Forecasting Approaches : The two general approaches to forecasting are :

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(i)                 Qualitative methods consist mainly of subjective inputs, often of non-numerical description.

  • Jury of executive opinion method involves taking opinion of a small group of high-level managers and results in a group estimate of demand.
  • Salesforce composite method is based on estimate of expected sales by sales persons.
  • Market research method or consumer survey method determines consumer interest in a product or service by means of a consumer survey.
  • Delphi method is a judgemental method which uses a group process that allows experts to make forecasts.

(ii) Quantitative methods involve either projection of historical data or the development of association models which attempt to use causal variables to arrive at the forecasts.

1. Time series models use a series of past data to make a forecast for the future. Time series is a time-ordered sequence of observations taken at regular intervals over a period of time.

Yc = T. S. C. R multiplicative model

Yc = T + S + C + R additive model

where T is Trend, S is Seasonal, C is Cyclical, and R is Random components of a series.

Trend is a gradual long-term directional movement in the data (growth or decline).

Seasonal effects are similar variations occurring during corresponding periods, e.g., December retail sales. Seasonal can be quarterly, monthly, weekly, daily, or even hourly indexes.

Cyclical factors are the long-term swings about the trend line. They are often associated with business cycles and may extend out to several years in length.

Random component are sporadic (unpredictable) effects due to chance and unusual occurrences. They are the residual after the trend, cyclical, and seasonal variations are removed.

Trend: Three methods for describing trend are: (1) Moving average, (2) Hand fitting, and

(3) Least squares.

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