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Forecasting

Forecasting

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Published by Balaji

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Published by: Balaji on Feb 16, 2010
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01/08/2013

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Topic:
Meaning of Forecasting
Need for Forecasting
How Forecasting helps inDecision Making
Introduction:
Forecasting is the estimation of the value of a variable (or set of variables) at somefuture point in time. In this note we will consider some methods for forecasting. A1
 
forecasting exercise is usually carried out in order to provide an aid to decision-makingand in planning the future. Typically all such exercises work on the premise that if we can predict what the future will be like we can modify our behaviour now to be in a better  position, than we otherwise would have been, when the future arrives. Applications for forecasting include:
Inventory control/production planning - forecasting the demand for a productenables us to control the stock of raw materials and finished goods, plan the production schedule, etc
Investment policy - forecasting financial information such as interest rates,exchange rates, share prices, the price of gold, etc. This is an area in which no onehas yet developed a reliable (consistently accurate) forecasting technique (or atleast if they have they haven't told anybody!)
Economic policy - forecasting economic information such as the growth in theeconomy, unemployment, the inflation rate, etc is vital both to government and business in planning for the future.
Why Forecast?
“Forecasting is an attempt to foresee the future by examining the past.”
Forecasts require judgment.
Lead times require that decisions be made in advance of uncertain events.
Forecasting is an important for all strategic and planning decisions in a supplychain.
Forecasts of product demand, materials, labor, financing are an important inputsto scheduling, acquiring resources, and determining resource requirements.
Most estimates obtained in quality forecasting are derived in an objective andsystematic fashion and do not depend solely on subjective guesses and hunches of the analyst.2
 
Thus, Statistical forecasting concentrates on using the past to predict the future byidentifying trends, patterns and business drives within the data to develop a forecast. Thisforecast is referred to as a statistical forecast because it uses mathematical formulas toidentify the patterns and trends while testing the results for mathematical reasonablenessand confidence. In many Forecasting Processes, statistical forecasting forms the baselinethat is adjusted throughout the process.
Meaning of Forecasting:
Forecasting is the process of estimation in unknown situations. Prediction is asimilar, but more general term. Both can refer to estimation of time series, cross-sectionalor longitudinal data. Usage can differ between areas of application: for example inhydrology, the terms "forecast" and "forecasting" are sometimes reserved for estimates of values at certain specific future times, while the term "prediction" is used for moregeneral estimates, such as the number of times floods will occur over a long period. Risk and uncertainty are central to forecasting and prediction. Forecasting is used in the practice of Customer Demand Planning in every day business forecasting fomanufacturing companies. The discipline of demand planning, also sometimes referred toas supply chain forecasting, embraces both statistical forecasting and a consensus process.Forecasting is apart of human conduct. Whatever an individual does at present isin the expectation of that certain events will take place in future. This expectation isgenerally based on the past experience. Forecast made in this fashion may or may not betrue always. In a world, where the future is not taken (known) with certainty, virtuallyevery business and economic decision rests upon a forecast of future condition.Thus, planning which is the backbone of any business activity requires theforecasting of future events, whereas forecasting helps in viewing those events in their  proper perspective .Objectivity is the corer stone of forecasting. It thus helps in reducingrisks associated with uncertain future events. Thus forecasting reduces the areas of 3

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