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Forecasting
Forecasting
Forecasting
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Forecasting

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  • 1. ADDITIONAL NOTES BM014-3-3-DMKGFORECASTINGEvery 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 wheneach 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, theseriousness of any errors, the effort considered worthwhile and so on.-Types of forecasting: 1) Qualitative/Judgement 2) Quantitative/Statistical –a. Projective forecasting b. Causal forecastingQuantitative/Statisticala.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 anentirely new product, it will have no past demand figures to project into the futures and it will not yetknow the outside influences that affect demand. So, the organization does not have the data forquantitative method.-The only option is to use a qualitative method.- such method are generally called judgmentalforecasting 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 cannotuse 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 methodsMethod Accuracy in term Short Medium Long CostPersonal insight Poor Poor Poor LowPanel consensus Poor to fair Poor to fair Poor LowMarket survey Very good Good Fair HighHistorical analogy Poor Fair to good Fair to good MediumDelphi 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.

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