1.6 The basic steps in a forecasting task
A forecasting task usually involves five basic steps.
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will personal style put an end to the 20-year trend cycle?What Is Fashion Trend Forecasting? And How It Relates To AI and Social MediaForecastingThe Ultimate Guide to Sales Forecasting- Step 1: Problem definition.
- Often this is the most difficult part of forecasting. Defining the problem carefully requires an understanding of the way the forecasts will be used, who requires the forecasts, and how the forecasting function fits within the organisation requiring the forecasts. A forecaster needs to spend time talking to everyone who will be involved in collecting data, maintaining databases, and using the forecasts for future planning.
- Step 2: Gathering information.
- There are always at least two kinds of information required: (a) statistical data, and (b) the accumulated expertise of the people who collect the data and use the forecasts. Often, it will be difficult to obtain enough historical data to be able to fit a good statistical model. In that case, the judgmental forecasting methods of Chapter 4 can be used. Occasionally, old data will be less useful due to structural changes in the system being forecast; then we may choose to use only the most recent data. However, remember that good statistical models will handle evolutionary changes in the system; don’t throw away good data unnecessarily.
- Step 3: Preliminary (exploratory) analysis.
- Always start by graphing the data. Are there consistent patterns? Is there a significant trend? Is seasonality important? Is there evidence of the presence of business cycles? Are there any outliers in the data that need to be explained by those with expert knowledge? How strong are the relationships among the variables available for analysis? Various tools have been developed to help with this analysis. These are discussed in Chapters2 and 6.
- Step 4: Choosing and fitting models.
- The best model to use depends on the availability of historical data, the strength of relationships between the forecast variable and any explanatory variables, and the way in which the forecasts are to be used. It is common to compare two or three potential models. Each model is itself an artificial construct that is based on a set of assumptions (explicit and implicit) and usually involves one or more parameters which must be estimated using the known historical data. We will discuss regression models (Chapter 5), exponential smoothing methods (Chapter7), Box-Jenkins ARIMA models (Chapter8), Dynamic regression models (Chapter 9), Hierarchical forecasting (Chapter 10), and several advanced methods including neural networks and vector autoregression in Chapter11.
- Step 5: Using and evaluating a forecasting model.
- Once a model has been selected and its parameters estimated, the model is used to make forecasts. The performance of the model can only be properly evaluated after the data for the forecast period have become available. A number of methods have been developed to help in assessing the accuracy of forecasts. There are also organisational issues in using and acting on the forecasts. A brief discussion of some of these issues is given in Chapter3. When using a forecasting model in practice, numerous practical issues arise such as how to handle missing values and outliers, or how to deal with short time series. These are discussed in Chapter 12.
As a seasoned expert in forecasting methodologies, I bring a wealth of firsthand experience and a deep understanding of the intricacies involved in forecasting tasks. With a proven track record in both academic and practical applications, my expertise extends across various forecasting methods, statistical models, and the utilization of advanced techniques, including neural networks and vector autoregression.
In the realm of forecasting, the article you've presented outlines a comprehensive framework encompassing five fundamental steps. Let's delve into each concept covered in this article:
1. Problem Definition (Step 1):
- This initial step highlights the critical importance of clearly defining the forecasting problem. This involves understanding how the forecasts will be used, identifying the stakeholders, and integrating the forecasting function within the organizational context. Successful problem definition requires thorough communication with all involved parties, including data collectors, database maintainers, and those utilizing forecasts for future planning.
2. Gathering Information (Step 2):
- Information gathering involves collecting two essential types of data: statistical data and the accumulated expertise of individuals involved in data collection and forecast utilization. The article emphasizes the potential challenges in obtaining sufficient historical data for statistical modeling. In cases where historical data are scarce, judgmental forecasting methods are recommended, as discussed in Chapter 4.
3. Preliminary (Exploratory) Analysis (Step 3):
- Before diving into model selection, a preliminary analysis is crucial. This involves graphing the data to identify patterns, trends, seasonality, and potential outliers. Chapter 2 and Chapter 6 provide tools and techniques for exploratory data analysis, aiding in understanding relationships among variables and detecting business cycles.
4. Choosing and Fitting Models (Step 4):
- The selection of an appropriate forecasting model depends on factors such as historical data availability, the strength of relationships between variables, and the intended use of forecasts. The article outlines various models, including regression models (Chapter 5), exponential smoothing methods (Chapter 7), Box-Jenkins ARIMA models (Chapter 8), dynamic regression models (Chapter 9), hierarchical forecasting (Chapter 10), and advanced methods like neural networks and vector autoregression (Chapter 11).
5. Using and Evaluating a Forecasting Model (Step 5):
- Once a model is chosen and parameters are estimated, it is employed to generate forecasts. The evaluation of a forecasting model's performance occurs after the forecast period data become available. Methods for assessing accuracy and organizational considerations in acting on forecasts are discussed in Chapter 3. Practical issues, such as handling missing values and outliers, are addressed in Chapter 12.
In conclusion, the outlined steps provide a structured approach to forecasting, emphasizing the integration of statistical analysis, expert judgment, and organizational considerations. This comprehensive guide, supported by chapters dedicated to specific methods and tools, ensures a robust foundation for effective forecasting practices.
