MGS 3310 Chapter 13

Forecasting
Slides 13a:
Introduction;
Qualitative Models
 What is a Forecast?

• A guess about what is going to happen in

the future
• An integral part of almost all business
enterprises
• Logical and rational, but still a guess!
• Objective is to minimize error (as you will
always be wrong!)
• Could be a complicated or simple process
 What is a Forecast? (cont’d)

• Good forecasts can lead to

– Reduced inventory costs
– Lower overall personnel costs
– Increased customer satisfaction

• The forecasting process can be based on:

– Educated guess
– Expert opinions
– Past history
 Introduction to Forecasting: Examples
 Manufacturing firms forecast demand for their product,
to schedule manpower and raw material allocation
 Service organizations forecast customer arrival patterns
to maintain adequate customer service
 Security analysts forecast revenues, profits, and debt
ratios, to make investment recommendations
 Firms consider economic forecasts of indicators
(housing starts, changes in gross national profit) before
deciding on capital investments.
 Model Differences

• Qualitative – opinion-based; incorporates

judgmental and subjective factors into forecast
• Quantitative – number-based; most frequently
used
– Time-Series – attempts to predict the future by
using historical data over time
– Causal – incorporates factors that may influence
the quantity being forecasted into the model
 Forecasting Models
Forecasting
Techniques

Qualitative Time Series

Models Methods

Delphi
Naive
Method
Moving
Jury of Executive
Average
Opinion
Weighted
Sales Force
Moving Average
Composite
Exponential
Consumer Market
Smoothing
Survey

Trend Analysis
Causal
Methods
Seasonality
Simple Analysis
Regression
Analysis Multiplicative
Decomposition
Multiple
Regression
Analysis
Qualitative Models: Using Expert Judgment
Many important forecasts are not based on formal models. For
example, during the high-interest-rate period of 1980 and
1981, the most influential forecasters of interest rates were
Henry Kaufman of Salomon Brothers and Albert Wojnilower
of First Boston.

These gentlemen combined relevant factors such as the money

supply and unemployment, as well as results from quantitative
models, in their own intuitive way to produce forecasts that
had widespread credibility and impact on the financial
community.

If you needed a long-term forecast for the personal computer

market, what approach would you take?
 The Delphi Method
The Delphi Method confronts the problem of obtaining a
combined forecast from a group of experts.
The consensus panel approach is to bring the experts
together in a room and let them discuss an event until a
consensus emerges. However, due to group dynamics, one
person with a strong personality can have an enormous
effect on the forecast.
The Delphi Method was developed by the Rand
Corporation to retain the strength of a joint forecast, while
removing the effects of group dynamics.
 The Delphi Method (cont’d)

– Iterative group process allows experts to make

forecasts without meeting face-to-face
– Participants are typically 5-10 experts who make
the forecast
– Staff personnel assist by preparing, distributing,
collecting, and summarizing a series of
questionnaires and survey results
– After three or four passes through this process, a
consensus forecast typically emerges.
 Grassroots Forecasting
The “Grassroots” technique is based on the concept of asking
those who are close to the eventual consumer, such as
salespeople, about what they are going to sell next period, and
added the forecasts to predict total demand.

Requires an experienced stable work force that knows the

customer base. Not good at retail!

Can be expensive. Takes salespeople away from sales effort.

Results can be biased.

In more sophisticated systems, forecasts may be adjusted on the

basis of the historical correlation between the salesperson’s
forecasts and the actual sales.
Consulting Customers (Market Research)

Market research is a large and important topic which includes

a variety of techniques, from consumer panels through
consumer surveys and on to test marketing.
The goal of market research is to make predictions about the
size/structure of the market for specific goods and/or services.
These predictions (forecasts) are usually based on small
samples and are qualitative in the sense that the original data
typically consist of subjective evaluations of consumers.
Market research is an important activity in most consumer
product firms. It also plays an increasingly important role in
the political and electoral process.
 Jury of Executive Opinion

– Opinions of a small group of high level

managers
– Often in combination with statistical models
– Result is a group estimate