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Forecasting is a method or a technique for estimating future aspects of a business or the operation. It is a method for translating past data or experience into estimates of the future. It is a tool, which helps management in its attempts to cope with the uncertainty of the future. Forecasts are important for short-term and long-term decisions. Businesses may use forecast in several areas: technological forecast, economic forecast, demand forecast. There two broad categories of forecasting techniques: quantitative methods (objective approach) and qualitative methods (subjective approach). Quantitative forecasting methods are based on analysis of historical data and assume that past patterns in data can be used to forecast future data points. Qualitative forecasting techniques employ the judgment of experts in specified field to generate forecasts. They are based on educated guesses or opinions of experts in that area. There are two types of quantitative methods: Times-series method and explanatory methods.
Time-series methods make forecasts based solely on historical patterns in the data. Time-series methods use time as independent variable to produce demand. In a time series, measurements are taken at successive points or over successive periods. The measurements may be taken every hour, day, week, month, or year, or at any other regular (or irregular) interval. A first step in using time-series approach is to gather historical data. The historical data is representative of the conditions expected in the future. Time-series models are adequate forecasting tools if demand has shown a consistent pattern in the past that is expected to recur in the future. For example, new homebuilders in US may see variation in sales from month to month. But analysis of past years of data may reveal that sales of new homes are increased gradually over period of time. In this case trend is increase in new home sales. Time series models are characterized of four components:...