Chapter 10- forecasting

Question 1

Forecasting

Answer 1

• use of existing data to predict future trends
• businesses need to use forecasting so that they can make plans for the future

Question 2

Methods of forecasting

Answer 2

Quantitative methods of forecasting (numerical)
Qualititative methods of forecasting (based on experience and understanding)
Which is the best method to use will depend on the business and what its trying to forecast

Question 3

Qualitative forecasting

Answer 3

• using views and opinions in reaching decisions about the future
• often based on previous experience or on a systematic collection of opinions from groups like consumers or sales staff
• some may think that this is a less accurate method
• quantitative methods may look more accurate but they will only be as good as the information on which they are based

Question 4

Qualitative forecasting methods

Answer 4

1. Delphi technique
   - form of structured qualitative forecasting that relies on information from experts
   - usually takes the form of a questionnaire that Is supplied individually to a group of experts
   - after the first round the information from all the questionnaires is summarised anonymously and given back to the experts for a new set of forecasts
   - believed that over this process the opinions in the group will converge to a median or average
   - process can continue over a number of rounds depending on a predetermined stop point
2. Brainstorming
   - technique that brings together individuals to discuss their ideas for solutions to problems
   - believed that it is more effective to use group discussion to resolve problems than to have individuals working alone
3. Instead of any structured techniques managers will rely on intuition to focus on outcome
   - they will rely on their knowledge of their business, their knowledge of their markets and the economy and past experience

• consumer expectations: there expectations may differ from the views held by others in the economy
• if consumers are pessimistic against trends its likely that this will affect future growth
• market research can be used to assess consumer feelings and options
• sales staff may have the most accurate view of the way in which the market is moving
• they are in daily contact with retailers, possibly consumers and they will be able to use this contact to assess the way in which the market is moving
• sales staff forecast are useful for short-term planning
• possible to use the options of academics and business experts to forecast future market changes
• can be done through meetings or through use of academic papers or b direct approach to experts or expert panels

Question 5

What is the best way to use qualitative forecasting?

Answer 5

• in conjunction with quantitative results
• using qualitative methods like local resident panels alongside quantitative methods will help to highlight this problem

Question 6

Quantitative methods: time series analsysis

Answer 6

• it is a moving average
• a moving average looks at data over a period of time and combines it over different periods to give averages
• its the use of a moving average using past data calculated over a period of time which is then projected to give forecast figures for the future

Question 7

When is time series analysis particularly useful?

Answer 7

• for a business that faces cyclical or season changes in demand
• because analysis will iron out the variations and give a long-term trend for the data
• analysis makes the assumption that past performance can be used as an indicator for the future

Question 8

What are the 4 components the business will want to find from the information given by time series analysis?

Answer 8

Trend
Cyclical variations
Seasonal variations
Random fluctuations

Question 9

Trend

Answer 9

• trend figure will smooth out these fluctuations to give a overall picture

Question 10

Cyclical variations

Answer 10

• variations that occur as a result of the business cycle and recessions and booms in the economy

Question 11

Seasonal variations

Answer 11

• changes that occur over the year

Question 12

Random fluctuations

Answer 12

• changes in sales that might be difficult to predict

Question 13

Finding the trend

Answer 13

• raw data must be used to calculate a moving average
• average can be calculated over a period of time but the choice will depend on the cycle of sales which the business faces

Question 14

How do you calculate the three-period average?

Answer 14

• add together the first 3 numbers and put the total alongside the middle if the first 3 years
• the first sales number then drops out and the following three numbers are added
• this process is continued down the table with the top number dropping out at each stage and the next 3 being added until the final 3 numbers are reached

Question 15

How do you calculate the three-period moving average?

Answer 15

• fourth column in table
• figure is found by dividing the totals in the third column by 3 to find the average figure

Question 16

When the moving average figures are plotted what should be drawn through them?

Answer 16

• a straight line
• called the line of best fit
• this line will show a long-term trend and can be used to forecast future sales
• the data is extrapolated in this process; the line of best fit will be extended to show what might be expected to happen in the future

Question 17

Line of best fit

Answer 17

• a kine drawn through the points on a graph so that the points are distributed as evenly as possible above and blow the line

Question 18

Calculating the cyclical variation

Answer 18

• it is the amount by which the actual sales in a period vary from the moving average figures
• cyclical variation= actual sales- moving average sales
• each of the periods have been given a period number in the final column
• it is then possible to calculate the average of the cyclical variations for each period
• add up e.g. all of period 1 and divide it by how many period 1

Question 19

Summary for calculating a moving average

Answer 19

• find the trend period
• calculate the moving total
• calculate the moving average
• calculate the cyclical variation
• calculate the average cyclical variation
• plot the trend line on a graph and extrapolate the forecast from the projected line of best fit
• add or subtract the average cyclical variation to the forecast figures on the graph

Question 20

Use and limitations of forecasts

Answer 20

• any forecast will only be as reliable as the data that is used to formulate it. It is vital in preparing forecasts to use accurate and reliable information
• businesses need to be careful about making assumptions about the future based on the expericne of the past. Events in political and economic spheres can occasionally make forecasts less useful
• most recent info is often the most useful and relevant
• forecast doesn’t not take into account of any change in the objectives of the business