Question

Which of the following considerations is a factor in deciding which forecasting model a firm should choose? Question 3 options: Accuracy required All of the above Analyst availability Data availability Time horizon to forecast

Answer 1

The answer will be All The Above.

1. Accuracy required: The accuracy, when computed, provides a quantitative estimate of the expected quality of the forecasts. For inventory optimization, the estimation of the accuracy of the forecast can serve several purposes: to choose among several forecasting models that serve to estimate the lead demand which model should be favoured, to compute the safety stock typically assuming that the forecast errors follow a normal distribution and to prioritize the items that need the most dedicated attention because raw statistical forecasts are not reliable enough. In other contexts, such as strategic planning, the accuracy estimates are used to support the what-if analysis, considering distinct scenarios and their respective likelihood.

2. Analyst availability: A key duty of forecast analysts is to recognize, follow, and analyze trends in the market. They research historical data to map trends and determine how they will influence the business. They must then prepare and present reports, charts, and tables detailing these market factors to company heads to help inform marketing and production strategy decisions. In addition to these duties, analysts must also routinely examine their own methodologies to find ways of improving predictive accuracy. The forecast analyst role requires familiarity with finance documentation and database software. Leadership skills are also often required.

3. Data availability: You can forecast from the top-down and from the bottom up. Top-down is usually more of a goal-setting activity, whereas bottom-up is usually more of an arse covering activity. The truth is usually somewhere in between and both have their own sets of data to prove their point. A good company will use the differences in those opinions to drive discussion about the differences in assumptions. So data is critical.

4. Time Horizon to forecast: A time horizon, also known as a planning horizon, is a fixed point of time in the future at which point certain processes will be evaluated or assumed to end. It is necessary for an accounting, finance or risk management regime to assign such a fixed horizon time so that alternatives can be evaluated for performance over the same period of time. A time horizon is a physical impossibility in the real world.

The most common horizons used in planning are one "quarter" (a quarter year, or three months), a year, two years, three years, four years (especially in a representative democracy where this is a quite common term of office and election cycle) and five years (incorporate planning). More far-sighted companies and government agencies may also use between ten and one hundred years.