Running head: FORECASTING TODAYS FUTURE

Forecasting Todays Future

Operations & Project Management

FORECASTING TODAYS FUTURE Abstract An economist is an expert who will know tomorrow why the things he predicted yesterday didnt happen today (Laurence J. Peter). Jacobs and Chase (2011) define forecasting as the ability to predict the requirements for materials, products, services, or other resources to respond to changes in demand. The right forecasting technique is important to prevent future errors or failure. Forecasting is utilized to determine scheduling, inventory, facility layout, purchase, and sales. There are many techniques

that can be used to shape the future of a company. The four basic types of forecasting are the following: qualitive, time series analysis, casual relationships, and simulation. This paper will compare and contrast the benefits of each style. Keywords: qualitive, time series analysis, casual relationships, simulation

FORECASTING TODAYS FUTURE Forecasting Todays Future

It doesnt take a genius to know planning for the futures prevents bad things from happening, or at least can redirect them. Forecasting is used by companies to predict future patterns. Forecasting allows leaders to make informed decisions based on historical data, future data, and the current situation. Through forecasting, some companies have been able to thwart their demise and to foresee many issues that can be avoided or the impact lessened. The following discussion will lend insight to four common methods that are used.

Furthermore, one of the methods used is qualitive forecasting. Qualitive forecasting relies on the experiences, judgment, and knowledge of the management team.

FORECASTING TODAYS FUTURE This method allows the manager to utilize techniques such as a panel consensus, historical analogy, or the Delphi method to predict future occurrences. During the panel consensus, a panel of people will work together to develop the forecasts. This allows all parties involved to voice their opinions and concerns. It is built on the predication that having a multitude of opinions, will more accurately reflect the outcome. On the other hand, when utilizing the historical analogy technique of qualitive forecasting, the success and failures of known products are used in data compilation. This allows a company to look at similar products on the market and use their data to

make assumptions used in forecasting. For example, a company producing compact discs (CDs) could use the data to determine if selling digital video discs (DVDs) is viable. The data is normally based upon the four stages of growth as depicted below. Introductory Stage Growth Stage Maturity Stage Decline Stage

Sales

Time
Historical Analogy Growth Cycle

In contrast, the Delphi technique utilizes the expertise of the employees. However, instead of sitting on a panel, suggestions or opinions are submitted through the use of questionnaires to prevent undue influences. This allows everyone to offer a true opinion without fear of repercussions or speaking in opposition to a superior. But,

FORECASTING TODAYS FUTURE much like the panel method, the results are then combined and redistributed for further

fidelity in the process. Therefore, it gives a more accurate accounting of the information. Times series analysis is another method used in forecasting. It allows companies to use historical data and present it over a predetermined amount of time. Based upon the combined data, a pattern should begin to show that will allow the company to make some assumptions. As an example, lets look at the data presented below. Base on the data, we can formulate that during years eight to fourteen, several players had a significant increase in home runs most likely due to steroids.

Steroid Era Users

80 70 60 50 40 30 20 10 0 1 3 5 7 9 11 Career 13 15 17 19 21
Number of Home Runs

Barry Bonds Mark McGwire Sammy Sosa Alex Rodriguez Manny Ramirez

Moreover, another method of forecasting uses causal relationships. Causal relationships explore the variances in planned or unplanned events. For example, if there was an increase of the sale of ice, it could be determined that due to temperatures of 100 degrees, people were buying more ice. Using causal relationships, because it was hot outside, more ice was bought. A common technique used in determining causal relationships is multiple regression analysis. Multiple regression analysis identifies a

FORECASTING TODAYS FUTURE single variable and simultaneously compares several other variables to determine the effects of the proposed product. According to Joseph Nguyen, regression analysis can be shown through the following analysis: suppose you want to forecast sales for your company and you've

concluded that your company's sales go up and down depending on changes in GDP. The sales you are forecasting would be the dependent variable because their value "depends" on the value of GDP, and the GDP would be the independent variable. You would then need to determine the strength of the relationship between these two variables in order to forecast sales.

Causal Relationships Lastly, simulation forecasting will be discussed. Simulation forecasting uses simulations to examine any assumptions about the condition of the forecast (Jacobs and Chase). Simulation models allow companies to see the outcomes of potential forecasts, thus allowing them to make a more informed decision for future success. The statapult simulation is a good example. Using the statapult simulation a company can determine where there is variance and where there is reliability. Simulations allow the

FORECASTING TODAYS FUTURE company to take an inexpensive look at a suggested course of action that may save the company money in the long run.

In conclusion, forecasting can be unpredictable at times. But, it is through forecasting that companies have the foresight to make product changes, adjust production timelines, and determine marketing areas for new products. Although forecasting can be time consuming, it can be well worth it in terms of reduced savings and increased profits to the company. All in all, there are many methods used in forecasting, such as qualitive, time series analysis, causal relationships, and simulations, in which companies must determine what the expected outcome is and look at what each method will help them accomplish.

FORECASTING TODAYS FUTURE References Jacobs, Robert F., Chase, Richard B. Operations And Supply Chain Management Thirteenth Edition. New Jersey: McGraw-Hill, 2011. 480-510. Print. Nguyen, Joseph (2009). Regression Basics For Analysis. Investopedia. Retrieved from http://www.investopedia.com/articles/financial-theory/09/regressionanalysis-basics-business.asp#ixzz1gTe1uvWl