Timeseries

and
Forecastin

What is
forecasting?

Forecasting is the process of predicting a future event.

---- it is simply a prediction, projection, or estimate of some
future activity, event or occurrence.
----it is an underlying basis of all business and services

decisions
Production
Inventory
Personnel productivity
Facilities

Types of
forecasting

Qualitative Forecasting
Methods
Quantitative Methods
Explanatory Methods
Time-series Methods

Qualitative
Forecasting

Qualitative forecasting methods attempt to use actual data to

determine a qualitative or actual market trend toward a certain
position or function in the market.
- These methods involve looking at non-numerical data.
Example:
If you were attempting to forecast whether a new product
would be successful, you could review customer surveys in
which customers have described their views of the ideal
product
function.forecasting methods are not as
Note:
Qualitative
effective as quantitative methods, which are the most
common methods and which come in a variety of different
formats. They are often applied when a great deal of data are
available on the target market.

Quantitative Methods
Quantitative methods use numbers -- sales numbers, web traffic
numbers, the amount of new accounts or cancellations of existing
accounts -- for a specific period depending on the breadth of the
forecast being performed.
Quantitative methods can be further broken down into
explanatory methods and time-series methods.

Explanatory Methods
Explanatory forecasting methods use data to attempt to explain trends
and to forecast future market direction based on existing data. These
consider past performance and marketing trends, such as consumer
spending reports and consumer confidence indexes, to attempt to
determine the future path for a certain product, website or company.
Explanatory methods involve looking at market activity to explain how
and why trends occurred, not just to predict what will occur. Because the
"how" is important here, this method is different than a time-series
method which just considers what the future trends will be.

What is a Time- series Methods in forecasting?

Time-series methods are used only with historical data to
predict future performance.
Time-series method remains the most commonly used
method in forecasting.
Example:

If $6 million in sales were made over the last year, a

time-series method might predict that $6 million in
sales could be achievable this year, with a slight
increase allowed for additional business. If a website
was hit 340 times on Sunday last week, a time-series
method might predict a similar influx on a future
Sunday.

Advantages and Disadvantages of the Time

Series Method of Forecasting
Advanta
ges
Reliability
The time series method of forecasting is the most reliable when
the data represents a broad time period. Information about
conditions can be extracted by measuring data at various time
intervals -- e.g., hourly, daily, monthly, quarterly, annually or at
any other time interval. Forecasts are the soundest when based on
large numbers of observations for longer time periods to measure
patterns in conditions.

Seasonal Patterns
Data points variances measured and compared from year to
year can reveal seasonal fluctuation patterns that can serve as the
basis for future forecasts. This type of information is of particular
importance to markets whose products fluctuate seasonally, such

Advantages and Disadvantages of the Time

Series Method of Forecasting
Advanta
ges
Trend Estimations
Data tendencies reporting from time series charts can be
useful to managers when measurements show an increase or
decrease in sales for a particular product or good.
Growth
The time series method is a useful tool to measure
both financial and endogenous growth.

Advantages and Disadvantages of the Time

Series Method of Forecasting
Disadvanta
ges

Trend Analysis

Types of Trend Analysis

Past Trend Analysis
One way to conduct a trend analysis is to review several
years worth of performance. This requires you to gather
data and sort it by year, quarter or month going back
several years, depending on how mature your company is.
Example:

A young company will most likely see larger fluctuations

in performance during the past three years, compared to
a company that has been around for many years and
has saturated the marketplace.

Types of Trend Analysis

Recent/Current Trend Analysis
Taking a look at whats been happening at your company
for the past year can help you anticipate changes that
might be coming, or it might just show a temporary blip.
Example:
If sale revenues have remained stable during the past six months
but the number of new customers has declined during that time,
this could be because youve saturated the market place.
If your expenses are rising, it could be caused by a temporary
increase in fuel or materials prices, or it could be a sign that your
labor costs have increased and will remain at this level for the long
term.

Types of Trend Analysis

Internal Trend Analysis
Examine recent trends that are happening within your
business, which include factors you can control. Look at
trends by department, such as the performance of your
sales, human resources and production, marketing and
information technology functions. Trends you can examine
include sales by territory, representative, product and
distribution channel. They can include overhead and
production expenses.
Example:
Analyzing sales uses a trend analysis to help you improve
performance. Knowing that you have a trend for a rush or slow
period during a specific time of year lets you plan production,
inventory and labor and capital needs in advance. You might make
inventory in advance during a slow period to address an expected
rush and keep more cash on hand to pay bills during a slow period,

Types of Trend Analysis

External Trend Analysis
In addition to keeping an eye on your internal
performance, you should stay abreast of whats
happening in the larger marketplace. Trade
associations, government agencies and business
magazines are good sources of information for business
trends. Track trends that involve your competition, such
as whether the number of competitors is growing or
shrinking, where competitors are locating, how they are
selling
and who their customers are. Keep track of new
Example:
technology and how its affecting your customers.
As consumers spend more time on smartphones instead of
computers, you might need to create apps or modify your website
so it works on smartphones to address your customers changing
shopping and purchasing habits.

The Pros and Cons of Trend Analysis

PROS
Trend analysis is often a quick method to gain
insights into your business operations and obtain
rough forecasts for key business variables.
Example:
If sales have increased 3 percent every year for the past five years, you
can forecast a probable 3-percent increase for next year.
If your summer season usually results in a 20 percent increase in
revenue from outdoor goods, you can predict the same increase for
next summer.
Note:
Entering historical data into a spreadsheet lets you carry out more
detailed analysis and output mathematical projections. The historical
data is usually readily available and you don't need any other inputs
or outside help to make the relevant forecasts.

The Pros and Cons of Trend Analysis

CONS
Because trend analysis is based on historical data,
both accuracy and reliability of such forecasts suffer
when the business environment changes or when you
mistakenly had a cyclical trends for long-term
influences.
Example:
if a new competitor enters your market, your sales,
revenue and profit may all decrease unexpectedly and
your trend analysis based on past data will give forecasts
that are too high.
If you come to the end of a recessionary business cycle
and you have analyzed the cyclical influence as a longterm trend, your forecasts are going to be too low as an
expansionary cycle takes hold.
Note: When you don't know how changes might affect your

Importance and Limitations of Forecasting

1. Supply Chain Efficiency
Accurate predictions allow a business to purchase raw
materials, parts and services more favorably because it has
sufficient time to shop for prices. An accurate forecast enables
a business owner to keep a lower inventory, thus reducing
costs. Raw materials efficiently become the right number of
finished products and move to the right locations.
2. Supplier and Customer Satisfaction
Accurate predictions and smooth management of the
supply chain help keep materials and parts vendors happy
because vendors have fewer problems with rush orders or
cancellations. In addition, customers receive timely deliveries
of what they ordered, rather than late deliveries or out-of-stock
notices. Satisfied customers keep on buying from the company

Importance and Limitations of Forecasting

3. Successful Long-Term Planning
Accurate long-term forecasts enable a business to better
manage financial and other planning. Valid sales forecasts give
the company a framework for setting realistic goals for its sales
teams. Accurate forecasts help managers foresee the need for
more staff in time to recruit and train them. Management can
plan new facilities for production and storage when and where
they will do the most good. A forecast also gives the company
time to arrange the financing needed for expansion.
4. Human Limitations
Qualitative forecasting often gets information from different
departments of a business, such as the sales force, and even
from the product's customers. Employees who do not cooperate
across departments or employees with strong opinions can skew
the results. If the sales force receives incentives for beating

Importance and Limitations of Forecasting

5. Limitations of Economic Predictions
Quantitative forecasting uses past numbers as its basis.
This type of forecasting normally includes the effects of the
leading indicator series and other complex economic data.
The leading indicator series includes information on stock
prices, unemployment insurance claims and the money
supply. Although forecasting that uses such data is highly
mathematical, it makes a crucial assumption that history
predicts
the
future.
If
market
conditions
change
unexpectedly, these methods become less accurate.

Trend