OPERATIONS MANAGEMENT
CHAPTER 3. BUSINESS FORECASTING
At the end of the chapter, the student should be able to:
a) Define business forecasting;
b) Identify the need, types and techniques in business forecasting; and
c) Apply the business forecasting process.
BUSINESS FORECASTING
Business is the process of making statements about events whose actual outcomes have not
yet been observed.
Example might be estimation of some variable of interest at some specified future date.
Prediction is a similar, but more general term. The data must be up to date in order for the
forecast to be as accurate as possible.
NEED OF FORECASTING
Forecasting is the process by which companies ponder and prepare for the future.
It involves predicting the future outcome of various business decisions.
It also helps the organization make plans that will lead to becoming a financially successful
business.
Businesses must understand and use forecasting in order to answer these important
questions. This helps the company prepare for the future.
Forecasting is used to answer important questions, such as:
How much profit will the business make?
How much demand will there be for a product or service?
How much will it cost to produce the product or offer the service?
How much money will the company need to borrow?
VARIOUS TYPES OF FORECASTING
There are a number of different methods by which a business forecast can be made.
There are many quantitative methods:- for example Time Series Forecasting, Regression
Forecasting, etc.
Then there are many qualitative methods :- (judgmental methods) such as Delphi Method,
Expert Decision.
Business Forecasting Techniques
Business forecasting and planning can be conducted by either quantitative modeling methods or
qualitative modeling methods:
Quantitative Techniques in Business Forecasting
Quantitative forecasting is a long-term business forecasting method concerned only with measurable
data such as statistics and historical data. Past performance is used to identify trends or rates of
change. These types of business forecasting are especially useful for long range forecasting in
business. Quantitative models include:
Trend Analysis Method: Also known as “Time Series Analysis,” this forecast method uses
past data to predict future events, excluding outliers and holding more recent data in higher
regard. This method is most effective when there is a large quantity of historical data showing
clear and stable trends. This is the most common and cost-effective method.
Econometric Modeling: This mathematical model makes use of several multiple-regression
equations to test the consistency of datasets over time and the significance of the relationship
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between datasets, and to predict significant economic shifts and the potential effect of those
shifts on the company.
Indicator Approach: This approach follows the relationship between certain indicators and
uses the leading indicator data in order to estimate the performance of the lagging indicators.
Lagging indicators are a type of KPI that measure business performance subsequently and
provide insight into the impact of business strategies on the results achieved.
Qualitative Techniques in Business Forecasting
Qualitative forecasting relies on industry experts or “market mavens” to make short-term predictions.
These techniques are especially useful in forecasting markets for which there is insufficient historical
data to make statistically relevant conclusions. Qualitative models include:
Market Research: Polls and surveys are conducted with a large number of prospective
consumers regarding a specific product or service in order to predict the margin by which
consumption will either decrease or increase.
Delphi Model: A panel of experts are polled on their opinions regarding specific topics. Their
predictions are compiled anonymously and a forecast is made.
OTHER CONCEPTS
1. General Business Forecast:
No business is completely independent and hence general business forecast is undertaken.
It helps to read the future conditions for business and to predict the probable changes in business
conditions that are likely to occur in the near future.
Every business is affected by the conditions of the c community in which it is located. We should not
be under the impression that only business conditions influence the general business. Political
conditions, fiscal policy, controls, population and national income etc. have direct bearing on the
business. So, it is necessary for the manager to take into consideration all these factors while
forecasting the prospects of his enterprise.
2. Sales Forecast:
This type of forecasting decides the fate of the organization as the sales determine the success of the
company. Therefore, sales forecasting should be undertaken with due care and precaution so as to
see that whatever planning department has decided is carried out to promote the sales.
It is from this point of view only that sales forecasting has been deemed to be as a guiding factor in
planning and important aspect of the organizational set up. In this connection O’ Donnell point out
that “It is the sales forecast that must set the stage for internal planning, business expenses, capital
outlays.
3. Capital Forecast:
Every business enterprise will have to think of its financial plans. It should be determined so as to
meet the needs of the company. With this object in view, forecasting of capital requirements has
become a necessity and is taken as a primary step in the organization.
In every business concern the capital is required not only to meet fixed and working capital but also
for depreciation, replacement, development, reorganization etc. Thus accurate forecasting helps the
organization to employ its capital to the fullest extent and can get the optimum returns on its
investment.
BUSINESS FORECASTING PROCESS
Business forecasting refers to the tools and techniques used to predict developments in business,
such as sales, expenditures, and profits. The purpose of business forecasting is to develop better
OPERATIONS MANAGEMENT
strategies based on these informed predictions. Past data is collected and analyzed via quantitative
or qualitative models so that patterns can be identified and can direct demand planning, financial
operations, future production, and marketing operations.
The business forecasting process entails:
Identify the problem, data point, or question that will be the basis of the systematic
investigation.
Identify relevant, theoretical variables and determine the ideal manner for collecting datasets.
Make estimates about future business operations based on information collected through
investigation.
Choose the model that best fits the dataset, variables, and estimates. The chosen model
conducts data analysis and a forecast is made.
Note the deviations between actual performance and the forecast. Use this information to
refine the process of predicting and improve the accuracy of future forecasts.