Explain the techniques of forecasting.

Ans.

Techniques of Forecasting

Forecasting technique can be classified into two major categories:

1. Qualitative forecasting technique.

2. Quantitative forecasting technique.

1. Qualitative Techniques

(i) Jury or executive opinion (Dolphi technique)

(ii) Sales force estimates.

(iii) Customer expectations.

(i) Jury or Executive Opinion: The jury of expert opinion sometimes referred to as the Dolphi technique; involves soliciting opinions or estimates from a panel of “experts” who are knowledgeable about the variable being forecasted.

In addition to being useful in the creation of a sales or demand forecast this approach is used to predict future technological developments. This method is fast less expensive and does not depend upon any elaborate statistics and brings in specialized viewpoints.

(ii) Sales Force Estimates: This approach involves the opinion of the sales force and these opinions are primarily taken into consideration for forecasting future sales. The sales people, being closer to consumers, can estimate future sales in their own territories more accurately. Based on these and the opinions of sales managers, a reasonable trend of the future sales can be calculated.

These forecasts are good for short range planning since sales people are not sufficiently sophisticated to predict long-term trends. This method known as the “grass roots” approach ends itself to easy breakdowns of product, territory, customer etc., which makes forecasting more elaborate and comprehensive.

(iii) Customer Expectations: This type of forecasting technique is to go outside the company and seek subjective opinions from customers about their future purchasing plans. Sales representatives may poll their customers or potential customers about the future needs for the goods and services the company supplies.

Direct mail questionnaires or telephone surveys may be used to obtain the opinions of existing or potential customers. This is also known as the “survey method” or the “marketing research method” where information is obtained concerning.

Customer buying preferences, advertising effectiveness and is especially useful where the target market is small such as buyers of industrial products, and where the customers are co-operative.

2. Quantitative Techniques

Quantitative techniques are based on the analysis of past data and its trends. These techniques use statistical analysis and other mathematical models to predict future events. Some of these techniques are:

(i) Time series analysis.

(ii) Economic models.

(iii) Regression analysis.

(i) Time Series Analysis: Time series analysis involves decomposition of historical series into its various components, viz., trend, seasonal variations, cyclical variations and random variations. Time series analysis uses index numbers but it is different from barometric technique. In barometric technique, the future is predicted from the indicating series, which serve barometers of economic change.

In time series analysis, the future is taken as some sort of an extension of the past. When the various components of a time series are separated, the variations of a particular phenomenon, the subject under study stay say price, can be known over the period of time and projection can be made about future.

A trend can be known over the period of time, which may be true for future also. However, time series analysis should be used as a basis for forecasting when data are available for a long period of time and tendencies disclosed by the trend and seasonal factors are fairly clear and stable.

(ii) Economic Models: Utilize a system of interdependent regression equations that relate certain economic indicators of the firm’s sales, profits etc. Data center or external economic factors and internal business factors interpreted with statistical methods. Often companies use the results of national or regional econometric models as a major portion of a corporate econometric model.

While such models are useful in forecasting, their major use tends to be in answering “what if”? Questions. These models allow management to investigate and in major segments of the company’s business on the performance and sales of the company.

(iii) Regression Analysis: Regression Analysis are statistical equations designed to estimate some variables such as sales volume, on the basis of one or more ‘independent’ variables believed to have some association with it.