FORECASTING

FORECASTING
 When estimates of future conditions are made
on systematic basis, the process is referred to
as “FORECASTING”.
 The figure(s) or the statement(s) obtained by the
process of forecasting is called “FORECAST”
 Forecasting aims at reducing the areas of
uncertainty that surround management decision-
making with respect to cost, pricing, profit, sales,
production, capital investment etc.
 FORECASTING
 The subject of business forecasting is
NOT to determine the a curve or series of
figures accurately that will tell us
exactly what will happen in future.

 Business forecasting makes a systematic

and analytical attempt on the basis of
statistical (past) data to estimate the
future conditions. (Of course, these
estimates are in the form of figures or
statements)
 DEFINITION
 “Forecasts are predictions or estimates of
the changes, if any, in characteristic
economic phenomena which may affect
one’s business plans” (Dalton McFarland)

 “Forecasting is the formal process of

predicting future events that will
significantly affect the functioning of the
enterprise” (William L. Glueck)
 IMPORTANCE / BENEFITS OF
FORECASTING
 Key to Planning
 Improves Creativity
 Better Coordination
 Facilitates Better Control
 Helps in Facing Changes
 Helps in Recognizing Opportunities in Advance
 Reduces Future Uncertainties
 Helps Adopting Definite Course of Action
 Steers the Organization to its Destination
 Prepares the Employees to Accept Changes (less
‘Resistance to Change’)
 Provides Better Results than Pure Hunch / Guess
 Provides Logical Basis for Looking Ahead
 Identifies Problems in Advance while Implementing Plans
 LIMITATIONS OF FORECASTING

 Weak Bases of Forecasting – Wrong

Assumptions, Approximations (“The only
certain thing about forecast that it will be wrong”)

 Forecasts Tell Us About the Trends, Not

Realities
 Doubtful Relevance of Past Data
 Time Consuming
 Expensive Process
 Forecasting – An Art and Not Science
 TYPES OF FORECASTS
 TECHNOLOGICAL FORECASTS:
 Concerned with rate of change technological progress. Useful to
forecast machines, products, process, procedures, techniques etc.
Govt. of India (Min. of science & Tech.): Technology Information
Forecasting & Assessment Council (TIFAC)
 ECONOMIC FORECASTS:
 Govt. Agencies / other organizations collect data for prediction of
estimates on the general business environment; e.g. future tax
revenue, general pricing policies, level of business growth, level of
employment, level of inflation etc.
 DEMAND FORECASTS:
 Gives the expected level of demand for goods & services. Basic input
for business planning, budgeting & control. Business decisions –
influenced by demand forecasts.
 FEATURES OF FORECASTS

 Causal Effect – characteristics existed in past

will continue exist in future
 Never Perfect
 More Accurate for group of items than
individual items
 Accuracy decreases as the time horizon
(period) increases
 CLASSIFICATION OF
FORECASTS
FORECAST APPLICATIONS CHARACTERISTICS FORECAST
HORIZON METHODS
SHORT-TERM Short adjustment of May be at item level Extrapolation of
(1 Week to 3 Prod. Persl., Job for planning of activity Trends,
Months) Scheduling, level. Should be at Judgemental,
Purchasing, Lay offs item level for Exponential
etc purchasing & inv. Smoothing
Control

Medium-Term Aggregate Plg., Numerical. Not Collective Opinion,

(3 Months to 3 Capital & Cash necessarily at item Time series,
yrs) Budgets, PPC, Inv. level. Group level. Regression
Plg. & Budgeting Analysis,
Judgemental
Long-Term (3 Business Plg., Broad, General. Often Technological,
to 5 Yrs or Product Plg., Capital only qualitative Economic,
more) Plg., Facility Plg., Demographic,
Location Plg. Marketing
Research,
Judgemental
 USES OF FORECASTS IN
BUSINESS DECISION-MAKING
 MARKETING:
 Demand Forecasting for Products
 Forecast for Market Share through Marketing Research

 Forecasting Trend in Prices, Consumer Behaviour etc.

 PRODUCTION:
 Materials Requirements
 Trends in Material Pricing & Labour Costs
 Maintenance Requirements
 Plant Capacity

 FINANCE:
 Cash Flows
 Revenues,

 PERSONNEL:
 No. of Workers in Each Category
 Labour Turnover
 Absenteeism
 FORECASTING MODELS

 Three Broad Classification:

A. Qualitative Methods:
 Historical Method
 Opinion Survey
 Executive Opinion Survey
 Customer / Distributor Survey Method
 Prior Knowledge
 Informed Judgement
 Sales Force Estimates
 Delphi Method
 Market Survey Method
 Marketing Research Method
 Life Cycle Analogy Method
 FORECASTING MODELS
B. Quantitative Method (Time Series Method)
 Past Average
 Last Period Sales
 Simple Moving Average
 Weighted Moving Average
 Exponential Smoothing
 Least Square Method
C. Quantitative Method (Econometric Method)
 Regression Analysis
 Correlation Analysis
 AN OVERVIEW

METHOD DESCRIPTION USES SHORT- LONG- REALTIVE

TERM TERM COST
Delphi Forecast By Long-Term Fair Fair Med to High
Method Experts Sales F’cast
Tech. F’cast
Marketing Questionnaires F’cast of Very Good Good High to Very
Research & Surveys Sales of High
Products
Life Cycle Based On Life Capacity / Poor Fair Medium
Analogy Cycle Of Similar Facility Plg
Products

Informed Experts – Product Fair to Fair to Low

Judgement Various Levels Sales Poor Poor
 SELECTION OF
FORECASTING TECHNIQUES
 Three Factors
1. The Characteristics of decision-making:
 Time Horizon
 Level of Detail
 No. of Items
 Control v/s Planning
2. The Characteristics of Forecasting Methods:
 Time Horizon
 The Pattern of Data (Seasonal, Trend, Cyclic)
 Type of Model (Causal, Time series, Statistical)
 Cost
 Accuracy
 Ease of Application
3. The Present Situation:
 Item to Be Forecast
 Amount of Historical Data Available
 Time Allowed to Prepare Forecast
Thank You