Map
Framework

Five-step forecasting process

The question it answers

A demand planner or finance director needs a sales forecast: in what order should the work go so that the result is usable for decisions?

Origin
Hyndman and Athanasopoulos, 2021
Diagram type
Process by phase
Level of analysis
Firm
Topics
Data & analyticsSupply chain & operations
Magnifying lens over a line chart tile, icon for data and analytics

Diagram

Five-step forecasting process

  1. Five steps
  2. Problem definitionOften the hardest step: understand how the forecasts will be used, who needs them and where forecasting sits in the organisation. Talk to everyone who collects the data or uses the forecasts.
  3. Gathering informationAt least two kinds: statistical data, and the accumulated expertise of the people who collect and use it. If history is too short, use judgmental methods.
  4. Preliminary analysisAlways start by graphing the data: consistent patterns, trend, seasonality, business cycles, outliers that need explaining.
  5. Choosing and fitting modelsThe best model depends on the history available, the strength of relationships with explanatory variables and how the forecasts will be used. It is common to compare two or three.
  6. Using and evaluating the modelProduce the forecasts, then evaluate them. A model can only be properly judged once data for the forecast period are available.

When to use it, and when not to

Use it when

The authors distinguish three horizons: short-term forecasts for scheduling personnel, production and transport; medium-term for buying materials, hiring and buying equipment; long-term for strategic planning.

Pitfalls

Pitfall

Confusing forecasts with goals and plans. A forecast predicts the future as accurately as possible from all available information, a goal is what you would like to happen, and a plan is the response to both. The authors also advise separating forecasters from users, because forecasts made by the people implementing the plan tend to be less accurate.

Sources

References

Listed A–Z by author surname, Harvard style. A source with a DOI links to https://doi.org/…; one without links to its page or says plainly that it has no DOI.

  1. Hyndman, R.J. and Athanasopoulos, G. (2021) Forecasting: principles and practice (3rd edn). Melbourne: OTexts.No DOIotexts.comCited in 2 articles