Answer to Question #194012 in Management for Prachi shiledar

Question

2. Demand forecasting is not a speculative exercise into the unknown. It is essentially a 

reasonable judgement of future probabilities of the market events based on scientific 

background. Explain the statement by elaborating different qualitative and quantitative 

methods of demand forecasting.

Answer 1

Quantitative forecasting methods can be used when there is reason to believe that activity in the past had a certain trend that can be continued in the future, and when the available information is sufficient to identify statistically significant trends or relationships.

Two typical quantitative forecasting methods are:

- Time series analysis (Trend projection). It is based on the assumption that what happened in the past gives a good approximation in assessing the future. This analysis is a method of identifying patterns and trends from the past and extending them into the future. This analysis method is used to estimate the demand for goods and services, estimate the stock requirements, forecast the sales structure or the demand for personnel. The more reliable the assumption about the similarity of the future to the past, the more likely the forecast accuracy. So time series analysis will be useless in situations with high levels of mobility or when there has been a significant, well-known change.

- Causal (cause-and-effect) modeling is the most sophisticated and mathematically complex quantitative forecasting method in use today. It is used in situations with more than one variable. Causal modeling is an attempt to predict what will happen in similar situations by examining the statistical relationship between the factor in question and other variables. In the language of statistics, this relationship is called correlation. The closer the correlation, the better the predictive power of the model. Full correlation occurs in a situation where in the past dependence has always been true.

Qualitative forecasting methods. To use quantitative forecasting methods, it is necessary to have sufficient information to identify a trend or statistically significant relationship between variables. When the amount of information is insufficient or the quantitative model is too expensive, you can resort to qualitative forecasting models. At the same time, forecasting of the future is carried out by experts.

The four qualitative forecasting methods are:

 - The opinion of the jury. This forecasting method is about combining and averaging the opinions of experts in relevant fields. An informal variation of this method is brainstorming, during which participants first try to generate as many ideas as possible. Only after the generation process stops, some ideas are evaluated.

 - The aggregate opinion of salespeople. Experienced salespeople often predict future demand correctly. They are familiar with consumers and can take into account their recent actions faster than they can build a quantitative model.

 - The consumer expectation model. It is a forecast based on the results of a customer survey of an organization. They are asked to assess their own future needs as well as new requirements. By collecting all the data obtained in this way and making corrections for overestimation or underestimation based on his own experience, the manager is able to accurately predict aggregate demand.

 - The method of expert assessments. It is the most formalized version of the collective opinion method. This method is a procedure that allows a group of experts to come to an agreement. Experts fill out a detailed questionnaire about the problem at hand. They write down their opinions about her. Each expert then receives a summary of the other experts' responses and is asked to re-examine their forecast and, if it does not match those of others, explain why this is so. The procedure is repeated three or four times until the experts come to a consensus. The anonymity of the experts is important. It helps to avoid possible group reflection on the problem, as well as the emergence of interpersonal conflicts based on differences in status or social coloring of expert opinions.