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Chapter II: Forecasting

Forecast
A statement about the future value of variable of interest such as demand.
Prediction about the future
Two important aspects of forecasts.
1. The expected level of demand
2. The degree of accuracy that can be assigned to a forecast
Forecast maybe:
1. Short range (e.g., an hour, day, week, or month)
2. Long range (e.g., the next six months, the next year, the next five years, or
the life of a product or service).
3. Intermediate (e.g., one season up to 2 years).
Forecasts affect decisions and activities throughout an organization
Accounting, finance
Marketing
Management formation System
Operation
Product/service design

Assume causal system


Past=>future
Forecast rarely perfect because of randomness
Forecast more accurate for groups vs. individuals
Forecast accuracy decreases as time horizon increases
Elements of Forecasting
1. Timely
2. Reliable
3. Accurate
4. Meaningful
5. Written
6. Easy to use
Steps in the Forecasting Process
1. Determine purpose of forecasting
2. Establish a time horizon
3. Select a forecasting technique
4. Gather and analyze data
5. Prepare the forecast
6. Monitor the forecast

Major Areas of Forecasting


Economic Forecasting- predicts what the general business conditions will be in the future (e.g.,
Inflation Rates, Gross National Product, Tax, Level of Employment)
Technology Forecasting- predicts the probability and /or possible future development in
technology (e.g., Competitive advantage or firms competitors incorporate into their products and
processes).
Demand Forecasting- predicts the quantity and timing of demand for a firms products.

Types of Forecasting
Judgemental uses subjective inputs
Time series- use historical data assuming the future will be like the past.
Associative Models- uses explanatory variables to predict the future.

Forecasting Methods
1. Subjective Approach- qualitative in nature and usually based on the opinion of people.
2. Objective Approach- quantitative / mathematical formulations- statistical forecasting)

Qualitative
- methods consist mainly f subjective inputs, which often defy numerical description. It
involve either the projection of historical data or the development of associative models that
attempt to utilize causal (explanatory) variables to make a forecast.
Quantitative
-consist of mainly of analysing objective or hard data. They usually avoid personal biases
that sometimes contaminate qualitative methods. In practice either approach or a combination of
both approaches might be use to develop a forecast.

Judgemental Forecast
Executive opinions
Sales force Opinion
Consumer Surveys
Outside opinions
Delphi Method
Opinions of managers and staff
Achieves a consensus forecast
Time Series Forecast
Trend- long term movement in data
Seasonality- short term regular variations in data
Cycle- wavelike variations of more than one years duration
Irregular Variations- caused by unusual cirscumtances
Random Variations- caused by chance