QUESTION 1

Forecasting is the process of developing the necessary methods to generate the future values
which can be used as the inputs for the goals and objectives of the firm. There are several uses of
forecasting specifically in business and management.

The primary use of forecasting in business and management is to control the business financial
matters in an efficient manner. For an example, the finance managers need forecasts of interest rates to
help in planning the timing of new capital acquisition and operations. The forecast of cash flows in
regards of expenses and revenues will maintain corporate liquidity and operational efficiency. Forecasts
also helps in the planning for cash and borrowing needs for the company’s future operations. These
would enable a business to operate efficiently while assisting the production process.

Another use of forecasting is to plan promotional campaigns and formulate sales strategies or
targets for products of a business. For instance, marketing managers rely on forecasts to determine the
future demand of the firm’s products by geographic region and consumers’ types that can maximize
their coverage. By setting advertising appropriations, more product sales will be generated while the
projected advertising campaigns will be more effective. These activities are particularly important to
maintain and improve the business’ market share.

Pertaining to the production planning, forecasts are useful to identify the needs and allocate
resources. Personnel managers for an example require forecasts in the planning for the number of
workers to be hired and trained. Forecasts help determine the factors that affect such variables as labour
turnover, retirement age, absenteeism and tardiness as inputs for planning and decision making
purposes. In return, these are beneficial in measuring risks and cutting costs to accomplish business
goals.

Inventory control is also one of the uses of forecasting in business and management. A business
needs estimates of future productivity levels of the firm in order to plan for inventory storage capacity.
These include ordering of raw materials and planning of shipments. Other than that, forecasts are also
needed in terms of material and maintenance requirements as well as equipment purchases. Forecasts
make it possible for a business to maintain balanced level of stock to meet the changing levels of
demand of the products.

Lastly, forecasting plays an important role in assessing the need for innovation or
diversification. The research and development department in particular, need technological forecasts to
prepare the business when facing new changes affecting their sales or when a product line is becoming
obsolete. In such cases, they will have to search for a new product line or make modification to the
existing product in line with the findings of the marketing research department. Since technology is
ever changing, forecasting is necessary for organisations to remain competitive in the market.

QUESTION 2

The objective of developing the forecasting models includes reducing uncertainties facing an
organization, whether it is a business or non-business entity. These models provide organisations
information that will facilitate decision making. Virtually every organization operates in an uncertain
and dynamic environment with imperfect knowledge of the future. While forecasters will not be
completely certain of what will happen in the future, they can reduce the range of uncertainty
surrounding a business decision. For an example, forecasting of demand of products will help
businesses anticipate market potentials and ease uncertain demand conditions.

Secondly, forecasting models are developed with the objective of simulating the consequences
of uncertain future events. Forecasting acts as an integral part of the planning and control system, thus
a forecasting procedure would allow organisations to predict the future effectively and in a timely
fashion. Part of successful business leadership comes from an ability to foresee future developments
and control anticipated turning points in the direction of the business. Monetary and fiscal policy of the
country, for example, are being guided by the projections of the employment and rate of inflation.

Apart from that, they also aim to quantify the effects of alternative management decisions.
Forecasting can be used as a tool to guide such business decisions, even though some level of
uncertainty may still exist in order for managers to make the right decision. Top management is
generally interested in making decisions based on forecasting economic factors that are critical in
strategic planning and action. Businesses compete in a global economy that requires strategic decisions
in every aspect of the corporate structure from production and inventory to purchasing, accounting,
marketing finance and personnel. For instance, reliable forecasts about the demographics of the market
in figures are essential in making choices on further marketing strategies.

Another objective is to provide users and preparers with standards or criteria of performance
and procedure for comparing actual against target. This standard procedure now becomes a standard
measurement in the implementation of the future objective of the firm. Financial forecasting in the
means of cash flow, rates of revenue and expense projections are critical to assess the performance of a
business during a particular accounting period. The actual figures will somehow give an idea as to how
well the business is doing and later assists in the planning process.

QUESTION 3

The techniques involved in forecasting are commonly categorized as qualitative technique and
quantitative technique that have distinct characteristics. The qualitative technique is also known as
subjective or judgmental forecasting and is generally used when data are scarce and insufficient to be
used for developing the mathematical models. On the other hand, quantitative technique is basically
statistical in nature and hence can be easily evaluated for accuracy by applying certain measurement
criteria.

Typical examples where qualitative technique is widely used include forecasting of new
products, predicting new technologies and predicting future scenarios. Its application usually involves
human judgment in the form of personal opinion or rating scheme to translate qualitative assessments
into quantitative estimates. There are however weaknesses in using this technique in which forecast
values generated are difficult to be evaluated and assessed for accuracy. Differences in the
understanding or background of individuals will lead to differences in opinions and forecasts.

The most well known qualitative technique is the Delphi method that involves conducting
samples survey on a panel of experts in several stages. There are three different groups of participants
in the Delphi process comprised of the respondents, staff personnel and the decision makers. It is useful
in technological forecasting, education and marketing.
 The second example of qualitative technique is the panel’s opinion which takes the opinions of
a small group of specially selected high level managers who are in the decision making positions. These
opinions and perceptions, formulated in combination with statistical models, would result in a group
estimate of the product’s demand or the visualization of the expected future scenario.

Sales persons is another example of qualitative technique in which they estimate the product
sales which later become the forecasts in their particular region at a specified point of time. Their
opinions are sought due to their familiarity with the products and the characteristics of the market. The
forecast values are further reviewed to ensure that they are achievable.

The last example of qualitative technique is the market survey where data is collected using
sample surveys conducted on the customers or potential customers. Proper application of this technique
requires an in-depth understanding of statistical sampling methodology and estimation procedures.
Market surveys will provide the information that allows business to improve their products apart from
helping them preparing the forecasts.

Unlike the qualitative techniques, the quantitative techniques are generally classified as either
projective or causal and need significant amount of historical data. The quantitative techniques involve
mathematical modellings, computations and estimations to generate forecast values that are accurate
and unbiased estimates of future values. The main advantage is that the model forecast performance can
be easily evaluated by utilizing significant amount of data.

The projective method of forecasting comprises of single variable models which are usually
referred to as univariate modelling techniques while the causal method of forecasting involves the
construction of multiple variable models, generally termed as the regression technique.

QUESTION 4

Forecasters have a wide range of methods available to them when forecasting ranging from the
qualitative to quantitative. In selecting a technique, the forecaster must consider the characteristics of
the decision-making situation for which a forecast is to be prepared and the characteristics of the
forecasting method.

First and foremost, forecaster will have to determine the forecast horizon. It is essentially the
time in the future at which points the forecasts are required. The determination of the forecast horizons
would ultimately influence the decision on the model type to be used. Generally, businesses are
interested in immediate term (less than a month), short-term (1 to 6 months), medium term (6 months
to 2 years), and finally long term that encompasses a time period greater than 2 years.

If the decision maker is interested in using the forecast for planning vs. control, then there are
implications for design, use and evaluation of the forecasting model. If the forecast is used for planning
purposes for example, the decision maker is interested in knowing whether the current market condition
will continue in the future. On the other hand, if management is interested in using its forecast control
purposes, then they would like to depend on a model that is capable of predicting, at an early stage, the
changes in the pattern or turning points of the business.
 The level of detail required in a forecast has major implications for the choice of method.
Organisations make decisions using aggregate and highly disaggregate data in their decision process.
For example, a corporate planning department would be mostly interested in corporate sales (highly
aggregate), and a production supervisor may be interested in the company’s product lines (highly
disaggregate).

The state of the market also has a major impact on the techniques applied in forecasting.
Volatile market conditions need a method that can be adapted continually to the recent results and the
latest information available. Stable market conditions, on the other hand, require a forecasting method
that can be checked periodically to determine the utility of the model.

Data pattern also plays a critical role in selecting a forecasting technique. Some data may show
a seasonal trend or cyclical pattern, whereas others may consist of an average value with random
fluctuations surrounding it. The relation between data pattern and the time frame becomes obvious when
one notes that trend patterns are long-term tendencies, while seasonal variations are periodic and
recurrent within a year. Thus, some techniques are better suited to a particular data pattern than others.

In selecting an appropriate model for forecasting, one must also consider the costs associated
with every formulation and development of the models. These include the cost of labor and expert
advice needed to build a model, the cost of internal data generation, the amount of time to simulate
alternative scenarios and update the model, and finally the time required to prepare the forecasting
report.

The level of accuracy desired is also significant in selecting a forecast model. It usually depends
on the objective of the forecasting exercise being undertaken. When the forecast of future trend pattern
made is not stringent, then there is greater chance of incidences of under forecast or over forecast.
Whilst some forecasts aim to provide indication of future trend, there are others whose high degree of
accuracy is desired.

The availability of data is the usual obstacle faced by many model builders. Long series of data
points would enable the accuracy and reliability of the model estimates. However, such long series of
data points are not easily available hence resulting in models being built on the barest minimum of
information.

Finally, model’s complexity or its ease of application is important in its selection. Organisations
are interested in using forecasting techniques that are easy to apply and, at the same time, capable of
producing accurate forecasts. The forecasters are recommended to initially develop simple models and
progress towards more complicated models at later stages as more experiences are gained. Additionally,
they must as well understand and feel comfortable with the technique chosen.

QUESTION 5

In making the forecasting, there are ten stages of general procedures that should be followed
through starting with determination of the purpose and objective of the forecasting exercise. To ensure
that the results of the exercise meet the management’s requirement, it is important at the initial stage to
explicitly state in writing the objective and purpose of the forecasting exercise being undertaken. The
forecaster also needs to understand the intended managerial use of the projection.
 The second stage involves the selection of relevant theory. The ability to understand the
underlying theory of a particular phenomenon is an important prerequisite in the process of finding the
solution to a forecasting exercise. This is because there are too many theories explaining the occurrence
or non-occurrence of various phenomena.

The third stage is the collection of data. Data can be classified as either internal or external data
depending on how and where they are collected. The availability of large amount of data is significant
in determining the most suitable forecasting technique.

The fourth stage involves getting to know the data collected. The information gained would
enable the modeler to determine the correct model to be formulated. Understanding the characteristics
of the data is another aspect that needs to be looked into.

The initial model estimation is the fifth stage in the forecasting work. The models are usually
given in the form of an equation or a system of equations. Thus, the forecaster is responsible to identify
the equation(s) that can be used to represent the problem being investigated. A simple model initially
needs to be developed by formulating an autoregressive model or a simple linear regression.

Next is the model evaluation and revision. It is a necessary prerequisite before the modeler can
formally claim that the estimated model is the best and can be used to generate the forecast values.
Where necessary, the performance of the estimated model should be matched against some benchmark
models.

The seventh stage of forecasting is the initial forecast presentation. The results have to
sufficiently provide the necessary inputs to the decision makers. Hence, this process allows passing of
the forecast figure back and forth between the modeler and the decision-maker repeatedly until a
consensual agreement is reached between the two parties on the final figure.

After that, the final revision is another stage of forecasting. The modeler needs to explain and
make known to the managers the forecasting methodology used. It may be necessary for the forecast
values to be revised in regards of the availability of new data or when there are occurrence of changes
in the data structure.

The forecast distribution is the ninth stage in forecasting. The forecast is delivered to the
management in a timely manner and in a consistent format. The forecaster must also determine who
should receive the forecasts, how detailed should they be and how frequently the users need to be
updated.

The tenth and last stage involved is the establishing of monitoring system. The usual technique
to monitor the progress of a project is to assess the accuracy of the methodology applied by checking
the achieved against the target over consecutive periods of time. This would allow the forecaster to
respond to unexpected events.