Question

Forecasting methods studied in this class are quantitative techniques including moving average, weighted moving average, exponential smoothing, linear regression, and exponential smoothing with trend component.

You are given a set of past demand data and asked to forecast demand for the future. What would you FIRST do to decide which demand forecasting method to use and why? Please choose one of the forecasting methods listed above.

Answer 1

Demand forecast is a method to determine the estimated demand for the coming period by the historical or previous data. The previous pattern for demands are being evaluated and according to that forecasting is being done.

There are different methods and models used for the forecasting process. Each has their own specifications. Therefore it is very important to decide which forecasting method is to be used for a particular situation.

In order to decide the demand forecasting method, the most important and our first step should be to analyse the purpose of demand forecasting and accordingly the method that would fully satisfy the purpose of demand forecast should be choosen further. This is important because analysing the purpose would provide a proper path and guide how to conduct the forecasting and in which direction so that the decision taken would be helpful in making proper estimate or forecasts for the future.

Once the purpose is analysed, we decide the best technique to carry forward that particular forecasting next to which relationship between the variables is being analysed and the data provided is also analysed if it is sufficient to provide accurate results.

Let's suppose an example. There is a garment shop which sells all types of clothing including summer and winter wears. As the winters are about to approach, the seller wants to have a demand forecast as to estimate how much winter clothing stock should he maintain for a particular period of time.

As the winter comes in phases where first initial days there is demand for light winter wears and then in further weeks it shifts to heavy winter wears as the winter approaches its peak. So the seller thought to have a average demand of type of winter wear for a particular interval of time, so that for particular periods he can manage sufficient stock of the products in demand.

Now to decide the type of method to use, first the seller should know the purpose of his demand forecasting which is very clearly mentioned above that is manage the stock of products in demand for a particular period.

Therefore, according to this purpose the best method to be used is the "moving average", where the seller can make a estimate from previous data that what is the average demand for winter wears in the initial stage to arrival of winter. Then after that time period, the average for winter wears would shift to clothes with heavy winter wears.

So, using this method, the seller can estimate the type of winter stock he needs to have for the particular interval of time and can maintain the average stick accorfing to that.

So here we saw that the moving average method best suited the case given, hence when the purpose was ear, we can see that accordingly we chose the type of forecasting method so that it can serve the purpose well and help the seller make proper estimate to have profit.

So, its clear that why forecasting is important and Aldo that why it is to bd properly analysed which method has to be used for demand forecasting.