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Choose the variables
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Collect the data
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Run the regression
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Interpret the results
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Validate the model
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Use the model for forecasting
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Here’s what else to consider
Demand forecasting is a crucial skill for inventory management, as it helps you plan your stock levels, avoid overstocking or understocking, and optimize your cash flow. One of the methods you can use for demand forecasting is regression analysis, which is a statistical technique that explores the relationship between a dependent variable (such as demand) and one or more independent variables (such as price, season, or promotion). In this article, you will learn the steps to use regression analysis for demand forecasting.
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1 Choose the variables
The first step is to decide what variables you want to include in your regression model. You should choose variables that are relevant, measurable, and available for your demand forecasting problem. For example, if you are forecasting the demand for a seasonal product, you might want to include variables such as month, temperature, or holiday. You should also consider whether you want to use a simple linear regression model, which has only one independent variable, or a multiple linear regression model, which has two or more independent variables.
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In order to use regression analysis in Forecasting, First Historical Data to be collected & cleaned. Then we need to understand what are variables in & how to predict these variables. Is there any relation between different variables to identify dependent and independent variables. Then we need to run the regression and Interpret the results, Validate the Model & use it for forecasting.
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While regression analysis is a common approach in demand forecasting, alternative methods may be better suited, particularly in the pharmaceutical industry:1. Time Series Analysis:Analyze historical sales data with moving averages or exponential smoothing.2. Collaboration with Sales Teams:Harness their insights into customer behavior and market trends.3. Strategic Scenario Development:Create scenarios for diverse market conditions.4. Market Research and Expert Opinions:Gather qualitative information.5. Adaptation to Seasonal Patterns:Identifying and accommodating recurring demand patterns.6. Coordinated Planning with Suppliers:Synchronize production and inventory levels with projected demand.
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In Excel, my method for calculating Demand Forecasting through Multiple Regression is:1. Preparing a table with historical data including time periods (weekly, monthly) and units sold (Y). Also, adding independent variables like salespersons, price, EXR, and inflation rate (X).2. Using Excel's Data Analysis tool, I perform Regression. First, I calculate the correlation % for each independent variable with a 95% confidence level.3. Then, I conduct a Regression for all independent variables combined.4. I compare correlation coefficients of each variable and the combined set. The one with the highest correl. coefficient indicates the most accuracy, which I select for use.5. I apply the forecast formula using data w/ highest correlation.
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- Pradeep Sharma Building Pluckk
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While doing regression analysis for demand we have to understand the variables and define the goals on the basis of different factors which are measurable.
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Using regression analysis for demand forecasting involves several steps. Regression analysis is a statistical technique that helps in understanding the relationship between variables. In the context of demand forecasting, you would typically use regression to model the relationship between demand and various factors that influence it. Here are the general steps:•Define the Problem and Objectives•Data Collection•Data Cleaning and Preprocessing•Variable Selection•Model Selection•Split Data into Training and Testing Sets•Model Training•Model Evaluation•Fine-Tuning•Forecasting•Monitor and Update
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2 Collect the data
The next step is to collect the data for your variables. You should have historical data for your dependent variable (demand) and your independent variables for a certain period of time. The data should be reliable, accurate, and consistent. You should also check for any outliers, missing values, or errors in your data and correct them if possible. You should have enough data points to make your regression model valid and robust.
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- Juan Rubén Del Villar Oñate. Profesional en Comercio Internacional | Especialista en Gerencia Financiera | Director Financiero | Coordinador Administrativo | Coordinador de Abastecimiento | Profesional en Compras| Excel Avanzado| Analisis Financiero
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En mi experiencia, considero que la Recopilación de Datos es un paso esencial que permite:Reunir datos históricos de demanda y factores estacionales que pueden influir en sus variaciones, como precios, promociones y condiciones del mercado. Estos datos no solo brindan un enfoque valioso para comprender las necesidades y comportamientos del cliente externo, sino también para evaluar la dinámica interna de la empresa.
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Imagine forecasting fridge sales. Your data menu includes monthly sales, energy efficiency, and maybe even discounts. But wait! One month, sales skyrocket. Is it a data hiccup or a Black Friday frenzy? Cleanse the chaos, hunt down missing discount details, and fix any sales blips. Now your data's as cool as a well-functioning fridge, and your regression model is set to chill! ❄️📊
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- Luis Gustavo García Business Intelligence
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Esta parte es importante y por lo menos los datos históricos deben de ser no menos de 3 años para poder tener una buena tendencia y poder entender la estacionalidad de los artículos.
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- DEVANG BAVALIA Engineering graduate in Electronics and communications with a Master's in International business management from Germany
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To use regression analysis for demand forecasting, start by gathering historical data on both the demand (dependent variable) and relevant independent variables. For instance, if you're predicting smartphone sales, collect data on factors like marketing expenses, economic conditions, and competitor prices. Ensure your data is reliable and check for any anomalies.In a real-world example, imagine analyzing past sales (demand) with advertising spending and seasonality data. If you notice a spike in demand during holiday seasons, this information can be vital for predicting future sales using regression analysis.
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Gather historical data on your dependent variable (e.g.,demand) and your potential explanatory variables.The more data you have,the better you will be able to train your regression model.Make sure your data is clean and accurate.This means checking for missing values,outliers,and inconsistencies.
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3 Run the regression
The third step is to run the regression analysis using a software tool, such as Excel, R, or Python. You should input your data into the tool and choose the appropriate regression function. The tool will generate a regression equation that shows how your dependent variable (demand) is influenced by your independent variables. The equation will have a constant term and a coefficient for each independent variable. The coefficient indicates how much the dependent variable changes when the independent variable changes by one unit.
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- Sudipta Banerjee In Pursuit of Excellence
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The assumption of normality of residuals is one of the key assumptions in regression models used in demand forecasting. Residuals are the differences between the observed values and the values predicted by the regression model. The normality of residuals implies that the distribution of these differences should be approximately normal or follow a bell-shaped curve. If the residuals are normally distributed, it facilitates more reliable statistical inferences.
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- Juan Rubén Del Villar Oñate. Profesional en Comercio Internacional | Especialista en Gerencia Financiera | Director Financiero | Coordinador Administrativo | Coordinador de Abastecimiento | Profesional en Compras| Excel Avanzado| Analisis Financiero
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Es crucial tener una visión clara de cómo queremos configurar nuestro Modelo de Regresión. Es importante señalar que hay tres tipos de regresión, y la elección entre ellos puede depender del ERP de la organización o de herramientas ofimáticas como Excel. A continuación, se describen los tres tipos de modelos de regresión más comunes para ayudarte a determinar cuál se alinea mejor con tu estrategia:Regresión lineal.Regresión polinómica.Regresión múltiple.
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- Eduardo Cruz Técnico em Logística e Materiais
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Como fazer um levantamento de demanda?Como fazer a gestão de demandas passo a passo?Identificar as demandas do negócio: faça um levantamento de todas as necessidades da empresa, desde as mais simples até as mais complexas.Utilizar fluxogramas de processos: para otimizar a compreensão, crie fluxogramas para todos os processos da organização.
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- Smriti Singh Procurement Optimization Expert | 7+ Years Delivering Strategic Sourcing Solutions
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With the selected variables and collected data in hand, it's time to run the regression analysis. Utilize statistical software or tools to perform the regression and generate a model. The model will provide insights into the relationships between the chosen variables and how they impact demand.
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4 Interpret the results
Interpreting the results of your regression analysis is the fourth step. To evaluate your model, you should look at the R-squared, which is a measure of how well your regression model fits the data and ranges from 0 to 1, with a higher value indicating a better fit. Additionally, you should consider the p-value, which measures how significant your regression coefficients are and ranges from 0 to 1, with a lower value indicating more significance. The standard error is also important and shows the variability of your coefficient estimates, with a low value meaning that your estimates are close to true values. Lastly, you should observe the signs and magnitudes of your regression coefficients to understand the direction and strength of the relationship between your variables. A positive coefficient means that there is a positive relationship between the independent and dependent variables, while a negative coefficient indicates a negative relationship. The larger the absolute value of the coefficient, the stronger the relationship.
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Regression analysis works better for stable demand environment because it's assumes that there is a linear relationship between the dependant variable ( in this case demand) and indipendent variables. However in dynamic or volatile environments where the relationship between variable is subject to frequent changes, regression analysis may not be as effective. Other forecasting method may be more appropriate.
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- Juan Rubén Del Villar Oñate. Profesional en Comercio Internacional | Especialista en Gerencia Financiera | Director Financiero | Coordinador Administrativo | Coordinador de Abastecimiento | Profesional en Compras| Excel Avanzado| Analisis Financiero
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La interpretación de resultados es una habilidad inherentemente humana. Es crucial entender los factores o indicadores en los que basarás la predicción de la demanda, ya que cada organización constituye un entorno único. Se recomienda examinar detenidamente los resultados del modelo para interpretar cómo cada variable influye en la demanda, proporcionando así información valiosa para la toma de decisiones.Las predicciones futuras, te ayudan una vez validado, el modelo puede emplearse para prever la demanda futura en función de nuevas entradas de variables independientes. Este enfoque estratégico puede ofrecer una ventaja significativa en la planificación y la toma de decisiones a largo plazo.
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Using the model without checking your R-squared is like wearing a one-size-fits-none suit—looks good, but it's not working! Don't let your P-values party without an invite; they're VIPs in the sales game. Neglecting these data buddies is like juggling blindfolded—fun, but you might drop the deals! 😄
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- Luis Gustavo García Business Intelligence
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Este paso es el más importante ya que por más variables que se contemplen la interpretación de los datos que se obtienen como resultado de la aplicación del modelo decidimos si son acorde a la estacionalidad y el grado de precisión que buscamos.
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La previsión de la demanda se nutre significativamente de la rica historia que los datos proporcionan. Sin embargo, para garantizar una previsión más precisa y adaptada a la dinámica cambiante del mercado, es esencial complementar estos datos con la interpretación humana y la experiencia del mercado.1-Análisis Histórico: Comenzamos con una revisión detallada de los datos históricos, identificando patrones y tendencias clave.2-Consulta a Expertos del Mercado: Se busca la valiosa aportación de expertos en el mercado, que comprenden las tendencias del consumidor, eventos del mercado y cambios regulatorios.3-Ajuste Continuo: A medida que se producen cambios en el entorno, se realiza un ajuste continuo de la previsión.
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5 Validate the model
The fifth step is to validate your regression model using new or unseen data. You should split your data into a training set and a test set. You should use the training set to build your regression model and the test set to evaluate its performance. You should compare the actual demand values with the predicted demand values using your regression model and calculate the accuracy and error metrics, such as mean absolute error, mean squared error, or root mean squared error. You should also check for any assumptions or limitations of your regression model, such as linearity, normality, or multicollinearity, and address them if necessary.
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- Juan Rubén Del Villar Oñate. Profesional en Comercio Internacional | Especialista en Gerencia Financiera | Director Financiero | Coordinador Administrativo | Coordinador de Abastecimiento | Profesional en Compras| Excel Avanzado| Analisis Financiero
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La validación del modelo es esencial y se realiza utilizando el conjunto de prueba. Evalúa la precisión del modelo mediante métricas como el error cuadrático medio (MSE) o el coeficiente de determinación (R²). Este proceso garantiza que el modelo sea robusto y preciso al generalizar su rendimiento más allá de los datos utilizados para entrenarlo.
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- Eduardo Cruz Técnico em Logística e Materiais
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Quais são as 5 etapas da análise de requisitos?Análise de RequisitosReconhecimento do Problema. É muito importante que o analista de requisitos entenda o problema do usuário. ...Avaliação e Síntese. ...Modelagem. ...Especificação. ...Revisão. ...Documento de Visão.
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- Smriti Singh Procurement Optimization Expert | 7+ Years Delivering Strategic Sourcing Solutions
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Before relying on the model for forecasting, it's essential to validate its accuracy. Use validation techniques such as cross-validation or holdout samples to assess how well the model performs on new data. This step ensures that the regression model is robust and can be trusted for demand forecasting.
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6 Use the model for forecasting
The final step is to use your regression model for demand forecasting. You should input the values of your independent variables for the future period you want to forecast and use your regression equation to calculate the predicted demand values. You should also consider the confidence intervals and error margins of your predictions and adjust them accordingly. You should monitor and update your regression model regularly to account for any changes in the market conditions, customer behavior, or business environment.
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- Nowshar Hussain Category Manager Toys, Stationery and Electronics Games, Pet Food and Pet Care Accessories for Retail and Online.
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Following are most common types of forecasting models.1. Time-series models are used to predict future values based on historical data. 2. Causal models are used to identify the relationship between the variables and the outcome. 3. Judgmental models are based on expert opinions and are used when there is no historical data available. 4. Machine-learning models are used to identify patterns in data and make predictions based on those patterns. 5. Ensemble models combine the predictions of multiple models to improve accuracy. 6. Hybrid models combine two or more types of models to improve accuracy.It is important to understand how to implement the forecasting models,There is no one approach that fits all of your business problems.
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3 major tips in using forecast models: 1. Skip Validation, Face Fallout:Validate your model with historical data to avoid unreliable forecasts.2. Update Blind Spots, Stay Relevant:Overlook changes, and your model becomes obsolete. Regularly adapt to market shifts for accurate predictions.3. Confidence Matters, Not Just Predictions:Don't ignore confidence intervals. They're your compass in uncertain forecasting waters.
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- John Meyer Parts manager at Honda of Danbury/Penske Automotive
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Forecasting is a huge procedure in the automotive business. Constantly running reports and watching the many numbers that flow into a department’s gross profit helps spot if anything is off and can be corrected early on. Managing is like driving, keep your eyes constantly on what is in front of you.
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- Eduardo Cruz Técnico em Logística e Materiais
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Quais são os quatro níveis de análise?Quais são os 4 tipos de análises de dados?1 - Análise descritiva.2 - Análise diagnóstica.3 - Análise preditiva.4 - Análise prescritiva.
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7 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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- Galih Kusuma A. Supply chain | Consultant | Data Analytics | Ecommerce |Operation| Technology Enthusiast
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To use regression analysis for demand forecasting, collect and clean historical data, select relevant predictor variables, and split the data into training and testing sets. Choose an appropriate regression model, train it, and evaluate its performance. Fine-tune as needed, apply the model to new data for forecasting, and regularly update for ongoing accuracy. Interpret coefficients, communicate findings, and continuously refine the model for effective demand planning and inventory management.
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- Objective: Define what you want to forecast (e.g., sales).- Data: Collect historical data on sales and influencing factors.- Preprocess: Clean data, handle missing values, and transform as needed.- Variables: Identify factors affecting demand (e.g., price, marketing).- Model: Choose a suitable regression model.- Split Data: Divide into training and testing sets.- Build: Train the model using the training set.- Evaluate: Assess model performance with metrics like MSE.- Predict: Forecast demand for future periods using the model.- Monitor: Regularly update and monitor the model.- Apply Insights: Use forecast insights for business decisions.
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- DEVANG BAVALIA Engineering graduate in Electronics and communications with a Master's in International business management from Germany
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In the real world, choosing variables for regression in demand forecasting is like assembling ingredients for a recipe. For predicting ice cream sales, factors like temperature, season, and promotions are key. Collecting data is the foundation; imagine analyzing past smartphone sales with data on marketing expenses, economic conditions, and competitor prices. When interpreting results, focus on R-squared and p-values; it's like deciphering the recipe's success. Validation, splitting data into training and test sets, is akin to taste-testing a dish to ensure it pleases consistently. Finally, using the model is like serving the perfected dish, adjusting predictions as the market's flavor changes.
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- Ismail Zanaty Looking for new opportunity
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Remember, the effectiveness of regression analysis for demand forecasting depends on the quality of data, appropriate model selection, and ongoing refinement based on changing business conditions.
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- Eeshani Chatterjee Associate Manager - Purchase | New Model Development @ Honda Cars India Ltd || Ex- Arrow Electronics | Green Supply Chain enthusiast
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In extremely simple language, Using regression analysis for demand forecasting involves a few simple steps. First, gather data on factors that might affect demand, like advertising or seasonality. Then, plug this data into a tool or software that does the math for you. The tool finds patterns and connections between these factors and your sales. Once it's done, you can use these patterns to predict future demand. It's like connecting the dots between different things that might influence sales, so you can make smarter decisions about how much stock to have on hand.
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