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CHAPTER TWO
FORECASTING

2.1 Meaning of Forecasting

Forecasts are estimates of the occurrence, timing or magnitude of future
event. Forecasts are statements about future specifying the volume of sale
to be achieved or material demand required and equipments, and other
inputs needed to meet sale. They give operation managers a rational basis
for budgeting, capacity planning, sales production and inventory, Personnel
and material management.

Forecasting is the basis of planning ahead even though the actual demand is
quite uncertain thus, it involves estimation of the future, and of particular
interest here is the expected demand of company’s product. Therefore,
forecast of future demand is the link between company’s internal
expectations with outside environment that permits planning function to
commence activities. A popular definition of forecasting is that it is
estimating the future demand product, service and the resources necessary
to produce an output.
2.2 Characteristics of forecasts
The following are the characteristics of forecasts:-
1. Forecasting techniques generally assumes that the same underling
causal system that assisted in the past will continue to exist in the
future.
2. Forecasts are rarely perfect; actual results usually differ from
predicted values.
3. Forecasts for a group of items tends to be more accurate than
forecasts for individual item, because forecasting errors among items
in a group usually are smaller than that of individual items.
4. Forecast accuracy decreases as the time period covered by the
forecast-time horizon increases.

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2.3 Steps in the Process of Forecasting
There are five basic steps in the forecasting process.
1. Determine the purpose of the forecast that will provide an indication
of:
a) the level of details required,
b) The amount of resources and
c) the desired level of accuracy.
2. Establish a time horizon that the forecast must cover, keeping in mind
that accuracy decreases as the length of the forecast period increases.
3. Select an appropriate forecasting technique particularly the
quantitative models.
4. Gather and analyze the appropriate historical data and prepare the
forecast. This requires identifying all major assumptions that are made
in conjunction with preparing and using the forecast.
5. Monitor the forecast to check its validity. If it is unsatisfactory,
reexamine the methods or techniques, assumptions, validity of data,
and make necessary adjustments to prepare a revised forecast.
2.4 Uses of Forecast
Components, subassemblies or/enquired services that are part of the
finished product may not required formal forecast (i.e. not all materials
required formal forecasts). Forecast should be used for end items and
services that have uncertain demand. The purpose of forecasting activities
is to make the best use of present information to guide decisions towards the
objectives of the organization in general. Accurate projections of future
activity levels can minimize short-term fluctuations in production and help
balance workloads. This reduces hiring, firing and overtime activities and
helps maintain good labor relationship.
Good forecasts also help managers have appropriate level of materials
available when needed. By anticipating employment and materials needs,

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the forecasts enable managers to make better use of facilities and give
improved service to customers.

Generally, good forecast

- Improve employee relation
- Improve materials management
- Helps to have better use of capital and facilities and
- Improves customer’s service.
2.5 Types of Forecasting
There are two types of forecasting technique. They are:
1. Qualitative forecasting techniques
2. Quantitative forecasting techniques
1. Qualitative Approaches
Qualitative forecasting technique is a technique that is used when there is no
historical data available about past performance. These forecasting
techniques are subjective and judgmental in nature and most of the time
they are based on opinion and expertise judgment. Qualitative forecasting
techniques rely on analysis of subjective inputs obtained from customers,
sales Person, managers and experts.
Forecasts based on judgment, experience or opinions are appropriate when:
a) Forecasts must be prepared quickly in a short period of time,
b) Available data may be obsolete or up to date information might not
be available because of rapid and continuous changes in the
external environment such as economic and political conditions,
c) Historical data cannot be available like demand for a newly
introduced product, and
d) The forecasting period is long range that past events will not
repeat themselves in a similar fashion.
There are four common types of qualitative forecasting techniques. They are:
1. Expert opinion method
2. Sales opinion

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 3. Consumer surveys
4. Delphi technique

1. Expert Opinion methods

One of the most simple and widely used method of forecasting which
consists of collecting opinions and judgments of individuals who are
expected to have the best knowledge of current activities or future plans.
This technique has its own advantages and disadvantage.
Advantage
- Decision is fast
- Responsibility and accountability is clear
- Brings together the considerable knowledge, experience, skill
and talent of various managers
- Managers (experts) will acquire experience that is obtained in
the discussion.
Disadvantage
- Probably poor forecast (due to lack of experience)
- Domination by one or few manger
- Diffusing responsibility for the forecast over the entire group
may result in less pressure to produce a good forecast.
2. Sales force Opinions
In this method, the sales representatives are required to estimate the
demand for each product and the forecast of each sales representative is
consolidated to prepare the over all forecast for the company.
This forecasting technique has also its own advantages and disadvantages
Advantages
- It can reset in quality forecast
- This pools together knowledge
- Can see from different approaches
Disadvantage
- Time taking decision

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 - Influenced by majority high stares persons
- Avoidance of responsibility

3. Consumer Surveys
This forecasting technique is based on the data which is collected from the
consumers. Because it is the consumers who ultimately determine demand,
it seems important to solicit information from them.
Advantage
- tap information that may not be available else where
- enhance the quality and accuracy of forecasts
Disadvantage
- Experience and knowledge is constructing
- Expensive and time consuming
4. Delphi Method
This is a qualitative method of forecasting which involves the development,
distribution, collection and analysis of series of questionnaires to get the
views of expertise that are located at different geographic areas to generate
the forecast. A moderator compiles results and formulates a new
questionnaire that is again submitted to the same group of experts. The goal
is to achieve a consensus forecast.
Advantage
- The tendency of process loss is avoided/minimized
- No influence of the majority
Disadvantage
- It takes time to reach a consensus
- Coordination and interpretation difficulty.

2. Quantitative Forecasting Techniques

Qualitative techniques consist of mainly analyzing objective or hard data.
This usually avoids personal biases that sometimes contaminate qualitative
methods. It is based on actual historical statistical data using mathematical

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and statistical methods to forecast demand. Thus, it is objective and is also
called statistical forecasting.
There are two types of quantitative forecasting techniques:
1. Time Series Analysis
2. Causal Methods
1. Time Series Analysis
A time series is a set of some variable (demand) overtime (e.g. hourly, daily,
weekly, quarterly annually). Time series analyses are based on time and do
not take specific account of outside or related factors.
Time series analysis is a time-ordered series of values of some variables. The
variables value in any specific time period is a function of four factors:
a) Trend c) Cycles
b) Seasonality d) Randomness

A) Trend – is a general pattern of change overtime. It represents a long time

secular movement, characteristic of many economic series.
B) Seasonality- refers to any regular pattern recurring with in a time period
of no more than one year. These effects are often related to seasons of
the year.
Example:
 Weather variations – sales of winter and summer
 Vacations or holidays – air line travel, greeting card, visitors
at tourists and resort centers.
 Theaters demand on weekends
 Daily variations: banks may over crowded during the
afternoon.
C) Cycle – are long-term swings about the trend line and are usually
associated with a business cycle (phases of growth and decline in a
business cycle).
D) Randomness – are sporadic effects due to chance and unusual
occurrences.

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