Forecasting

Forecasting

Benjamin Peterson

MGT 554

LECREACIA TRUITT

March 20, 2006

In business being able to predict how a particular product will sell and how many will need to be made is an important part of staying competitive. Forecasting how your product or products will perform is a key component of budgeting, capital improvements, and investing for any company. How would you grow your company if you did not know that for the next 2 years your average performance of each product would be X.? By knowing this you can estimate your income and then budget for your future. If the forecast is too great, inventories will be too high and money will be lost because of overproduction. If the forecast is too small, the demand for the product or service will out way the inventory and money will be lost because the customer cannot buy the product and future business may also be lost.

There are several methods that can be used to forecast demand. These are not limited to, but may include:

• Grass Roots Forecasting

• Panel Consensus

• Historical Analogy

• Time Series Analysis

• Delphi

All of these methods work basically the same. They all try to predict the amount of product or service that will be purchased in a given time period. The way these methods arrive at their conclusions, however, is different.

Panel Consensus

The Panel Consensus method of forecasting uses internal people in the company from all levels in the organization to create its forecast. The process takes place through open meetings with a free exchange of ideas. The drawback of this method is that some people in a lower level of the company may feel intimidated by the top-level employees in these meetings. They may feel too hesitant to contradict a vice president’s thoughts about demand and as a result, not give their opinion. This limits the open nature of the method and may skew results. (Chase 2005 pg514)

Historical Analysis

Historical Analysis forecasts demand for a new product. It bases the forecast for one product on the demand for a similar product. An example would be forecasting demand for a new type of camera film based on sales of the company’s latest camera in the market. This is an accurate way to predict the sales of products that share market share with similar products. (Chase 2005 pg514)

Grass Roots

A company can perform study after study however these gages can still fail because they are not directly dealing with the clients or consumers in the market. A grass roots forecast is where each sales person reports on the trends with in their own region. The benefit of this is that where a broad survey may miss important questions, or a technical study of data can over look an up coming or current market trend, a grass roots forecast has the benefit of a personal connection that can bring out reactions and suggestions about the product that may be in the public mind but unknown nationally because of regional differences. The perfect example of this is in the insurance business. Each agent can communicate with their clients who they know personally and have a community bond with to see how there individual policy fills the needs of their lives. If it turns out that a certain policy is not liked or not needed in one region it can be rewritten or replaced in a way that better fits that needs of the region. (Chase 2005 pg514)

Delphi

“The Delphi method was developed by the Rand Corporation in the 1950s.” (Chase 2005 pg517) In this forecasting method it was recognized that the views of the upper management or influential co-workers could skew the results or sideline the ideas of those who may not have years of experience. In an effort to curb this error in data an anonymous questionnaire is passed out to a cross section of people from different departments who would be considered knowledgeable in there areas. The questionnaire is collated and then refined and reworked