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Chapter 14
Chapter 14
Forecasting &
Planning
Reducing Risk in Decision Making
WHO USES FORECASTS?
► In business, forecasts form the basis for planning
capacity, production and inventory, staffing, sales and
market share, finances and budgeting, research and
development, and top management’s strategy.
2. Delphi Method
In the Delphi method group technique, a panel of experts are questioned individually about their
perceptions of future events. The experts do not meet as a group, which reduces the possibility
that consensus is reached because of dominant personality factors. Instead, the forecasts and
accompanying arguments are summarized by an outside party and returned to the experts, along
with further questions. This continues until a consensus is reached.
This type of method is useful and quite effective for long-term forecasting. Because it is done
in questionnaire format, it eliminates the disadvantages of groupthink. There is no committee
or debate; the experts are not influenced by peer pressure to forecast a certain way.
Low reliability and lack of consensus from the returns are cited as the main disadvantages of
the Delphi method.
QUALITATIVE APPROACH
3.
\ Sales-Force Polling
\
► Some companies use as a forecast source salespeople who have continual contact with customers.
They believe that the salespeople who are closest to the ultimate customers may have significant
insights regarding the state of the future market.
► The advantages of this forecast are:
► It is simple to use and understand; It uses the specialized knowledge of those closest to the action.
► It can place responsibility for attaining the forecast in the hands of those who most affect the actual results.
► The information can be broken down easily by territory, product, customer, or salesperson.
The disadvantages include salespeople’s being overly optimistic or pessimistic regarding their
predictions, as well as inaccuracies due to broader economic events that are largely beyond their
control.
4. Consumer Surveys
► Some companies conduct their own market surveys regarding specific consumer purchases.
Surveys may use telephone contacts, personal interviews, or questionnaires as a means of obtaining
data.
► Extensive statistical analysis usually is applied to survey results to test hypotheses
regarding consumer behavior.
STEPS IN THE FORECASTING PROCESS
Naive models may be classified into two groups. One group consists of simple projection models.
These models require inputs of data from recent observation, but no statistical analysis is performed
The second group is made up of models that, while naive, are complex enough to require a
computer. Traditional methods such as classical decomposition, moving average, and exponential
smoothing
► Smoothing techniques are a higher form of naive model. The two typical forms
are moving averages and exponential smoothing.
► Moving averages are averages that are updated as new information is received. With
the moving average, a manager simply employs the most recent observations to calculate
an average, which is used as the forecast for the next period.
► Advantages and Disadvantages
The moving average is simple to use and easy to understand. However,
there are two shortcomings:
1. It requires users to retain a great deal of data and carry it along with them from forecast period
to forecast period.
2. All data in the sample are weighted equally. If more recent data are more valid than older data,
why not give them greater weight?
The forecasting method known as exponential smoothing gets around these disadvantages.
Exponential Smoothing