Steps in Forecasting
Determine the purposes for using the forecasts.
Select the items to be forecast and determine those factors affecting the
sales of each product group and their relative importance.
Choose a forecasting method or methods best suited for the job.
Gather all necessary and available data.
Analyze the data:
Check and cross-check deductions resulting from the analyses.
Make assumptions regarding the effects of the various factors that
cannot be measured or forecast.
Convert deductions and assumptions into specific product and territorial
forecasts and quotas.
Apply forecasts to the company operations.
Periodically review performance and revise forecasts.
Forecasting Techniques
Qualitative Forecasting techniques relies on non-numerical data and subjective
judgement. These methods are based on opinions, expert knowledge and
qualitative research such as market research, surveys and expert interviews.
Qualitative Approach Techniques
1. Sales Force Composite: This method predicts future sales by estimates.
With the salesperson being closest to the customers, they can create a
sales forecast that considers changes in price, product design, expected
changes in competition etc.
2. Consumer Surveys: This method is also known as the Opinions survey as
it utilizes the opinions of consumers to create estimates of consumer
spending patterns in the short run.
3. Jury of Experts: This is where experts in the field such as dealers,
industry analysts, marketing consultants etc. These experts would
provide knowledge on sales, production, spending, finance and
purchasing to create a forecast for future sales.
4. Delphi Method: This forecasting format is based on the results of
multiple rounds of questions sent to a panel of experts. The answers to
each round of questioning are shared so that the group can adjust their
answers according to their interpretation of the group's response. The
ultimatum of this process is to have a consensus of what the group truly
thinks.
Quantitative techniques often rely on historical numerical data, statistics
and mathematical models to make predictions. These methods involve
analyzing past numerical trends to project future outcomes.
Quantitative Forecasting Techniques
1. Moving Average: These are averages that are updated as new
information is received. It employs the most recent information, drops
the oldest information and calculates an average which is used as the
forecast for the next period.
Advantages of Forecasting
1. Strategic Planning: Forecasting helps businesses set
long-term goals and objectives. By predicting future
trends and market conditions, businesses can develop
strategies to capitalize on opportunities and mitigate risks.
2. Resource Allocation: It enables the effective allocation
of resources such as capital, labour, and materials.
Businesses can allocate resources where they are needed
most, optimizing efficiency and reducing waste.
3. Budgeting and Financial Planning: Forecasting helps
in creating realistic budgets and financial plans. Accurate
revenue and expense forecasts allow businesses to
manage cash flow, secure financing, and ensure financial
stability.
4. Inventory Management: Forecasting helps businesses
maintain optimal inventory levels. By predicting demand,
companies can avoid overstocking or understocking,
reducing carrying costs and stockouts.
5. Production and Operations Planning: Manufacturers
can use forecasting to plan production schedules and
optimize capacity utilization. This minimizes production
bottlenecks and reduces lead times.
Disadvantages of Forecasting
Forecasting can be a valuable tool for businesses, helping them plan for
the future and make informed decisions. However, it also comes with
several disadvantages and challenges that businesses need to be aware
of:
1. Inaccuracy: Forecasts are based on historical data and assumptions
about future conditions. These assumptions may not always hold
true, leading to inaccuracies in the forecasts. Unexpected events,
such as economic downturns or natural disasters, can significantly
impact the accuracy of forecasts.
2. Uncertainty: The future is inherently uncertain, and forecasting
cannot account for all possible variables and scenarios. This can
lead to uncertainty in business plans and decision-making, as well
as potential financial losses if the forecasts are off the mark.
3. Resource Intensive: Developing and maintaining a robust
forecasting system requires time, money, and skilled personnel.
Small businesses may find it challenging to allocate resources for
forecasting activities.
4. Complex Data Analysis: Forecasting often involves complex data
analysis, including statistical modelling and data interpretation.
Businesses may need to invest in specialized software or hire
experts to perform these tasks effectively.
5. Overreliance: Businesses can become overly reliant on forecasts,
leading to a false sense of security. This can result in poor decision-
making if the forecasts are consistently inaccurate.
