Importance of forecasting&

introduction to methods of
forecasting
What is Forecasting
It is an estimate which will happen in future

e.g. demand of a product

Rainfall at a particular place

Forecasting refers to the practice of predicting what will happen in the future
by taking into consideration events in the past and present.

Basically, it is a decision-making tool that helps businesses cope with the

impact of the future’s uncertainty by examining 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.
Factors affecting the forecast
• Business cycle
• Random variation
• Customers plan
• Product life cycle
• Competitors effort and prices
• Customers confidence and attitude
• Quality
• Credit policy
• Design of goods or services
• Reputation for service
• Sales effort
• Advertising
Types of forecasts

• 1)Qualitative Methods

• 2)Quantitative Methods
Difference between qualitative and
quantitative forecasting
• Qualitative forecasting deals with the opinion of managers or customers survey which helps to get an
overview of forecasted information.
• Whereas quantitative forecasting deals with numerical data.
• Qualitative forecasting deals with summative data as it is considered less accurate than that
quantitative analysis.
• Qualitative forecasting is considered biased as the data is collected manually, whereas
• quantitative data relies upon previous performance .
• The quantitative forecasting technique concerns numerical data that focuses on the projection of
customer trends towards other parameters of the business
• whereas qualitative forecasting techniques are used through gathering experts’ opinions for
forecasting any figure and undertaking any strategy related to performing a business
function. records (Guest, et al., 2012).
• Qualitative forecasting is applicable for the short term whereas
• quantitative is applicable for long-term decisions.
Qualitative Methods
1. Market Survey

• This is considered a direct and very old method to conduct a survey

among the prospective users of the product.

• Depending on the respondent category, a survey can be in the form

of a salesforce survey or customer survey.

• The main purpose of the organization to conduct this type of survey

is to either forecast or predict the demand for products or determine
the new market potential.
• The information on the survey can be obtained from customers or users through
• telephonic interviews,
• in-person interviews, or
• mail questionnaires.

• The survey method is mainly useful for new product development by estimating the
product demand or identifying new potential markets to launch the product.

• The market survey can be further categorized as sample or census surveys.

• A sample survey is used in the case of consumer products in which a small group of
customers is selected through the method of statistical sampling.

• A Census(an official count or survey, especially of a population) survey is mainly useful

when the number of participants is less and all can be included in the survey.
• For example, industrial buyers can be selected for the census survey.
 2.Salesforce Opinion

• The opinion of the salesforce is considered another reliable source of

gathering information for estimating future demand.

• This method includes taking input from sales staff on future estimated
sales.

• This method works on the assumption that salespeople understand

the needs of customers in a better way because they are in direct
contact with most of the customers.

• The response of this survey is aggregated(a whole formed by

combining several separate elements) to determine future demand.
3.Executive or Expert Opinion

• This method of qualitative forecasting includes gathering the advice

or opinion of expert members who are part of a group of experts and
their opinion is further utilized to determine the forecast.

• Key executives from different departments such as accounts,

production, sales, finance are also a part of this expert team.

• The estimation of the demand is provided by these experts according

to their experience and expertise.

• An approach of the personal focus group can be used to obtain such

expert opinion in which all experts gather at a common area and
conclude a final estimate through an agreement.
4.Delphi Method

• This method also includes a group of experts i.e. decision-makers, industry key
people, etc. that provide their opinions to determine a forecast.

• But unlike the expert opinion method, experts don’t gather physically in this
method to provide their opinion.

• In this method, each individual member of the expert group (THEY ARE
UNKNOWN TO EACH OTHER)provides their responses to independent
representatives who are responsible for making a summary of these forecasts
and any supportive statements.

• They forward the summary back to the experts along with any further queries.

• This process continues until a final agreement is obtained.

5. Nominal Group Testing

• This method includes providing a product or service for trial purposes

to a particular group of people such as employees, students, etc.

• Their responses based on the experience of using products or services

are collected and examined further to forecast.

6. Life Cycle Analysis

• In this method, opinion is formed after assessing the stage of the life
cycle of a product into which it currently lies.
Quantitative Methods

• This method includes activities such as sufficient data collection and

use of various statistical techniques to determine some sort of
patterns that will act as a forecast.
• Quantitative methods are categorized into two methods
i.e. Time series analysis and Causal methods.

1. Time Series Analysis

• In the time series analysis method,
• analysis of data of one type or several types is done to determine the
forecast.
• In this method, patterns of the prior or historical data are examined
and future demand is forecasted based on those patterns.
Time Series
• This is considered a group of data that is collected or recorded at
regular intervals i.e. on a weekly, quarterly, or yearly basis.
Few examples can be

• collecting sales data of an organization on a quarterly basis since

2015,
• recording temperature on an hourly basis,
• agricultural output on annual basis, etc.
Time series can be used for predicting forecast for the long-term i.e. for
more than 5 years because it is based on the assumption that there is a
repetition of past patterns in the future.

Different purposes can be there for long-term projections such as

making decisions on :
manufacturing,
purchasing,
planning of new manufacturing units,
new product development.
There are four main elements of time series i.e.

• Trend
• Cyclic Variations
• Seasonality or Seasonal Variations
• Random or Irregular Movements
• 1) Naive Method

• This is the simplest method among forecast methods of

time-series analysis.

• In the naive method, the past period’s (the most recent

one) actual demand is used as a forecast to predict
demand for the next period.

• It considers the assumption of the repetition of the past

data.
 For example, a two-wheeler company that sells two-wheelers wants to make sure that it has
enough sales staff and vehicles to meet the next demand.
So, the company forecast the demand for offerings (two-wheelers) of next month, and for this,
data of the previous 5 months is obtained as mentioned below:

In the naive method, the actual demand for the month of sep’20 will be considered as the forecast for the month of Oct ’20.
So, the demand of Sep’20= Forecast of Oct’20 = 300.
The same is shown in the below table and
chart:
Moving Average Method
• In this method, the moving average is calculated by doing the sum
and average of the values mentioned in a time series over periods
that are specified on a repetitive basis.

• The next period’s forecast will be the same as the average calculated
by summing previous or recent observations.

• Also, equal weightage is given to each observation.

For example,
in the above example of two-wheelers, the forecast can
be calculated through the moving average method
• To calculate the moving average of three months,
• an average of the demand for the previous three months will be
calculated and
• the same will be considered in next month’s forecast.
• Let’s say to forecast the demand of Aug’20 using the moving average
method,
• actual demand data of two-wheelers from May’20-Jul-20 will be
considered which is 100, 150, and 200 respectively.
• So, the computation of the forecast for Aug’20 would be:

• Forecast of two-wheeler demand for

• Aug’20: (100+150+200)/3= 150.

• Similarly, the forecast for other months will be calculated and is

shown in the below table:
• Forecasts of five months will be calculated in the same manner, for
the previous five months’, an average of demand i.e. from May’20-
Sep’20 will be taken.

• So, the forecast for two-wheeler demand for Oct’20:

(100+150+200+180+300)/5= 186.
Weighted Moving Average Method
• In this method, more weightage is given to recent data or
observations as compared to past data or observations.

• Unequal weights can be assigned to the past data.

• The weighted moving average is used to calculate the weighted

average related to recent sales in order to estimate the demand for
the short-term.

• The total of all weights in this method is required to be equal to 1.

• For example,
• in the above illustration of two-wheeler demand forecast, to
calculate the monthly demand forecast for May’20 through Oct’20
using a weighted moving average of three months,
• we need to assign weights to each month’s actual demand for two-
wheelers by ensuring that heavier weight is assigned on the months
that are more recent.
• So, by keeping the above in view,
• to calculate the forecast of Aug’20, we have assigned weights
• 0.12, to May’20
• 0.38, to Jun’20,
• 0.50, to Jul’20
• So, the total of all assigned weights is equal to 1 and more weights are
assigned to the most recent month.
• Forecast of Aug’20=

(weight of May’20 *actual demand of May’20)

+
(weight of Jun’20 * actual demand of Jun’20)

+
(weight of Jul’20 * actual demand of Jul’20)
Similarly, the forecast for other months are shown in below table
and chart:
4) Exponential Smoothing Method

• This method determines forecasts by using weighted averages that are

based on past observation.
• More importance is given to recent data or values in a particular series.
• Moreover, in the exponential smoothing method, weights start declining
or decreasing exponentially with past observations.
• In more simple words, we can say, that in the case of the observation that
is the most recent one, the associated weight is higher.
• In this method, each new forecast is determined by adding the past
forecast and the percentage of the value which is the difference between
the actual forecast and that past forecast. So, the new forecast will be:
• New forecast = Past forecast value + α (Actual demand
value – Past forecast value)

• In the above formula, α is considered a Smoothing constant that varies

from 0.01 to 0.50.
• If the value of α is higher, then changes in time series can be tracked more
closely.
• For example, a computer PC or Laptop assembling company assembles
personal computers or laptops from different generic parts. For this, it
purchases generic parts in bulk at a discounted price from different
sources wherever there is a good deal in terms of quality and less price.
• So, the company wants to forecast the demand for their PCs or laptops in
order to determine the required generic parts to be purchased and keep as
an inventory.
• The future demand forecast from Jan’20-Sep’20 using exponential
smoothing and

• smoothing parameter α= 0.2 is computed by considering demand data

of the last 12 months as shown in the below table.

• Also, in the below example, as the data for Dec’19 is not available,

• so it is assumed that both actual and forecast for Jan’20 are the same.

• Now, the forecast is made for each subsequent month (starting from
Jan’20) till Sep’20 using the exponential smoothing method.
• The above calculation of the exponential smoothing forecast of each
month is as under:
• Jan’20= same as actual demand= 30
• Feb’20= 30 + 0.2 (30-30) = 30
• Mar’20= 30+ 0.2 (34-30) = 30.8
• Apr’20= 30.8+ 0.2 (35-30.8) = 31.64
• May’20= 31.64+ 0.2 (30-31.64) = 31.31
• Jun’20= 31.31+ 0.2 (40-31.31) = 33.05
• Jul’20= 33.05+ 0.2 (50-33.05) = 36.44
• Aug’20= 36.44+ 0.2 (42-36.44) = 37.55
• Sep’20= 37.55+ 0.2 (48-37.55) = 39.64
• The above calculation of the exponential smoothing forecast of each
month is as under:
• Jan’20= same as actual demand= 30
• Feb’20= 30 + 0.2 (30-30) = 30
• Mar’20= 30+ 0.2 (34-30) = 30.8
• Apr’20= 30.8+ 0.2 (35-30.8) = 31.64
• May’20= 31.64+ 0.2 (30-31.64) = 31.31
• Jun’20= 31.31+ 0.2 (40-31.31) = 33.05
• Jul’20= 33.05+ 0.2 (50-33.05) = 36.44
• Aug’20= 36.44+ 0.2 (42-36.44) = 37.55
• Sep’20= 37.55+ 0.2 (48-37.55) = 39.64