Ankita

What is forecasting?
Every business requires predicting the future on the

basis of historical data. The prediction needs to be close to the actual behavior so that you can be benefited out of your prediction. You need to optimize the inventory using past sales record and several other business examples are there. The increasing complexity of the business environment these days requires you to e a step ahead, implies that every organization needs to know the future values of their key decision variables. Forecasting is essential to make reliable and accurate estimates of the future.

 There are two broad categories of

forecasting techniques:

Quantitative methods and qualitative methods. Quantitative

methods are based on algorithms of varying complexity, while qualitative methods are based on educated guessing. Quantitative methods come in two main types: time-series methods and explanatory methods. Time-series methods make forecasts based purely on historical patterns in the data. Say you want to forecast site visitors over the next few weeks. Time-series methods only use historical site visit data to make that forecast.

Time Series
Time Series Analysis: Here we assume that future is going to

look like the past. We need to decompose the Time series pattern into Trend, Cycles, Seasonal and Irregular behavior.

Trend: Steady tendency of either upward or downward movement in the average value of forecast variable y over time. Cycles: An upward and downward movement in the variable about the trend line over a time period is called cycles. Seasonal: Fluctuation repeated in a year. Special case of cyclical movement is called seasonal. Irregular: Not predictable.

 Exponential Smoothing Methods:

Forecasting technique which weights past data from previous time periods with exponentially decreasing importance in the forecast so that most recent data carries more weight in the moving average. F t = X t -1 + (1-) Ft-1

X t -1 Actual value for the present period

Ft-1 Forecasted value of the past period

Smoothing constant
= 2 / (n + 1) Approximate value of

 Trend Projection Methods:

Linear Trend Model: The method of least squares from regression analysis is used to find the trend line of best fit to a time series data. Other trend projection models are Quadratic Trend Model and Exponential Trend Model.

Trend Line Y = a + b x (You can use the least square method used in regression method)

Diagrammatic representation of cyclical and trend component of time series