QUESTION 2.

Forecasting is a process of estimating a future event by casting forward past data. The past data
are systematically combined in a predetermined way to obtain the estimate of the future. Thus
forecast is an estimate of future values of certain specified indicators relating to a
decisional/planning situation

IMPORTANCE OF FORECASTING TO BUSINESESS

 In marketing, total demand for products must be forecasted in order to plan total
promotional effort. Pricing and promotion, e-business strategies.
 In finance, interest rates must be predicted so that new capital acquisitions can be planned
and financed. Timing and amount of funding/borrowing needs.
 In personnel management, forecasts of the number of workers required in different job
categories are required in order to plan job recruiting and training programs. Hiring
activities, layoff planning.
 In production scheduling, predictions of demand for each product line for specific weeks
and months allow the firm to plan production schedules and inventory maintenance.
 In process control, forecasts of the behavior of the industrial process in the future are
required so that the number of defective items produced can be minimized

QUALITATIVE TOOLS FOR FORECASTING

Qualitative forecasting techniques are subjective, based on the opinion and judgments of
consumers and experts;

 They are appropriate when past data are not available.

 They are usually applied to intermediate – or long – range decision

For example, the introduction of new products and the redesign of existing products or packaging
suffer from the absence of historical data calls for this technique of forecasting.
The following are some of the Qualitative Tools for forecasting

 EXECUTIVE OPINIONS: A small group of upper-level managers (e.g., in marketing,

operations, and finance) may meet and collectively develop a forecast. This approach is
often used as a part of long-range planning and new product development. It has the
advantage of bringing together the considerable knowledge and talents of various
managers. However, there is the risk that the view of one person will prevail, and the
possibility that diffusing responsibility for the forecast over the entire group may result in
less pressure to produce a good forecast.
 SALES FORCE OPINIONS: Members of the sales staff or the customer service staff are
often good sources of information because of their direct contact with consumers. They are
often aware of any plans the customers may be considering for the future. There are,
however, several drawbacks to using sales force opinions. One is that staff members may
be unable to distinguish between what customers would like to do and what they actually
will do. Another is that these people are sometimes overly influenced by recent
experiences. Thus, after several periods of low sales, their estimates may tend to become
pessimistic. After several periods of good sales, they may tend to be too optimistic. In
addition, if forecasts are used to establish sales quotas, there will be a conflict of interest
because it is to the salesperson’s advantage to provide low sales estimates.
 CONSUMER SURVEYS: Because it is the consumers who ultimately determine demand,
it seems natural to solicit input from them. In some instances, every customer or potential
customer can be contacted. However, usually there are too many customers or there is no
way to identify all potential customers. Therefore, organizations seeking consumer input
usually resort to consumer surveys, which enable them to sample consumer opinions. The
obvious advantage of consumer surveys is that they can tap information that might not be
available elsewhere. On the other hand, a considerable amount of knowledge and skill is
required to construct a survey, administer it, and correctly interpret the results for valid
information. Surveys can be expensive and time-consuming. In addition, even under the
best conditions, surveys of the general public must contend with the possibility of irrational
behavior patterns. For example, much of the consumer’s thoughtful information gathering
 before purchasing a new car is often undermined by the glitter of a new car showroom or
a high-pressure sales pitch. Along the same lines, low response rates to a mail survey
should— but often don’t—make the results suspect. If these and similar pitfalls can be
avoided, surveys can produce useful information.
 HISTORICAL ANALOGY: The historical analogy method is used for forecasting the
demand for a product or service under the circumstances that no past demand data are
available. This may specially be true if the product happens to be new for the organization.
However, the organization may have marketed product(s) earlier which may be similar in
some features to the new product. In such circumstances, the marketing personnel use the
historical analogy between the two products and derive the demand for the new product
using the historical data of the earlier product. The limitations of this method are quite
apparent. They include the questionable assumption of the similarity of demand behaviors,
the changed marketing conditions, and the impact of the substitutability factor on the
demand.
 DELPHI METHOD: A statement or opinion of a higher-level person will likely be
weighted more than that of a lower-level person. The worst case in where lower level
people feel threatened and do not contribute their true beliefs. To prevent this problem, the
Delphi method conceals the identity of the individuals participating in the study. Everyone
has the same weight. A moderator creates a questionnaire and distributes it to participants.
Their responses are summed and given back to the entire group along with a new set of
questions. The Delphi technique can usually achieve satisfactory results in three rounds.
The time required is a function of the number of participants, how much work is involved
for them to develop their forecasts, and their speed in responding.

QUANTITATIVE TOOLS FOR FORECASTING

Quantitative forecasting tools are used to forecast future data as a function of past data.

 They are appropriate to use when past numerical data is available and when it is reasonable
to assume that some of the patterns in the past are expected to continue in the future
 These tools are usually applied to short-term or intermediate- range decisions
The following some of the Quantitative tool for forecasting

 Trend refers to a long-term upward or downward movement in the data. Population shifts,
changing incomes, and cultural changes often account for such movements.
 Seasonality refers to short-term, fairly regular variations generally related to factors such
as the calendar or time of day. Restaurants, supermarkets, and theatres experience weekly
and even daily “seasonal” variations.
 Cyclical variations: These refer to the variations in time series which arise out of the
phenomenon of business cycles. The business cycle refers to the periods of expansion
followed by periods of contraction. The period of a business cycle may vary from one year
to thirty years. The duration and the level of resulting demand variation due to business
cycles are quite difficult to predict.
 Irregular variations are due to unusual circumstances such as severe weather conditions,
strikes, or a major change in a product or service. They do not reflect typical behavior, and
their inclusion in the series can distort the overall picture. Whenever possible, these should
be identified and removed from the data.
 Random variations are residual variations that remain after all other behaviors have
been accounted for

We will recommend the Quantitative tools for forecasting for them