Unit 2-Forecasting

What is Forecasting?
 Determining Future Events Based on Historical Facts and Data.
 Process of predicting a future event based on historical data
 Educated guessing
 Underlying basis of all business decisions
•Production
•Inventory
•Personnel
•Facilities
Some Thoughts on Forecasts
o Forecasts Tend to Be Wrong!
o Forecasts Can Be Biased! (Marketing, Sales, etc.)
o Forecasts Tend to Be Better for Near Future
So, Why Forecast?
Better to Have “Educated Guess” About Future Than to Not Forecast At All!

Forecasting

 is a technique for making predictions of the direction of future trends based on the
analysis of past and present data. Businesses use forecasting to determine how to allocate
their budgets or plan for expected expenses for an upcoming period of time.
 Basically, it is a decision-making tool that helps businesses cope with the impact of the
future’s uncertainty by analyzing historical data and trends. It is a planning tool that
enables businesses to chart their next moves and create budgets that will hopefully cover
whatever uncertainties may occur.
Forecaster uses data for carried out forecasting methods can either get from primary sources or
secondary sources.
 Primary sources: Primary sources provide first-hand information, gathered directly by
the person or organization that is doing the forecasting. They usually collect the data
from various questionnaires, focus groups or interviews and, although all the information

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 is difficult to gather and integrate, the direct way of acquiring the data makes primary
sources the most trustworthy.
 Secondary sources: Secondary sources provide information that already collected and
processed by a third-party organization. Receiving the data in an organized and arranged
way makes the forecasting process easier.
Features of Forecasting
Here are some features for making a forecast:
1. Involves future events
Forecasts are created to anticipate future possibilities, scope, etc making them important for
product planning.
2. Based on past and present events
Forecasts are based on points of view, intuition, guesses, as well as on actual facts, figures, and
other related data. All the factors that go into forming a forecast reflect to some extent what
happened with the business in the past and what is likely to occur in the future.
3. Uses forecasting techniques
Most organizations use the quantitative method, particularly in the planning and budgeting
process

Process of Forecasting
You need to follow a careful process in order to generate accurate results. Let’s discuss some
steps in the process:
1. Develop the basis of forecasting
The first step in the process is developing the basis of the analysis of the company’s condition
and determining where the business is currently standing in the market.
2. Estimate the future operations of the business
Depending upon the research organized during the first step, the second part of forecasting is
concerned with estimating the future conditions of the industry how the business operates and
predicting how the company will handle it.

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3. Regulate the forecast
This step involves looking at different forecasts data in the past and comparing them with the
actual impact that happened to the business. Then evaluated differences in previous results and
current forecasts, and the reasons behind the deviations are recognized.
4. Review the process
They reviewed every step. After that, they made refinements and modifications if needed.

Forecasting Steps
Collect Relevant/Reliable Data
Data Collection Be Aware of “Garbage-In,
Garbage Out

Data Analysis Plot the Data

Identify Patterns

Choose Model Appropriate for Data

Model Selection Consider Complexity Trade-Offs
Perform Forecast(s)
Select Model Based on Performance
Measure(s)
Monitoring
Track Forecast Performance
(Conditions May and Often Do
Change)

Benefits of forecasting
Helps to Predict the Future
It gives management a broad idea of what to expect. Forecasting gives the company a sense of
direction, which will allow the business to function better in the marketplace. Forecasting brings
out some risks and uncertainties that a new business may face and can offer an entrepreneur the
right tools to prepare for elements, such as the strength of the competition, potential demand for
a product or service and future industry development.
Good for Customers
If a company can anticipate demand, it is more likely to make sure its products are always
available within the market. There is a greater chance of meeting customer’s orders and
delivering the product on time.

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Keeps a Company Up-to-date
Businesses that forecast regularly must think ahead all the time. This helps them predict the
change in market trends. Forecasting gives managers required data that they can use to identify
any weakness in the organization’s processes. By discovering potential shortcomings ahead of
time, the company’s managers have the suitable tools to rectify any weakness before they affect
the profits.
Learn from Past Experience
Most businesses face several possible uncertainties, such as periodic rises and falls in sales,
changes in staff and changes in raw material prices, depending on the exact nature and purpose
of the organization. Forecasting plays a significant role in bringing managers with the
information they need to make wise decisions regarding the company’s future.
Collecting and analyzing past data helps people remember what worked previously and what
didn’t. Learning from experience strengthens us.
Promoting workplace cooperation
Gathering and studying the data required for forecasting typically requires coordination and
association between all the company’s department managers, as well as other employees. This
makes the entire process a collaboration, enhancing team spirit and cohesion.
Receiving Financing
If the business requires a loan for a new project, the bank will ask for information about the
future, such as sales, profits, etc. The bank needs that data before it will think of approving the
loan.

Types of Forecasts by Time Horizon

•Short-range forecast Quantitative methods
•Usually < 3 months
•Job scheduling, worker assignments
•Medium-range forecast
•3 months to 2 years
•Sales/production planning
•Long-range forecast
•> 2 years
•New product planning Qualitative Methods

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Forecasting Approaches
Qualitative Quantitative

•Used when situation is vague & little data exist Used when situation is ‘stable’ & historical
•New products data exist
•Existing products
•New technology
•Current technology

Involves intuition, experience Involves mathematical techniques

•Based On Educated Opinion & Judgment Based On Data (Objective)

(Subjective)
•Particularly Useful When Lacking Numerical
Data

General Guiding Principles for Forecasting

1.Forecasts are more accurate for larger groups of items.
2.Forecasts are more accurate for shorter periods of time.
3.Every forecast should include an estimate of error.
4.Before applying any forecasting method, the total system should be understood.
5.Before applying any forecasting method, the method should be tested and evaluated.
6.Be aware of people; they can prove you wrong very easily in forecasting

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