Forecasting and Time Series

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As the operations manager of Colsam Company Limited, I have been tasked to make a presentation to management on the importance of forecasting. The presentation would be done along the following lines.

* THE MEANING OF FORECASTING
* STEPS USED TO DEVELOP A FORECASTING SYSTEM
* QUALITATIVE FORECASTING
* QUANTITATIVE FORECASTING
* BENEFITS OF FORECASTING

THE MEANING OF FORECASTING

A planning tool that helps management in its attempts to cope with the uncertainty of the future, relying mainly on data from the past and present and analysis of trends. Forecasting entails the use of historic data to determine the direction of future trends. Forecasting is used by companies to determine how to allocate their budgets for an upcoming period of time. This is typically based on demand for the goods and service it offers compared to the cost of producing them. Investors utilize forecasting to determine if events affecting a company, such as sales expectations will increase or decrease the price of shares in that company. Forecasting also provides an important benchmark for firms which have a long –term perspective of operations. Forecasting starts with certain assumptions based on the management’s experience, knowledge and judgment. These estimates are projected into the coming months or years, using one or more techniques such as exponential smoothing, weighted moving averages trend projection, regressing analysis and trend projection. Forecasting is used to answer important questions, such as how much demand will there be for a product or services, how much will it cost to produce the product or offer the services, how much money will the company need to borrow and when and how will borrowed funds be repaid. Businesses must understand and use forecasting in order to answer these important questions. This helps the company prepare for the future. It also helps the organization make plans that will lead to becoming a financially successful business.

STEPS USED TO DEVELOP A FORECASTING SYSTEM

1. Analysing and understanding the problem; you must first identify the real problem for which the forecast is to be made. This will help the manager to fix the scope of forecasting.

2. Developing sound foundation: The management can develop a sound foundation for the future after considering available information, experience, type of business, and the rate of development.

3. Collecting and analyzing data: Data collection is time consuming. Only relevant data must be kept. Many statistical tools can be used to analyze the data.

4. Estimating future Events: The future events are estimated by using trend analysis. Trend analysis makes provision for some errors.

5. Comparing results: The actual results are compared with the estimated results. If the actual results tally with the estimated result, there is nothing to worry. In case of any major difference between the actual and the estimates, it is necessary to find out the reasons for poor performance.

6. Fellow up Action: The forecasting process can be continuously improved and refined on the past experience. Areas of weaknesses can be improved for the future forecasting .There must be regular feedback on past forecasting.

FORECASTING METHODS

All forecasting methods can be divided into two broad categories: qualitative and quantitative. Many forecasting techniques use past or historical data in the form of time series. A time series is simply a set of observations measured at successive points in time or over successive periods of time. Forecasts essentially provide future values of the time series on a specific variable such as sales volume. Division of forecasting methods into qualitative and quantitative categories is based on the availability of historical time series data.

QUALITATIVE FORECASTING METHODS

Qualitative forecasting techniques generally employ the judgment of experts in the appropriate field to generate forecasts....
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