Forecasting with Indices
Forecasting is a technique used by businesses to predict the current and future trends based on the relationship between various variables. This helps in managing the ambiguity of the future. It provides valuable information that is useful for both short term and long term decision making. There are two methods of forecasting; qualitative forecasting and quantitative forecasting, and therefore it is important to choose the best method for a particular business.
Quantitative forecasting uses historical data to predict future trends. The time series method of forecasting is a quantitative method that uses a time series of previous data to forecast. Qualitative method of forecasting uses expertise in a particular field to predict future trends. Time series method has two main goals: Identify the pattern of occurrences over a given time period. Predict future values using the pattern predicted.
Once a period has been recognized, a model is produced to forecast future values. Time series assumes that the underlying economic and social forces that brought changes will continue to operate the same ay and therefore the patterns observed in the past will continue in the future. Using a time series method, historical data is used to predict future trends. One of the disadvantages of this method is that it makes no effort to identify causes of the observed patterns and thus it cannot tell whether the underlying forces have changed or not.Forecasting is important for the growth of any business.
Lack of forecasting will mean that the business lacks the capability to tell whether sales will increase or decrease and therefore will not know whether to increase or decrease the ordering of their inventory. As a business grows, it gathers monthly and yearly data and can use this information to create an index. This index is useful when examining current trends and to forecast the future of the business. When forecasting for inventory, indices are very important. An index is a time series that has been scaled such that the value in one period is 100. The period whose value is set to 100 is called base period.
According to Sevilla and Somers (2007) “Quantitative indexes and rating systems are used to give information about general treends and to allow us to make comparisons and judgments” (p. 133)” The index number of a given period is given by the current number divided by the value of the base period and multiplied by 100. A month-to-month evaluation period is better as it gives a more information and will be more accurate therefore better decisions will be made. To ensure that the company is ready for winter months, inventory for winter goods shows peak around November, and this is consistent for the four years. There’s a decrease in stock around June, during the summer months.To ensure that the company is ready for the summer months, the stock volumes are highest around May, picking up the month of March when they are lowest.
During the months of June when winter inventory is lowest, the summer inventory is at its pick. The company prepares for summer during the third month. Inventory forecast for next year The monthly forecast for the next year is given by the average of the four years monthly actual. Each monthly forecast is the average of the four year actuals.