Slides 13a: Introduction; Qualitative Models

1. Slides 13a: Introduction; Qualitative Models MGS3100 Chapter 13 Forecasting

2. 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

3. 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

4. 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.

5. 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

6. Forecasting Models

7. 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?

8. 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.

9. 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.

10. 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 sales people 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.

11. 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.

12. Jury of Executive Opinion • Opinions of a small group of high level managers • Often in combination with statistical models • Result is a group estimate