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Qualitative Forecasting Methods

For most operational decisions, the forecasting environment is sufficiently stable
and enough data are available to allow quantitative forecasting methods to be used.
Quantitative models can be difficult to develop, but once developed, they are easy
to apply and automate.

Background and Strategy of Quantitative Forecasting
Quantitative forecasting is an iterative process in which we study and analyze
relevant data, develop a model, evaluate the model versus actual data, and then
either adopt, refine, or revise the form of the model. We repeat this process as
many times as are needed to obtain an acceptable model. The better one is at
choosing an initial forecasting model, the simpler the task of eventually identifying a
good model.
Even the most stable products demand, exhibit some randomness. A random
variable (Yt) is a quantity whose value we do not know in advance of some event (t).
The values of Yt, for successive time periods are being generated by an extremely
complicated process that we will never know exactly. Here are the strategies we’ll
use in quantitative forecasting:
1. We observe the actual values of Y, takes on overtime (we will designate these
actual historical values as yl . . . , Yt) and possibly the values of other variables
that may be related to Yt..
2. From these actual values (called time series data) we select a function; f (.)
that we belive approximately describes the real process.
3. We then act as if the real process has the form
Yt = f (.) + έt
Where έt is a random component that is assumed to be normally distributed
random variable with a mean value of zero.
4. Because the random component cannot be predicted and has an average
value of zero, we ignore it in making our forecast. If the function f (.)
approximates the actual generating process closely, we can simply compute
its value and use it to forecast future values of Y t . We will designate our
forecast of the value Yt, will take on at time t as F ; so Ft = f (.) .
The arguments of the function f (.) may be previous values of Y t,, measures of
time or values of other physically different variables.
The essence of statistical forecasting may be related to the variable we wish to
forecast, called the dependent variables and to determine a specific function f (.)
that describes the relationship.

Steps in Modeling

timeliness. Parameters are the constants that appear within each function that make it unique. Select and implement the best model. We use measures of forecast accuracy to compare one model with other possible models. Estimate the parameters of the function. Seasonal Component (S) – describes any regular fluctuations above or below the basic process. Permanent Component (P) . Casual Models – (associative models) assume that the value of the dependent variable is a function of. Five components in time series forecasting: 1. Appropriate graphs can help the forecaster develop intuition about the phenomenon being modeled. not just its accuracy. . and cost.describes any long-term upward or downward movement in the process over time.) 3. or the “basis level” of the process at some point in time if there is a trend. graphing the data should help make the forecaster more efficient in selecting appropriate forms for the function f(. 4. we guess a general form for the function f(. Random component (et) – represents random blips that follow no regular pattern. The best model may depend on factors like the model’s simplicity. we usually assume that they come from a normal probability distribution with a mean value of zero.1.describes patterns in the data that occur as a function of the business cycle. 3. 4. the values of other variables that are knowable in a timely fashion.describes the long-run average level of the process. Cyclic component (C) . Time Series and Casual Models Time Series models – it forecasts the future values of the dependent variable using only previous values of that variable. After analyzing the plotted data. 2. Select a general form of the function. or is related to. More important.) 2. the model should be checked to verify if the parameters are statistically meaningful and that the underlying assumptions of the model are satisfied. these tend to vary irregularly and have a periodicity of several years. 5. This is done by comparing the performance of the different models with actual historical values for some common period of time. forecast stability. 5. Trend Component (T) . In addition. In any general family of functions there are an infinite number of unique functions. Graph the relevant data. Evaluate the quality of the model.