ACTIVITY 5

1. What Is Forecasting?
Forecasting is a technique that uses historical data as inputs to make informed
estimates that are predictive in determining the direction of future trends.
Businesses utilize forecasting to determine how to allocate their budgets or plan
for anticipated expenses for an upcoming period of time. This is typically based
on the projected demand for the goods and services offered.
Forecast: A prediction, projection, or estimate of some future activity, event, or
occurrence.
2. Elements of a good forecasting
The forecast should be timely: A certain amount of time is going to be needed
to respond to a new forecast. Capacity can’t be expanded overnight, and in order
to increase or reduce production to meet the forecast you’re going to need
enough time to reconfigure your equipment and processes. Accordingly, try to
leave enough time in your forecasting to cover any potentially needed changes.
The forecast should be accurate: Sure, this sounds a little obvious, but any
forecasting needs to be as accurate and researched as possible. This will enable
any user to plan for possible error, and will provide a good basis for comparing
alternative forecasts.
The forecast should be reliable: In a similar vein to being accurate, a forecast
system needs to produce the same results every time. Even an occasional error
could cause big problems for your overall forecast and projections, and could
leave users with the uneasy feeling that their system isn’t as reliable as it should
be.
The forecast should be in the correct units: The forecast needs to be in a unit
of measurement that is the most meaningful to whoever will be using it. If the
forecast is primarily financial, measuring it in the cost of the items as opposed to
the quantity of items produced will prove more useful, while production planners
need to know how many of each unit will be produced, and so on and so forth.
The forecast should be simple to understand and use: Forecasts that are
overly complicated tend not to instill a lot of confidence in users. Make sure your
forecasts are thorough enough to cover everything that needs to be forecasted,
but simple enough that new users can get acclimated quickly.

Timely = the horizon must cover the time necessary to implement changes so
that its results can be used.
Accurate = the degree of accuracy should be stated, enabling users to plan for
possible errors and providing a basis for comparing alternative forecasts.
Reliable Methods = method/software should work consistently
Meaningful Units = choices of units should be dependent on user needs
 Results in Writing = the forecasts users must all be on the same page, so all
should be reading from a written summary of forecast results (same
interpretation)
Simple Techniques = the technique should be easy to use, and simple to
understand. If the technique is too sophisticated, users may not have faith in it.
Cost-Effective = the forecast's cost of implementation should be justified /
outweighed by its benefits.

3. Why is forecasting important in making decisions?

Forecasting plays a major role in decision making because forecasts are useful
in improving the efficiency of the decision-making process. Businessmen use
various qualitative and quantitative demand forecasting techniques to predict
future demand for products and accordingly take business decisions. Qualitative
techniques include expert opinion, survey and market experiments, whereas
quantitative techniques include time series analysis and barometric method.

4. What are the two types of forecasting approaches?

Qualitative forecasting methods, often called judgmental methods, are methods

in which the forecast is made subjectively by the forecaster.

Quantitative forecasting methods, on the other hand, are based on

mathematical modeling. Because they are mathematical, these methods are
consistent.
5. What are different types of forecasting methods?
 Naive Forecasting Methods- The naïve forecasting methods base a
projection for a future period on data recorded for a past period
  Qualitative and Quantitative Forecasting Methods- Whereas personal
opinions are the basis of qualitative forecasting methods, quantitative
methods rely on past numerical data to predict the future.
 Casual Forecasting Methods- Regression analysis and autoregressive
moving average with exogenous inputs are causal forecasting methods
that predict a variable using underlying factors.
 Judgmental Forecasting Methods- The methods produce a prediction
based on a collection of opinions made by managers and panels of
experts or represented in a survey.
 Time Series Forecasting Methods- The time series type of forecasting
methods, such as exponential smoothing, moving average and trend
analysis, employ historical data to estimate future outcomes.
6. Differentiate a random variation from an irregular variation.
Random Variation occur without any known reason or explanation. They’re the
unforeseeable and unexpected changes in demand. While, Irregular variations
are changes that result from a one-time event. They’re not representative of
normal conditions. A celebrity using a product in public that spurs fans to go out
and purchase in mass and the sale of water bottles before a major weather
event are examples of irregular variations.
7. Why is a judgmental forecast considered a subjective forecast?
A forecast made on subjective information. A judgmental forecast is made by a
person thought to be knowledgeable about the company or market about which
the forecast is being made. It may consider quantitative information, but it relies
on a great deal of subjective feeling.
8. How does a trend differ from a seasonality?
Trends can result in a varying mean over time, whereas seasonality can result in
a changing variance over time, both which define a time series as being non-
stationary.
9. Why is focus forecasting important to some companies?
It is vital for businesses because it allows them to plan production, financing, and
other strategies.
10. When is a naive forecast or an averaging technique used?
The naive forecast creates a baseline forecast that can allow a forecast value-add
for more advanced methods. While averaging technique is a technique that
calculates the overall trend in a data set. In operations management, the data set is
sales volume from historical data of the company. This technique is very useful for
forecasting short-term trends. It is simply the average of a select set of time
periods.

References:

Nordmeyer MBA, MA, B. (2018). Types of Forecasting Methods. Retrieved from:

https://bizfluent.com/info-8195437-types-forecasting-methods.html Retrieved date:
January 8, 2021

Anderson, M.A, MSE, Edward J. Anderson, Geoffrey Parker (n.d). How Demand
Variation Affects Operations Management. Retrieved from:
https://www.dummies.com/business/operations-management/how-demand-
variation-affects-operations-management/ Retrieved date: January 8, 2021