What are forecasting models

Dec 19

Successful companies frequently use forecasting models for planning. A visual reference that emphasizes expected outcomes and trends is helpful for both new and existing companies. We will explore the most common models and gain insight into how basic models work in this article.

What is a forecasting model?

Businesses use various tools for making predictions, including models to forecast sales, supply and demand, consumer behavior, and many other outcomes. Sales and marketing significantly benefit from these models. Different forecasting methods are offered by businesses that provide different levels of information. A forecasting model is appealing regardless of how complex it is because it allows for a visual guide for what to expect.

Four common types of forecasting models

Companies indeed utilize various modeling tools and methods to predict their future actions. Here are several examples of forecasting models that corporations can use to improve their business practices and provide better service to their customers. The primary categories of models are described below.

Time series model
Econometric model
Judgmental forecasting model
The Delphi method

Time series model

Historical data is used in this model to make reliable forecasts. Knowing how variables interact over time, such as hours, weeks, months, or years, will help you better visualize data patterns.

Various methods are available to complete a time series model. Still, these general steps can be used in a spreadsheet to estimate the outcomes based on data gleaned from the recent analytical analysis:

You should have time-based and value-based data available to use.
In the first column, enter any time or duration-related data.
You can now forecast the remaining values in the next column.
Identify relevant data you want to use for forecasting.
Choose the Forecast Sheet under Forecast Group on the Data tab.
To create the graph, you'll need to access the sheet and select the option you want.
Click the Forecast End button to set the end date for the forecast.

Following the creation of the forecasting model, you would then be able to interpret the future of your business.

Econometric model

In economics, economists frequently use an econometric model to forecast supply and demand changes and price changes. The creation of such a model involves incorporating complexity in data and knowledge. As the name implies, a statistical model of this type helps forecast future economic developments.

This type of model has the following basic structure:

Your dependent and independent variables must be determined. Say, for example, that you ask what effect X has on Y. How do you intend to test the economic relationship?
Test this relationship with a hypothesis. Identify other factors, which may affect "Y." These factors are called "Z," or the control variables.
Obtain the data set consisting of "Y," "Z," and "X."
Find anomalies and outliers in this data.
Analyze the relationship between "Y" and "X" to determine whether it is linear, quadratic, or nonlinear.
Make sure you understand the mathematical formulas for calculating the transformations.
What is the significance of "X" in your hypothesis? What effect does "Y" have on "X?"
To further analyze your results, including the "W" variables.

Judgmental forecasting model

Models of forecasting based on judgment rely on subjective and intuitive information to provide predictions. For example, sometimes, there is no reference data available. When launching new products or facing unpredictability in the market, judgmental forecasting is also a valuable tool.

Judgmental models have the following characteristics:

Based on subjective, opinionated reasoning
It assumes a set of specific variables
There are limitations
When new information is added, accuracy improves

In research and development, this type of forecasting model is beneficial. An expert panel or focus group can provide insights not readily available from computer models. If a company surveys a group of people and learns what they are looking for in a product, they will figure out what to develop for it.

The Delphi method

Based on the information provided by a panel of experts, this method is commonly used to forecast trends. The Delphi method is used for the series of steps about the Oracle of Delphi; compared to an individual's response, the answers provided by a group are more valuable and unbiased. Each company's or group's researchers may be involved in a different number of rounds, depending on their goals.

These questions are continuously asked, which helps companies determine the "correct answer." Since experts revise their previous assumptions in light of additional insight provided by the panelists, each process round improves the quality of information. Each game of the process concludes after reaching the predetermined metric.

You can create your judgmental forecasting model by following these steps:

Determine who will facilitate the meeting

Think about the neutrality of the facilitator, as well as their experience researching before selecting a facilitator. For example, the director of research and development may be an excellent facilitator.

Hire the experts that you need

A panel of anonymous experts is used by businesses when they research a product that is not yet on the market; anybody with considerable experience in the subject can serve as an expert. For example, a company may work with swim instructors or safety specialists to develop a new swim product. Customers who frequently use similar items may even be approached.

Describe the problem

Companies must provide all relevant details surrounding the issue to make an informed decision. By giving the issue's elements and any vital information, everyone will have a better understanding of what should be done.

The first round of questions

Introducing the topic and starting the discussion with this first round of questions is helpful. The experts will provide anonymous feedback and submit it to the facilitator after the information reading.

The second round of questions

Following a review of the answers provided by the panel and the editing of the content, the facilitator filters out irrelevant information and looks for common themes before submitting new information to the board. Each panelist can anonymously review the previous responses and resubmit their responses based on further details. Panelists will then present their responses back to the moderator.

Round three questions

After reviewing the new responses and sorting through the information again, the facilitator will send out the surveys to the panel. This process can continue for three or four rounds before a consensus is reached.

Take action

The researchers can proceed with any implementation plans once they have received sufficient information. Perhaps this is the beginning of the development of a new product, or maybe it is the start of production on a product they weren't sure about.

Why is forecasting important for your business?

There may be a perception that forecasting is labor-intensive for an unpredictable, possibly nonexistent return. The benefits of forecasting to your business are numerous, and you should use them regularly.

Business forecasting has the following benefits:

Business performance and in-house data are better understood
Having an adequate budget and enforcing it
Faster response to seasonal or cyclical changes
The ability to recognize patterns and relationships at a larger scale

The practice of forecasting may not be perfect, but it can help you keep up with new market trends and understand your company's financial state. These days, inventory management software can easily forecast data for your business using relevant variables about your business. Check Inventooly if you want inventory forecasting management software for your business activities. A robust automated inventory analysis enables Inventooly to optimize your inventory and provide you with a thorough picture of your business so that you don't miss out on any opportunities.