in the operation
Steps in the Forecasting Process
1. Determine the purpose of the forecast- determine a purpose
2. Establish a time horizon- should have a timeline
3. Obtain, clean, and analyze appropriate data- acquire significant data
4. Select Forecasting Technique- choose the right technique
5. Make a forecast- determine where to plot the technique
6. Monitor the forecast- This is done to determine the performance of the forecast. If there
are irregularities, try to revalidate, and re-examine the assumptions, and methods used.
Modify or revise if necessary.
2 Approaches to Forecasting
Qualitative Approach - usually subjective, which sometimes disregards numerical
description.
➢ It generally incorporates factors such as decision-makers' intuition, emotions, personal
experiences, and value systems as well It is sometimes called judgmental forecasting
Quantitative Approach - This involves projection and historical data as well as the
development of associative and causal models in making forecasts. It also uses mathematical
models.
 Qualitative/Judgmental Quantitative
Forecasting

Expert Opinion Trend, Seasonality

Delphi Method Cycles, Irregular Variations

Sales Force Polling Random variations

Naive Model

Moving Average

Weighted Moving Average

Exponential Smoothing

Trend projection

Linear Progression, Correlation

Coefficient

Qualitative Approach
• Expert Opinion - View of Managers or a group with a high degree of knowledge, often
with a mixture of statistical models
• Delphi Method - Same as Expert’s Opinions, group of professionals
• Sales Force Polling - The sales force is used by the Company to attain their sales forecast,
the sales persons, approximate the sales
• Consumer market Survey - Firms, at times, conduct their consumer or potential customer
survey to accumulate information regarding future purchasing plans.
• Time Series - is a time-ordered arrangement of observations taken on a regular interval, It
can be hours, daily, weekly, monthly, quarterly, semi-annually, and annually. It can be used
to measure demands, earnings, profits, shipments, event occurrences, productivity, price
indexes, as well as outputs.
In time series, the analyst must identify the essential behavior of the series, by plotting the data
and analyzing the plot. The behaviors can be defined as follows;
• Trend - is a slow upward or downward movement of the data, over time. Changes in
income, population, age distribution, or cultural views may account for movement in trend.
• Seasonality - It is a data pattern that repeats itself after days, weeks, months, quarters

Period Pattern *Season* Length Number of “Seasons” in Pattern

Week Day 7

Month Week 4-4 1/2

Month Day 28-31

Year Quarter 4

Year Month 12

Year Week 52
Cycle - a pattern of data that happens every numerous years. It is typically supplementary to the
business cycle and is very vital in short-term business analysis and planning.
Irregular variations - these are due to unusual circumstances such as Force Majeure, strikes, and
major changes in the product and services
Random Variations - are remaining variations that continue after all other behaviors have been
accounted for.
Choosing a Forecasting Technique
When choosing what technique to be used, consider the following;
• Cost
• Accuracy
• Availability of Historical data
• Availability of Computer hardware
• Time allotted to gather and analyze the data as well as the preparation.
Managers can use the following when using forecast information;
• Reactive Approach - it is a view of forecasts as possible future demand, and the Manager can
react and try to meet the demand.
• Proactive Approach - it seeks to influence the demand. Managers tend to do this by the use
of advertising, pricing, or product and service charges.
The Use of Computer Software in Forecasting
• Computer applications and software play a vital role in forecasting specifically for a
quantitative approach
• It allows the Manager to analyze the data quickly and easily, as well as it can be revised right
away if necessary.
• There are Excel, as well as SPSS to help the Manager ease doing a forecast
Key Ideas to Remember About Forecasting
1. Demand forecasts are important, they help Managers resolve how much volume or supply
will be needed to match probable demand, both within the business and the supply chain
2. For the reason that there a random variations in demand, it is possible that the forecast will
not be perfect, so Managers need to be ready to deal with forecast errors.
3. Non-random elements might also exist, so it is essential to monitor forecast errors.
4. It is significant to select a forecasting method that is cost-efficient and that reduces forecast
error