BUSINESS FORECASTING

Second Assignment

Submitted to: Dr. Dennis Petri

Submitted by:
Md. Nazmul Hasan- 110000703

Date of Submission: 11th April, 2011

Forecasting involves the generation of a number, set of numbers, or scenario that corresponds to a future occurrence. It is absolutely essential to short-range and longrange planning. Forecasting is based on the previous data, it is beyond prediction and more subjective, based on instinct or guess. For example, the evening news gives the stock price "forecast" for the next day, not the stock price "prediction." Regardless, the terms forecast and predictions are often used inter-changeably. For example, definitions of regressiona technique sometimes used in forecastinggenerally state that its purpose is to explain or "predict." Forecasting is basically based on a number of assumptions: The past will repeat itself. As the forecast horizon shortens, forecast accuracy increases. Forecasting in the aggregate is more accurate than forecasting individual items. Forecasts are seldom accurate.

William J. Stevenson lists a number of characteristics that are common to a good forecast: Accurate Reliable Timely Easy to use and understand Cost-effective

He also lists the following as the basic steps in the forecasting process: Determine the forecast's purpose. Establish a time horizon. Select a forecasting technique. Gather and analyze data. Make the forecast. Monitor the forecast.

Forecasting model range from the simple to the extremely complex. These models are usually classified as being structural or non structural. We will use the forecasting

techniques to project the service demand for Dundee Infrastructure within the next 3 years.

Using structural Model

The demand for Dundee city council could be affected by a number of reasons: population size, age groups of population, how far the council will be able to influence the people to use their services frequently and some other factors. To try to forecast demands based on such amount of variables may not seem plausible, not only hard to collect all the data which related to our variables, but also hard to generate the appropriate model to do our forecasts. Moreover it is not possible to forecast if there is any cynical variables in the model, especially if the cycle changes.

Forecasting method for the next 3 years on the expected population sizes in particular age groups and demand for services will be made using a non structural model.

ARIMA model is the preferred model when data is limited. Forecasts for the next 3 years on the demand for the Dundee council service will not rely on any exogenous variables at all. This model is mentioned as Auto Regressive Integrated Moving Averages. ARIMA (p, d, q) is called as a non-structural model. Non-structural model provides a better forecasting in compare to the structural model and smoothing method. ARIMA model is used to forecast for long term predictions.

Specific data on population sizes for all the age groups and recycling deposit points is required from the Dundee City Council. These data is important to find out the previous demand of their services in the recent past years. The possible model may look like: Y =0 +1 Population +2Maintenance + Error Term Five chronological steps to be followed under Box Jenkins Methodology to estimate a suitable ARIMA (p, d, q) model.

Test for stationary and difference if necessary. Identify the right model to be estimated. Estimate the models. Diagnostic the checking. Using Selection criteria (AIC, SIC).

Limitations of the ARIMA Method:

ARIMA identification is difficult and time consuming. Many of the models have no structural interpretation. We are forecasting for the next 3 years, we begin forecasting with the 1st year and then by using this forecasted value we evaluate for the 2nd and 3rd year, which makes forecasting not as accurate as of the next year and hence the Errors roll over years.

Unpredicted shock could take place such as if the population increases/decreases in the town, then the expected demands would go high/low respectively , which would affect the forecasting.

The ARIMA model doesnt tell about the various factors which might affect the demands in future.

Though there are more disadvantages than advantages, but the advantages may still outweigh the disadvantages. How often council should collect the bins

This is a new service the council is going to start. So to collect information from the town people, I will follow the following steps: Market survey Well conduct a market survey with customers and potential customers regarding their thoughts about the new service council is about to start and will ask them questions which will help us in forecasting that how often council should collect the bins. Questionnaires and focus groups People will be asked to fill the questionnaire about the new service.

After collecting information from the area, we will analyse it and decide whether the idea s fruitful or not. If the views are positive then council can start the service. But this method can be time consuming at times and cost might be higher as we may required hiring professionals. Other limitations are:

Responses or reactions of customers may be biased. Sometimes it can be difficult to collect information.

The Dundee city council would want to know about how much providing the additional service may increase the amount of material that will be recycled.

Assuming maintenance is the only independent variable, the regression model may look like: Y= 0 + 1 Maintenance + t(where t= 0, errors are unbiased). By putting the amount for maintenance, we will get the particular value for the Dependent Variable Y. We will conduct the forecast using 95% confidence. Advantages of Regression Model: Low cost and simple method

Limitations of Regression Model: Linear regression is often inappropriately used to model non-linear relationships. Linear regression is limited to predicting numeric output. A lack of explanation about what has been learned can be a problem. Variables are omitted and Specification Error.

The following information is required from the Dundee City Council: List of services provided by the Council. Town population along with their age groups. A list of the Recycling deposit points of all the location within Dundee.

But using regression model to solve this case may not be a good idea. So I prefer to use the survey technique again as the previous case to find out required information. No specific previous information is required to arrange this survey.

Using Software ::Eviews software (latest version) For forecasting, to avoid the individual error and to reduce required time abovementioned software will be used on the data provided by the council. Rest of the information will be collected by Qualitative forecasting technique. A survey on the focused group would help us to know the amount of material that needs to be recycled. But like the previous problem it can have following limitations:

Information can be difficult to collect during working days. This method can be an expensive one as we need to do the survey on each and every user.

References
Wilson H and Keating B (2007), Business Forecasting (5th Edition), New York, McGraw-Hill Companies Inman R. (2011), Forecasting, [online], http://www.referenceforbusiness.com/management/Ex-Gov/Forecasting.html (Accessed 09 April 2011) Camo (2011), Linear Regression Model, [online], http://www.camo.com/rt/Resources/linear_regression_model.html (Accessed 09 April 2011) Business (2011), ARIMA MODELS (Box-Jenkins), [online], http://www.business.bgsu.edu/faculty_staff/bennion/ARIMA.html (Accessed 09 April 2011)