1) Forecasting involves predicting future conditions and is needed continually for planning and decision making. There are different time horizons for forecasts including short, medium, and long term.
2) Quantitative forecasting methods use past data patterns or external influences to project future outcomes, while qualitative methods rely on subjective expert judgment when there is little past data.
3) Qualitative judgmental forecasting includes personal insights, panel consensus, market surveys, historical analogy, and the Delphi method. The appropriate method depends on factors like cost, accuracy needs, and data availability.
1. ADDITIONAL NOTES BM014-3-3-DMKG
FORECASTING
Every decision in an organization is based on forecasts of future conditions.
-the lists of things that are forecast is endless; demand for products, interest rates, productivity, output,
resources needed, manpower available, time to finish a job, production rates, weather, share prices,
costs of raw materials and so on.
-forecast are needed continually, and as time moves on, actual performance is compared with forecasts,
original forecasts are updated, plans are modified and so on.
-there is no single method that is always best-we have to look at the number of models and see when
each can be used.
The time horizons for forecasting
1) Short range/short term forecast-cover the next few weeks-describing the continuing
demand for a product. Normally cover 3 months to a year. It is meant for planning
purchasing, job scheduling, workforce levels, job assignments and production levels.
2) Medium range/medium term forecast- look ahead between 3 months and 3 years, the
time typically to replace an old product by a new one. It is useful in sales planning,
production planning and budgeting, cash budgeting, analyzing operating plans.
3) Long term forecasts- look ahead several years-the time typical needed to build a new
factory. Uses for new product development, capital expenditures, facility location or
expansion and R&D.
-The time horizons affects the choice of forecasting method because of the availability of historical data,
how relevant this is for the future, the time available to make the forecast, the cost involved, the
seriousness of any errors, the effort considered worthwhile and so on.
-Types of forecasting: 1) Qualitative/Judgement
2) Quantitative/Statistical –a. Projective forecasting
b. Causal forecasting
Quantitative/Statistical
a.Projective forecasting-look at the pattern of past demand and extends this into the future.
-if demand in the last 4 weeks has been 10,20,30,40, we can project this pattern
into the future and suggest that demand in the next week will be around 50.
b.Causal forecasting- looks at outside influences and uses these to forecast.
2. ADDITIONAL NOTES BM014-3-3-DMKG
-the productivity of a factory might depend on the bonus rates paid to
employees-then we can forecast future productivity from the planned bonus
rate.
-Both of these approaches rely on accurate, numerical data-but if an organization is introducing an
entirely new product, it will have no past demand figures to project into the futures and it will not yet
know the outside influences that affect demand. So, the organization does not have the data for
quantitative method.
-The only option is to use a qualitative method.- such method are generally called judgmental
forecasting and rely on subjective views and opinions.
-this classification of methods does not mean that each is independent and must be used in isolation.
-managers should look at all available information and then make the decision they feel is the best.
-this means that any forecast should have a subjective review before it is used.
Qualitative/Judgement
-methods are subjective views, often based on the opinions of experts.
-if there is no relevant historical data (mostly due to developing new products)-the organizations cannot
use quantitative forecasting methods, and must use judgmental methods.
5 types of judgmental forecasting
1) Personal insights
2) Panel consensus
3) Market surveys
4) Historical analogy
5) Delphi method
Personal insights Panel consensus Market survey Historical Delphi method
analogy
-uses a single -combining the -Sometimes -demand for -the most formal
person who is views of even groups of most products of the judgement
familiar with the different people experts do not follow a methods & has a
situation to -but it can be have sufficient common pattern well-defined
produce a difficult to reach knowledge to through their procedure.
forecast based consensus. give a lifetime. -a number of
on their own -It is more reasonable -most sales go experts are
judgement. reliable than one forecast. This through periods contacted by post
-most widely person’s insight. happen, for of:- introduction & each is given a
used-the example; with -growth questionnaire to
managers should the launch of a -maturity complete.
avoid it. new product. -decline -the replies from
3. ADDITIONAL NOTES BM014-3-3-DMKG
-It relies entirely -then market -withdrawal these
on one person’s surveys collect -if organization questionnaires
judgment-as well data from a introduce a new are analyze &
as their opinions- sample of product, it might summaries are
prejudices & potential have a similar passed back to
ignorance. customers- product that was the experts.
-It can give good analyze their launched -each expert is
forecasts, but views & make recently & can then asked to
can also give inferences about assume that reconsider their
very bad ones. the population demand for the original reply in
-the major at large. new product will the light of the
weaknesses its -market survey follow the same summarized
unreabilities. can give useful pattern. replies from
-someone who is info but tend to others.
familiar with the be expensive -the process of
situation often and time modifying
produce worse consuming. responses in the
forecast than light of replies
someone knows made by the rest
nothing. of group is
repeated several
times.
-usually between
3 & 6 times.
Comparisons of the methods
Method Accuracy in term
Short Medium Long Cost
Personal insight Poor Poor Poor Low
Panel consensus Poor to fair Poor to fair Poor Low
Market survey Very good Good Fair High
Historical analogy Poor Fair to good Fair to good Medium
Delphi method Fair to very good Fair to very good Fair to very good Medium to high
-each of these judgmental methods work best in different circumstances.
-if you want a quick reply, personal insights is the fastest and cheapest method.
-If you want a reliable forecast, it may be worth organizing a market survey or Delphi method.