FORECASTING METHODS

Although there are many different forecasting tools and methods, they can be divided into four general categories. 1. Judgemental methods- involve the collection of expert opinions 2. Market research methods - involve qualitative studies of consumer behaviour 3. Time-series methods mathematical methods in which future projection is extrapolated from past performance 4. Causal methods are mathematical methods in which forecasts are generated based on a variety of systems variables

1.0 JUDGEMENT METHODS

Judgement methods strive to assemble the opinions of a variety of experts in a systematic ways. e.g. salespeople or dealers frequently have a good understanding of the expected sales, since they are close to the market.

A sales force composite can be assembled that combines each persons estimate in a logical way.

THE DELPHI METHOD

A panel of experts is assembled in order to reach a consensus, without gathering them in a single location. The technique is designed to eliminate the danger of one or a few strong willed individuals dominating the decision making process. Each member of the group of experts is surveyed for his or her opinion, typically in writing. The opinions are compiled and summarized. Each individual is given the opportunity to change his or her opinion after seeing the summary. This process is repeated until consensus is achieved.

Market Research Methods

Market testing and market surveys can be valuable tools for developing forecasts, particularly of newly introduced products. In market testing, focus groups of potential customers are tested for their response to the product, and their response is extrapolated to the entire market to estimate the demand for product.

Market surveys involve gathering data from a variety of potential customers, typically through interviews, telephone based surveys, and written surveys.

Time-Series Methods
Time-series methods use a variety of past data to estimate the future data. There are a number of techniques, each of which has advantages and disadvantages. Below are some of the common time series methods: Moving Average Each forecast is the average of some numbers of past data points. The key is to select the number of points in the moving average so that the effect of irregularities is minimized. Exponential Smoothing Each forecast is a weighted average of the previous forecast and the last demand point. Thus this method is similar to the moving average, except that it is the weighted average of all past data points, with more recent points receiving more weight.

Forecast based on data with trend

Methods for data with Trends The previous two methods assume that there is no trend in the data. If there is a trend, methods such as Regression Analysis and Holts Method are more useful, as they specifically account for the trend in the data. Regression analysis fits a straight line to data points, while Holts method combines the concept of exponential smoothing with the ability to follow a linear trend in the data. A number of techniques are also available for seasonal changes in demand.

Causal Methods
In time-series methods, forecasts are based entirely on previous values of the data being predicted. In contrast, Causal methods generate forecasts based on the data, other than the data being predicted. In this, the forecast is a function of some other pieces of data. e.g the forecast for the next quarter may be a function of inflation, GNP, the unemployment rate, the interest rates, weather or anything besides the sales in previous quarters.

Selecting the Appropriate Forecasting Technique

The quality of forecasts is frequently improved by combining the various techniques. The results of combined forecasts are generally better than individual forecasts. Experience and intuition of the person / persons taking the final decision is important.