Forecasting in Management- Methods,features,advantages,importance and process
- 2. Objectives • At the end of the chapter you will be able to understand – The meaning, definition and features of forecasting – Know about the importance of forecasting – The areas of forecasting and its advantages – Difference between the forecasting and planning
- 3. Introduction • Forecasting is the technique of estimating the relevant future events and problems on the basis of past and present behavior or happenings • Forecasting depends upon an analysis of past events and current conditions
- 4. Meaning and Definition • Meaning of Forecasting – Forecasting the systematic guessing of future course of events with the help of analysis of present and past events • Definition of Forecasting – According to Webster’s new Collegiate Dictionary, ‘A forecast is a prediction and its purpose is to calculate some future events or conditions
- 5. Features of Forecasting • Forecasting is concerned with the future events • Impact of future events has to be considered in the planning process • Forecasting considers all the factors which affect the organizational functions
- 6. Forecasting Process • Forecasting period may be short-term or long- term. In either of the cases certain stages or steps have to be passed as below • Thorough preparation of foundation – Detailed investigation and complete analysis of the company are necessary for forecasting – Forecasting is based on the foundation
- 7. Forecasting Process • Estimation of future – The prosperity of the future can be estimated with the help of past experience and performance • Collection of results – All the information can be collected – Nothing can be omitted and irrelevant information can be avoided while collecting results
- 8. Forecasting Process • Comparison of results – The actual results are compared with estimated results to know derivations • Refining the forecast – The forecast can be refined in the light of derivations which seem to be more realistic
- 9. Importance of Forecasting • Forecasting helps the management in the following ways: • Pivotal role in an Organization – Planning is the backbone of effective functioning of an organization – Planning is based on forecasting
- 10. Importance of Forecasting • Development of a business – Business is established in order to achieve specified objective • Implementation of project – Forecasting is an important factor which enable the entrepreneur to get success • Primacy to planning – Planning can not be done without the forecasting
- 11. Importance of Forecasting • Co-ordination – Forecasting helps management executives in effective co- ordination indirectly • Effective control – Forecasting can provide adequate information for exercising effective control • Key to success
- 12. Areas of Forecasting • Accurate forecasting is necessary for efficient management. So making accurate forecasting is of utmost necessity in the following areas • Competition – It is necessary to predict the strategies followed by the competitors – Forecasting helps the management to enhance the market share of the
- 13. Areas of Forecasting • Supply of labor – The supply of labor is changing in its structure – The three categories of labors are 1) skilled labor, 2) semi-skilled workers, 3) unskilled workers – No industry can be expanded or modernized without adequate labor force
- 14. Areas of Forecasting • Economic condition – The strength of any business unit depends on its economic condition – Good economic condition assists in the growth of the company • Growth trend – A forecast in growth trend helps the management to decide the opening level
- 15. Areas of Forecasting • Social change – Forecasting can predict the convenience and comforts that would be enjoyed by the consumers in future • Political change – Frequent changes I politics bring about changes in the policy of government towards business
- 16. Areas of Forecasting • Technology – The invention of new technology may change the operations on an organization • New laws and regulations – A meticulous adoption of new laws and regulations is necessary for effective functioning of an organization
- 17. Forecasting methods • Various techniques of forecasting are used in the field of business because the future of any business can never be predicted with certainty. Some techniques are as below: • Similarity events methods – It is also called as Historical analogy method – The similarity of events of past and
- 18. Forecasting methods • Jury of executives options – The opinion of experts is sought under this method and the meritorious one is accepted – The reasons for favoring a particular opinion by an expert in known to the management • Survey method – Field survey can be conducted to
- 19. Forecasting methods • Sales person’s opinion – A reasonable sales trend can be predicted based on the opinions of sales persons • Business barometers – Index numbers are used to measure the state of condition of business between two or more periods – However, index numbers do not give an assurance for success.
- 20. Forecasting methods • Expectation of consumer – Under this method, a survey is conducted in order to know the future needs of consumes • Time series analysis – In this method, the future is forecast on the assumption that the past activities are good indicators of future activities – Time series analysis can be applied
- 21. Forecasting methods • Delphi method – This method was developed by Rand corporation in 1969 to forecast the military events – this method is useful when past data is not available • Extrapolation – Means estimation of future behavior from the known data
- 22. Forecasting methods • Regression analysis – Used to find out the effect of changes of the relative movements of two or more inter-related variables – Regression analysis helps in isolating the effects of the factors that are responsible for the changes made in variables to a great extent
- 23. Forecasting methods • Input and output analysis – Under this method, a forecast can be made if the relationship between the input and output is known – The prevailing inter relationship among the various sectors of the company can be well established
- 24. Forecasting methods • Econometric model – Also called as casual model – The complex relationship of various variable is responsible for the future behavior of one variable • These techniques can be divided in to two broad categories – Qualitative techniques: based on human judgment – Quantitative techniques: based on the
- 25. Advantages of Forecasting Forecasting helps a businessman in a number of ways. Some of the advantages of the forecasting are: • Facilitates planning – Forecasting facilitates the planning function of management. – Provides basis for preparing a possible planning
- 26. Advantages of Forecasting • Ensures – coordination – Forecasting of an organization can not be done by an individual, which involves group efforts • Easy controlling – Control is not possible in absence of forecasting. – Forecasting helps the management to exercise control
- 27. Limitations of Forecasting • Forecasting is based on certain assumptions and can give wrong results if the assumptions are faulty • Too much expectations from forecasting will cause disappointment • It is not possible to forecast correctly since it is very difficult to collect reliable information
- 28. Difference between Forecasting and Planning No. Forecasting Planning 1 Basis for planning Basis for future plan of action 2 No decision can be taken without help of forecasting Helps to arrive at certain decisions 3 Done at middle or lower level of management Done at top level of management 4 Few members are involved Large number of persons 5 Does not stimulates activity among employees Stimulates some activity to achieve the objective 6 Tool for planning Not a tool for forecasting
- 29. Difference between Forecasting and Planning • Forecasting is an integral part of planning process • Forecasting provides scope for guessing of future happenings • Forecast serves as a guideline to executives for proper planning
- 30. Summary • Forecasting involves detailed analysis of the past and present events to get a clear idea about probable events in future • It is very important as it plays a pivotal role in an organization • Accurate forecasting is necessary for efficient management
- 31. Summary • It uses some methods like similarity events method, executive method etc. • It requires high degree of skill • Basis for planning • Forecast is important as it considers the factors which effect proper
- 32. End of Chapter 4 Forecasting