BUSINESS

FORECASTING
Trang, Ha Thi Thu (PhD)
SEM, HUST
COURSE DESCRIPTION

• This course aims to introduce quantitative methods and

techniques for time series modeling, analysis, and forecasting
with the aid of computer programming software.
• The main contents of the module include:
(1) Overview of Business Forecasting;
(2) Input data analysis and model selection;
(3) Simple forecasting models; and
(4) Linear trend model for forecasting;
(5) Time series model;
(6) Forecast by regression model;
(7) The Box - Jenkins (ARIMA) methodology;
(8) Judgmental Forecasting.
TEXTBOOK AND REFERENCES
Textbook
Hanke, John E. and Dean W.
Wichern. (2014) Business
forecasting, 9th Edition,
Pearson
References
Gloria González-Rivera. (2013)
Forecasting for Economics
and Business. Routledge
Diebold, Francis. X. (2017)
Forecasting in Economics,
Business, Finance and
Beyond. University of
Pennsylvania.
Computer software: Excel, R.
COURSE DESCRIPTION

Assessment
Criteria Weight
Component
Mid-term 40%
A1. Mid-term
A1.1 Participation Rate 10%
(*)
A2.1 Assignment 30%

A2. Final A2.1 Final exam 60%

Chapter 1
OVERVIEW OF BUSINESS FORECASTING

Trang, Ha Thi Thu (PhD)

SEM, HUST
CHAPTER 1: OVERVIEW OF BUSINESS FORECASTING

1.1. DEFINITION AND ROLE OF BUSINESS FORECASTING

1.2. TYPES OF BUSINESS FORECASTING

1.3. PROCESS OF BUSINESS FORECASTS

1.4. FORECAST EVALUATION

1.1. Definition and role of business forecasting

“FORECASTING—long denigrated as a waste of time at

best and a sin at worst— became an absolute necessity in
the course of the seventeenth century for
adventuresome entrepreneurs who were willing to take
the risk of shaping the future according to their own
design.”
Peter Bernstein (1996)
“Forecasting is considered art and science of estimating
future events”.
Heizer and Render (2010)
“Forecasting is a systematic attempt to probing the future
through inference from facts that are already known”.
Louis Allen
1.1. Definition and role of business forecasting

 Forecasting is a process of estimating or predicting

future demand through past and present events.

 Forecasting is both a decision-making and planning tool

because, through its support, businesses can examine
historical data and deal with the effect of uncertainty of
future
1.1. Definition and role of business forecasting
…bad prediction of the future
…bad prediction of the future
…bad prediction of the future
…2022 Predictions….
The Commonality of Forecasting

• All organizations wish for excellence in management

(whether manufacturing or a hospital).

• Demand for products, labor, materials, and other

resources must be estimated using either formal or
informal forecasting methods.
Importance of Business Forecasting

• Allows organizations to improve profits

• Essential in eliminating waste such as:
Inventory shortages
Missed due dates
Plant shut-downs
Lost sales
Lost customers
Expensive expediting
Missed strategic opportunities.
1.2. TYPE OF BUSINESS FORECASTING

Type of Business Forecasting

Based on Time Based on Forecast

Based on Economy Based on Output
Horizon Method

Short-term Macro-level Time-series

A point forecast
Forecast Forecasting methods

Medium-term Industry-level An Interval Quantitative or

Forecast Forecasting forecast Causal methods

Long-term Firm-level Qualitative

A density forecast
Forecast Forecasting methods
1.2. TYPE OF BUSINESS FORECASTING

By Time Horizon Forecast

• Short-term Forecast
• This includes a short time frame and is based on the nature and type of the
industry.
• Short-term forecasting is usually done for a period of six months and up to one
year.
• In most cases, this type of forecasting is utilized in tactical decisions and day-
to-day planning processes related to production, workforce applicability,
inventory, etc.
• Medium-term Forecast
• This forecast includes a time frame of one year to three years and is
• useful in cash budget planning, layout planning, capital budget planning,
production planning, sales & marketing planning, etc.
• Long-term Forecast
• This forecast is done for a longer duration and generally covers a time horizon
of more than three years.
• It facilitates long-term strategic planning decisions related to expansion
planning of plant, capacity planning while opening a new manufacturing unit.
1.2. TYPE OF BUSINESS FORECASTING

By Time Horizon Forecast

1.2. TYPE OF BUSINESS FORECASTING

By Economy
• Forecasting at Macro-level
• This includes general economic environment forecasting of a country’s
economy and is focused on business conditions across a nation’s whole
economy.
• This is measured by the national income or expenses, industrial
production, general employment level, GDP, unemployment rate….
• Forecasting at Industry-level
• This is concerned with the overall demand for the products of a whole
industry and includes analyzing statistical trends. Trade associations
prepare an industry-level forecast.
• Example: Forecasting cement and cloth demand of a country
• Forecasting at Firm-level
• This covers the demand forecasting of the products of a specific firm.
• Examples: forecasting the demand for Apples or Samsung Mobile, etc.
1.2. TYPE OF BUSINESS FORECASTING

By Economy
Examples:
A plant manager might be interested in forecasting the number
of workers needed for the next several months (a micro
forecast), whereas the federal government is forecasting the
total number of people employed in the entire country (a
macro forecast).
Top management would be interested in forecasting the sales
of the entire company, for example, whereas individual
salespersons would be much more interested in forecasting
their own sales volumes.
1.2. TYPE OF BUSINESS FORECASTING

By Forecast Methods
1.2. TYPE OF BUSINESS FORECASTING

By Nature of Output
• A point forecast
• the forecast will be
a single number
best guess
• An interval forecast
• a range of numbers
within which the
future value is
expected to fall
• A density forecast
• An entire
probability
distribution for the
future value.
1.3. BUSINESS FORECASTING PROCESS

Forecasting techniques operated on the historical data

generated leads to the identification of the following 5 steps in
the forecasting process:

1. Problem formulation and data collection

2. Data manipulation and cleaning

3. Model building and evaluation

4. Model implementation (the actual forecast)

5. Forecast evaluation
1.3. BUSINESS FORECASTING PROCESS

Management’s
Question/Problem

Data Gathering

Model Formulation
Feedback Loop

Design the Forecasting Experiment

Analysis and Interpretation

No
Valid Results?

Yes

Report Results

Figure 1.1 The Forecasting Process

1.3. BUSINESS FORECASTING PROCESS

Given that, several key questions should always be raised if the

forecasting process is to be properly managed:
• Why is a forecast needed?
•Who will use the forecast, and what are their specific requirements?
• What level of detail or aggregation is required, and what is the
proper time horizon?
• What data are available, and will the data be sufficient to generate
the needed forecast?
• What will the forecast cost?
• How accurate can we expect the forecast to be?
• Will the forecast be made in time to help the decision-making
process?
• Does the forecaster clearly understand how the forecast will be
used in the organization?
• Is a feedback process available to evaluate the forecast after it is
made and to adjust the forecasting process accordingly?
1.4. FORECASTING EVALUATION

The predictability of an event or a quantity

depends on several factors including:
1.How well we understand the factors that
contribute to it;
2. How much data are available;
3. Whether the forecasts can affect the thing we
are trying to forecast.
1.4. FORECASTING EVALUATION
1.4. FORECASTING EVALUATION

Question: Which is easiest to forecast?

 Daily electricity demand in 3 days time
 Time of sunrise this day next year
 Google stock price tomorrow
 Google stock price in 6 months time
 Maximum temperature tomorrow
 Exchange rate of $US/AUS next week
 Total sales of drugs in Australian pharmacies next month
 Timing of next Halley’s comet appearance
1.4. FORECASTING EVALUATION

Question: Which is easiest to forecast?

Level of Difficulty in Forecast

Google stock price in 6 months time

exchange rate of $US/AUS next week

Google stock price tomorrow

total sales of drugs in Australian pharmacies next month

daily electricity demand in 3 days time

maximum temperature tomorrow

timing of next Halley’s comet appearance

time of sunrise this day next year

1.4. FORECASTING EVALUATION

Something is easier to forecast if:

1. We have a good understanding of the factors that
contribute to it
2. There is lots of data available;
3. The future is somewhat similar to the past
4. The forecasts cannot affect the thing we are trying
to forecast.
… to be the most effective Forecaster

• Forecasts rely on logical methods of manipulating data that

have been generated by historical events.

• The quantitative forecasting techniques discussed in most of

this course to be only the starting point in the effective
forecasting of outcomes important to the organization:
Analysis, judgment, common sense, and business experience
… to be the most effective Forecaster

THE MOST EFFECTIVE FORECASTER is able to formulate

a skillful mix of quantitative forecasting and good judgment
Chapter Summary

• Importance of Business Forecasting

• As a Strategic Tool
• Planning and Control Tool

• Various Application of Forecasting in Business

• The Art and Science of Forecasting

• The Process of Forecasting