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What is Forecasting? Types of Forecasting Methods

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What is Forecasting?

Forecasting is a technique of predicting the future based on the results of previous data. It involves a detailed analysis of past and present trends or events to predict future events. It uses statistical tools and techniques. Therefore, it is also called Statistical analysis. In other words, we can say that forecasting acts as a planning tool that helps enterprises to get ready for the uncertainty that can occur in the future. Forecasting begins with management's experience and knowledge sharing. To obtain the most numerous advantage from forecasts, organizations must know the different forecasting methods' more subtle details. Also, understand what an appropriate forecasting method type can and cannot do, and realize what forecast type is best suited to a specific need. Let's list down some significant benefits of forecasting:
  • Better utilization of resources
  • Formulating business plans
  • Enhance the quality of management
  • Helps in establishing a new business model
  • Helps in making the best managerial decisions

What is Prediction?

Prediction is using the data to compute the Outcome of the unseen data.

How does Prediction work?

Firstly, the daily data is fetched from the market once at a time in a day and update it into the database. Now, the prediction cycle along with learning developed with the use of newly combined data. Historical data collected and the learning and prediction cycle developed to generate the results. The prediction results obtained in the form of the various set of periods such as two days, four days, 14 days and so on.

Difference between Prediction and Forecasting

Prediction is the process of estimating the outcomes of unseen data. Forecasting is a sub-discipline of prediction in which we use time-series data to make forecasts about the future. As a result, the only distinction between prediction and forecasting is that we consider the temporal dimension. Confusing? So do we forecast the weather or predict the weather? Consider this, What are the chances that it will continue to rain in five minutes if it is already raining? Since it is raining right now, regardless of any other factors that affect the weather (such as air pressure and temperature), the chances of it raining again in five minutes are high. Right?vThe temporal dimension is whether it is raining right now or not?  Without that forecasting the next 5 mins wouldn't make much sense.

Importance of Forecasting

Prediction of labor, material and other resources are highly crucial for operating. If the services are Predicting better, then balanced workload sheet may be appropriately planned before. Therefore, forecasting benefited in a variety of ways such as -

  • Provides reliable and relevant information about the present and past trends and future predictions that help in planning better.
  • Alerts to face the challenges of future events.
  • Helps in the use of production facilities efficiently.
  • Gives the confidence to take important decisions.
  • Helps in the handling of uncertainty efficiently.
  • Provides better services for customers.
  • Helps to utilize capital and resources efficiently.
  • Optimized the design of facilities and operation system.

Importance of Predicting

Accurate forecasting is essential for every manufacturer, retailer, the distributor in the industries. The critical benefits are -

  • Increased customer satisfaction.
  • Efficient optimization of inventory.
  • Better planning to reduce stock out and to overstock.
  • Efficient Production Scheduling.
  • Reduce the safety stock requirement.
  • Lowering the cost of near expiry products.
  • Improvement in pricing and promotion management.

How to Enable Forecasting?

A successful forecasting platform is a result of collaboration between the corresponding manager and forecaster. Therefore clear three main queries to choose the best forecasting technique for the particular problem.

  • Determine the process of using the technique required for determining the accuracy and the extent of the ability of methods to meet the requirements for solving the problem.
  • Explore the system's dynamics and components for which forecasting is applied: It helps simplify the relationship between the system elements. Thus, the forecaster can develop the model to extract the facts and logic of the given situation, which are highly important for forecasting.
  • Determine the past's importance for estimating the future. Moreover, Current changes may change the overall patterns, and these changes can increase after a long period.

Types of Forecasting Methods

  • Qualitative Methods - Where historical evidence is unavailable, qualitative forecasting techniques are sufficient. They are subjective, based on the opinion and judgement of consumers and experts. They are typically used to make moderate or long-term decisions.
  • Quantitative Methods - Forecasting future data as a result of historical data is done using quantitative forecasting method. If historical numerical evidence is available and it is fair to conclude that any of the characteristics in the data will persist into the future, they are suitable to use.
  • Average Method - All future values are predicted to be equal to the mean of the previous data.
  • Naive Method -  The previous month's actuals are used as the projection for this period without any adjustments or attempts to identify causal factors,. Naive Method is used for economic and financial time series.
  • Drift Method - Allowing predictions to rise or decrease over time is a variant on the nave process, with the amount of change over time (called the drift) fixed to the average change observed in the historical records

Forecasting Best Practices

  • Create a Repeatable monthly process.
  • Focus on determining the relevant points such as Competitors sales data.
  • Amount of absolute stock - Frequency of data, Shipments, Orders.
  • Integration with the respective channels of sales.
  • Measuring the forecasting accuracy at the Location and the Customer Planning Level.
  • Maintenance of Real-Time and updated data.
  • Integration of forecasting with management practices.
  • Developing collaborative processes.
  • Developing forecasting as a continuous process.

Top Forecasting Tools

  • Demand Works is for the management of the inventory, capacity, sales and operational planning.
  • QuickBooks is a platform to generate the trend, and forecasting reports that further helps in improving the financial and budgeting services.
  • Tableau is useful for predicting Business Intelligence goals.

A Predictive Approach

Prediction Techniques and Methods help Enterprises to meet demand management goals, Increase customer satisfaction and better utilization of resources. To know more about Predictive Forecast, we advise taking the subsequent steps -

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