Members of Group 6:

Pham Phu Hung - 10

Tran Thuc Nguyen - 16
Nguyen Huynh Phuong - 22
Nguyen Thi Lan Quynh - 24
Nguyen Thi Quynh Tam - 26

Question 7.2: Discuss the three basic demand forecasting models.

a. Judgmental forecasting
- Judgmental forecasting involves using judgment or intuition and is preferred in
situations where there is limited or no historical data, such as with a new product
introduction. Judgment forecasting techniques include surveys and the analog
technique, among others. With survey forecasting, questionnaires (surveys) are used
to learn about customer preferences and intentions. A strong understanding of survey
design and population sampling methodologies is necessary in survey forecasting, and
you should recognize that customer intentions don’t always translate into actual
behavior. Analog forecasting involves determining an analog (similar item) to the
item being forecast and then using the analog’s demand history as a basis for the
relevant forecast. A key challenge is selecting the appropriate analog to use.
- Hyndman and Athanasopoulos (2018) assert that this method involves a set of logical
procedures aimed at obtaining from experts the data necessary for the preparation and
selection of rational decisions. In the theoretical aspect, the legitimacy of using
judgmental forecasting is confirmed because methodologically correctly obtained
expert judgments meet two criteria for the reliability of any new knowledge: accuracy
and reproducibility of the result. Therefore, judgmental forecasting is created by
experts based on their experience and assessments.
- Judgmental forecasting helps to formalize the procedures for collecting, summarizing,
and analyzing expert opinions to transform them into the most convenient form for
making an informed decision. Moreover, this method of forecasting is continuously
developed and improved. Currently, judgmental forecasting, in combination with
other mathematical and statistical methods, can minimize the risk of making the
wrong decision.
- Judgmental forecasting is applied in certain cases:
● When an object or some phenomenon cannot be described mathematically.
 ● When there is no reliable, accurate, statistical information about the object that allows
the use of objective methods.
● When there are no means for mathematical processing. For example, if there is no
computer equipment, software, or qualified personnel.
● It is a suitable method for an emergency situation when a quick decision is needed.
→ Thus, there are four main cases in which judgmental forecasting is used.
- Limitations:
● Judgmental forecasts are subjective and therefore do not come free of bias or
limitations.
● Judgmental forecasts can be inconsistent because they depend heavily on human
cognition and are vulnerable to its limitations.
● Judgment can be clouded by personal or political agendas, where targets and forecasts
are not segregated.
● Subsequent forecasts tend to converge or be very close to an initial familiar reference
point (anchoring). Anchoring may lead to conservatism and undervaluing of new and
more current information and thereby create a systematic bias.
❖ Example:

A famous example of judgmental forecasting in historical real-world contexts is Apple Inc.,

which Steve Jobs led. Jobs was renowned for his keen insight into consumer preferences and
his capacity to foresee emerging trends in the tech sector.

When he introduced the iPod in 2001, Jobs predicted that people would want to carry their
entire music libraries in their pockets, despite the prevailing skepticism at the time. This
judgmental forecast proved to be accurate, as the iPod became a massive success and
revolutionized the music industry. While there were existing products with some similarities
to the iPhone, none of them offered the same combination of features, design, and user
experience that made the iPhone such a revolutionary product. The iPhone's introduction of
the multi-touch interface, app ecosystem, and seamless integration of hardware and software
set a new standard for smartphones and transformed the mobile industry.

One of the techniques Steve Jobs used is “Prototype Testing and Iteration” that Jobs believed
in the importance of hands-on experimentation and rapid iteration. He would often develop
prototypes of new products and features, test them rigorously, and make adjustments based
on feedback before finalizing designs and features.
Overall, Steve Jobs' use of judgmental forecasting played a pivotal role in Apple's
transformation from a struggling computer company to one of the most valuable and
influential technology companies in the world. His ability to anticipate future trends and
consumer preferences, combined with his commitment to innovation and excellence,
continues to shape Apple's legacy to this day.

b. Time-series forecasting
Time series forecasting is one of the most applied data science techniques in business,
finance, supply chain management, production and inventory planning. Many prediction
problems involve a time component and thus require extrapolation of time series data, or time
series forecasting. It is a technique for the prediction of events through a sequence of time. It
predicts future events by analyzing the trends of the past, on the assumption that future trends
will hold similar to historical trends
Logistics Applications
Demand Forecasting: This is a cornerstone. By analyzing past sales data, seasonality, and
market trends, logistics companies can predict future demand for products and services. This
allows for:
● Optimized Inventory Management: Stocking the right amount of goods to avoid
stockouts or excessive storage costs.
- Warehouse Space Allocation: Effectively allocating space based on anticipated
demand fluctuations.
- Transportation Planning: Predicting transportation needs to ensure sufficient capacity
and avoid delays.
● Resource Allocation: Forecasting helps predict labor requirements for picking,
packing, and shipping activities. This enables logistics companies to:
- Schedule Staff Effectively: Ensure they have enough staff on hand during peak
periods and avoid understaffing during slower times.
- Optimize Workforce Planning: Plan for training needs and potential recruitment based
on future demand forecasts.
● Proactive Risk Management: Time series forecasting can identify potential
disruptions in the supply chain, such as:
- Seasonal Fluctuations: Predicting peak shipping seasons allows for proactive
measures like hiring temporary staff or securing additional transportation resources.
 - External Events: By analyzing historical data on events like port strikes or weather
disruptions, companies can develop contingency plans to mitigate their impact.
Benefits of Forecasting in Logistics:
Improved Efficiency: By anticipating demand and allocating resources effectively, logistics
companies can streamline operations and reduce costs.
Enhanced Customer Satisfaction: Accurate forecasts ensure on-time deliveries and minimize
stockouts, leading to happier customers.
Increased Profitability: Optimized resource allocation and proactive risk management
contribute to a healthier bottom line.
Challenges and Considerations:
Data Quality: The accuracy of forecasts hinges on the quality and completeness of historical
data.
External Factors: Unforeseen events like economic downturns or political instability can
significantly impact forecasts.
Model Selection: Choosing the right forecasting model depends on the specific data and
prediction needs
❖ Example: Predict airline ticket prices

Fareboom uses time series forecasting to predict airfare prices and help users optimize their
travel budgets. They collect historical airfare data, preprocess it, and identify relevant factors
like seasonality and demand. Using models like ARIMA or LSTM, they generate accurate
predictions, which are integrated into their platform for real-time price insights during flight
searches. This allows users to make informed decisions and secure the best deals, while
Fareboom continuously improves its models for enhanced accuracy and user experience.

c. Cause-and-effect forecasting

Causal forecasting considers the cause-and-effect relationship between variables. It identifies

factors such as economic indicators, market conditions, or consumer behavior that influence
the variable being forecasted. Regression analysis and econometric models are commonly
used in causal forecasting.

Identification of Variables: This stage involves identifying the variables that are
hypothesized to influence the dependent variable (effect) being forecasted. These variables
can include both independent variables (causes) and the dependent variable itself.
Data Collection: Data collection involves gathering historical data on the identified variables
from relevant sources. This data may include quantitative data (e.g., sales figures, economic
indicators) and qualitative data (e.g., customer feedback, market trends).

Data Preprocessing: Data preprocessing involves cleaning, organizing, and transforming the
collected data to make it suitable for analysis. This may include handling missing values,
removing outliers, and standardizing variables.

Model Selection: Model selection involves choosing the appropriate statistical technique or
algorithm to model the causal relationships between variables. Common techniques include
regression analysis, time series analysis, econometric modeling, and machine learning
algorithms.

Model Development: Model development involves estimating the parameters of the selected
model using the historical data. This may involve fitting the model to the data using statistical
software or programming languages.

Validation and Testing: Validation and testing involve evaluating the accuracy and
reliability of the forecasting model using historical data that was not used in model
development.

The cause-and-effect forecasting Model offers significant benefits in terms of understanding

causal relationships, improving prediction accuracy, enhancing decision-making, mitigating
risks, optimizing resource allocation, facilitating scenario analysis, supporting continuous
improvement, and gaining a competitive advantage in the marketplace.

❖ Example:

Toyota utilizes cause-and-effect forecasting to predict production output based on market

demand factors. This includes monitoring fuel consumption trends, fluctuations in fuel prices,
digital advancements, and environmental policies. By analyzing these factors, Toyota adjusts
its production strategies to meet consumer preferences for fuel-efficient vehicles,
technological innovations, and eco-friendly models. This approach enables Toyota to align its
product offerings with market trends and effectively manage production and inventory levels
to meet customer demand.