Updated March 8, 2023
Introduction to Forecasting Techniques
This is an outline of Forecasting techniques. Forecasting can be defined as the process of estimating the future using calculations and forecasts that take into account previous performance, current trends, and expected changes shortly. Forecasting is necessary for the planning process since it determines the course of action to be taken in the future. It specifies the likelihood of future events occurring. As a result, future occurrences can only be predicted to a certain extent.
Techniques of Forecasting
Many forecasting techniques have been created in recent years to deal with managerial forecasting concerns’ increasing diversity and complexity. Each has a specific use, and choosing the right approach for the job is essential. In technique selection, the forecaster has a role to play. The better people comprehend the spectrum of forecasting options, the more likely a company’s forecasting efforts will be successful.
A forecasting methodology or method is a set of mathematical equations that predicts a value or occurrence in the future. Many statistical forecasting software packages or user programs are implementations of forecasting methods.
Few Terms to be considered in the forecasting Process:
- Time Horizon: The time horizon affects most forecasting methods in two ways: the length of time in the future for which different methodologies are appropriate and the number of periods for which a forecast is required.
- Data Pattern: An appropriate approach can be chosen to match forecasting methods, like time series, with the existing data pattern.
- Accuracy: Within the bounds of human error, forecasts must be as accurate as feasible.
- Cost: The following four expenses are often involved in every forecasting procedure: development, data preparation, and actual operation.
- Reliability: Never forecast anything based on unreliable data for decision-making purposes.
The top Two approaches are discussed in this article:
Qualitative: Qualitative data provides for the description of patterns and the importance of factors affecting specific events. Qualitative data is used in qualitative approaches. These methods aren’t objective, analytical, or practical, especially regarding short-term forecasts.
- Regression analysis: Sales are statistically related to one or more explanatory (independent) variables using regression analysis. Marketing decisions (for example, price changes), competition information, economic statistics, or any other variable related to sales could all be explanatory variables.
- Neural Networks: To uncover relationships, Neural Networks look for patterns in previous sales history and descriptive data. The forecast is created using these relationships.
- Exponential Smoothing: To generate a forecast, exponential smoothing takes an exponentially smoothed weighted average of past sales, trends, and seasonality.
- Moving Average: To produce a forecast, a Moving Average uses an average of a certain number of previous observations. New observations are used in the forecast as they become available, and the oldest observations are dropped.
- The Naive Method is a forecasting technique that assumes the next expected point is identical to the last observed point.
Quantitative: Quantitative data are, by accident, the foundation for analyzing economic phenomena and processes. Mathematical, statistical, financial, and optimization models are used in these forecasts.
- The SalesForce Composite aggregates salespeople’s projections.
2. Customers’ expectations are used as the basis for forecasting in Customer Expectations (Customer Surveys). A customer survey is often used to collect data from the sales team.
The availability of (historical) data is a need for utilizing it. Computer-based forecasting is the most common name for this method.
(1) straight-line, (2) moving average, (3) simple linear regression, and (4) multiple linear regression.
Forecasting Technique in Data Science – Python and R helps
The deconstruction of historical series into its many components, such as trends, seasonal variances, cyclical variations, and random variances, is known as time series analysis. When the various components of a time series are separated, the fluctuation of a specific condition, the subject of research, can be determined throughout time, and future projections can be produced. A pattern can be identified over time and may also be true in the future. When data is available for an extended period, and the tendencies revealed by trend and seasonal elements are relatively apparent and stable, the time-series analysis should be used as a basis for forecasting.
Using R code:
Moving Average could be manipulated using ma(). The moving average is calculated using what is known as a “sliding window” of size n.
sm <- ma(ts, order=4)// moving Average for weeks in a month
Exponential smoothing can be done in a variety of ways. The goal is to assign observations progressively less weight. It is performed using ets(). Forecasts are made using weighted averages, in which the weights decline exponentially as the number of observations increases in the past, with the smallest weights corresponding to the oldest observations:
ets_model = ets(training, allow.multiplicative.trend = TRUE)
Model Time Series With Complex Seasonality Pattern:
In the forecast package, use the tbats() function. This approach can be used to model time series with many seasons. Because this is a computationally complex task, the parallel processing capability built into the system can be used. It allows for multiple non-integer seasonality cycles.
tbatsFit <- tbats(tda, use.parallel=TRUE, num.cores = 1)
A Deep Neural Network allows clustering SKUs to locate lookalikes (for example, based on prices, product features, or appearance) and bootstrap predictions using their sales histories. A DNN is programmed to group new items based on their performance.
Machine learning takes demand forecasting to the next level, allowing for improved forecasts based on real-time data from internal and external sources, including demographics, weather, online reviews, and social media.
Note: The most important thing to take away from these stages is that each model can outperform others on a specific dataset. As a result, just because one model performs well on one type of dataset doesn’t guarantee it will also do well on others. In R, we can also look into the forecast package designed for time series modeling.
High-quality data, skilled staff, well-reasoned assurances, and a clear presentation of uncertainty are all essential when producing predictions. When using projections, decision-makers must understand the level of risk and uncertainty, as well as the reasons behind this, to make informed decisions about allocating resources so that services are delivered on time and within budget.
This is a guide to Forecasting techniques. Here we discuss the implementations of forecasting methods and how to allocate resources. You may also have a look at the following articles to learn more –