Manager’s Guide to Forecasting

In: Business and Management

Submitted By fergomez
Words 6086
Pages 25
Manager’s Guide to Forecasting

by David M. Georgoff and Robert G. Murdick

Harvard Business Review
Reprint 86104

J A N U A RY– F E B R U A RY 1 9 8 6

HBR

Manager’s Guide to Forecasting
David M. Georgoff and Robert G. Murdick

E

arly in 1984, the Houston-based COMPAQ Computer Corporation, manufacturer of IBMcompatible microcomputers, faced a decision that would profoundly affect its future. Recognizing that IBM would soon introduce its version of the portable computer and threaten COMPAQ’s dominance in this profitable market, the company had two options. It could elect to specialize in this product line and continue to market its highly regarded portables aggressively, or it could expand market offerings to include desktop microcomputers. The latter move would force the year-old company to confront IBM on its home ground. Moreover, COMPAQ would have to make a substantial investment in product development and working capital and expand its organization and manufacturing capacity. COMPAQ’s management faced several important unknowns, including the potential market’s size, structure, and competitive intensity. Management recognized that the company’s vitality might seriously erode if it did not expand its product line. If the expansion were successful, COMPAQ might enjoy economies of scale that could help ensure its survival in a dynamic and very competitive industry. If COMPAQ’s market assumptions were incorrect, however, its future might be bleak. Many of today’s managers face similar new market realities and uncertainties. Continually confronted with issues critical to their companies’ competitive future, they must deal with novel and rapidly changing environments. In short, they must judge a broad range of dissimilar influences.

For more than a decade, new forecasting techniques have theoretically helped managers evaluate these varied…...

Similar Documents

Forecasting Assignment

...Forecasting Assignment Name University of Phoenix Operations Management – MGT 554 Instructor Date Forecasting Assignment Forecasting assists managers (companies) to help predict future demand. Demand management is important because companies can increase value or productivity and reduce costs. Chase, Jacobs, & Aquilano (2005) state, “the purpose of demand management is to coordinate and control all sources of demand so the productive system can be used efficiently and the product delivered on time” (p. 512). When a manager is choosing a forecast method, the manager must analyze the cost of doing the forecast and the opportunity cost of using inaccurate data. In addition, Chase, et al. (2005) state “the manager must look at the following factors: (1) Time horizon to forecast, (2) Data availability, (3) Accuracy required, (4) Size of forecasting budget, and (5) Availability of qualified personnel ( p. 518). This paper will compare and contrast three forecasting methods (Delphi Method, Box Jenkins Technique, and Econometric Models) used by managers to help predict future demand as well as explain how the National Basketball Association (NBA) uses forecasting methods to forecast demand under conditions of uncertainty. The Delphi method is a qualitative technique. Chase, et al. (2005) defines qualitative techniques as “subjective or judgmental and are based on estimates and opinions (p. 513). The Delphi method according to Chase et al., is when a group of experts......

Words: 1586 - Pages: 7

Forecasting

...Introduction Forecasting is a difficult task, no matter if it involves a weather forecast or forecasting the potential of a local small business all the way up to large international corporations. Forecasting, on the basis of an inventory, is formed by statistical data of previous months, years and seasons. Patterns will emerge, allowing a company to be able to determine how to handle on hand inventories which will allow them to keep overhead costs low while still allowing customers maximum access to goods and products. Predicting future needs on the basis of history should give a company a good foundation, but at the end of the day, depending on the industry, it would be counterproductive to solely base judgement on the past. Market fluctuations, change in the value of the dollar and the desires of the consumers may be impossible to judge yet directly affect inventories and profits. Rite Aid has over 4,700 retail pharmacies throughout the country. To simplify the inventory data, a chart has been constructed to indicate the average inventory value of a pharmacy over the course of an entire year. Year 2012 2011 2010 2009 Inventory $3,138.455 $3,158,145 $3,164,239 $3,184,531 The dollar amounts listed for each year represent the average amount, in dollars, of inventory kept at each of the approximately 4,700 stores. Having stated this fact, it is important to recognize that with all statistical data, it must be noted that some stores will have......

Words: 1057 - Pages: 5

Forecastings

...Forecasting Methods Genius forecasting - This method is based on a combination of intuition, insight, and luck. Psychics and crystal ball readers are the most extreme case of genius forecasting. Their forecasts are based exclusively on intuition. Science fiction writers have sometimes described new technologies with uncanny accuracy. There are many examples where men and women have been remarkable successful at predicting the future. There are also many examples of wrong forecasts. The weakness in genius forecasting is that its impossible to recognize a good forecast until the forecast has come to pass. Some psychic individuals are capable of producing consistently accurate forecasts. Mainstream science generally ignores this fact because the implications are simply to difficult to accept. Our current understanding of reality is not adequate to explain this phenomena. Trend extrapolation - These methods examine trends and cycles in historical data, and then use mathematical techniques to extrapolate to the future. The assumption of all these techniques is that the forces responsible for creating the past, will continue to operate in the future. This is often a valid assumption when forecasting short term horizons, but it falls short when creating medium and long term forecasts. The further out we attempt to forecast, the less certain we become of the forecast. The stability of the environment is the key factor in determining whether trend extrapolation is an appropriate......

Words: 1639 - Pages: 7

Forecasting

...Forecasting HSM/260 University of Phoenix 06/20/2013 Exercise 9.1 The following data represent total personnel expenses for the Palmdale Human Service Agency for past four fiscal years: 20X1 $5,250,000 20X2 $5,500,000 20X3 $6,000,000 20X4 $6,750,000 Forecast personnel expenses for fiscal year 20X5 using moving averages, weighted moving averages, exponential smoothing, and time series regression. For moving averages and weighted moving averages, use only the data for the past three fiscal years. For weighted moving averages, assign a value of 1 to the data for 20X2, a value of 2 to the data for 20X3, and a value of 3 to the data for 20X4. For exponential smoothing, assume that the last forecast for fiscal year 20X4 was $6,300,000. You decide on the alpha to be used for exponential smoothing. For time series regression, use the data for all four fiscal years. Which forecast will you use? Why Moving Averages Fiscal Year Expenses 20X2 $ 5,500,000 20X3 6,000,000 20X4 6,750,000 20X2-X4 6,083,333 20X5 6,083,333 = $2,277,776 3 I followed Rule 3. Older data are less important than more recent data. I decided to only go back three years so I......

Words: 707 - Pages: 3

Forecasting

...TOPIC 1. FUNDAMENTALS OF ECONOMIC FORECASTING TOPIC I TOPIC I. FUNDAMENTALS OF ECONOMIC FORECASTING   Contents 1. Meaning of forecasting 2. Features, importance and limitations of forecasting 3. Forecast types   1. Meaning of forecasting Forecast is a likely, scientifically well-grounded opinion about the possible state of the events, objects or processes in the future. Forecasting is a process of making statements about events whose actual outcomes (typically) have not yet been observed. Forecasting is a process of predicting or estimating the future based on past and present data. Economic Forecasting is a process of making forecasts based on analysis of past trends and regularities of the economic processes. Economic forecasts can be carried out at a high level of aggregation – for example for GDP, inflation, unemployment or the fiscal deficit – or at a more disaggregated level, for specific sectors of the economy or even specific companies. Economic forecasting provides information about the potential future events and their consequences for the organization. It may not reduce the complications and uncertainty of the future. However, it increases the confidence of the management to make important decisions.   Economic forecasting includes the following steps: 1. Identifying items to be forecast. The items of socio-economic forecasting are the economic processes (for example, inflation, demand, supply), any indicator describing the company activity (for......

Words: 17426 - Pages: 70

Forecasting

...FORECASTING FUNDAMENTALS Forecast: A prediction, projection, or estimate of some future activity, event, or occurrence. Types of Forecasts * Economic forecasts * Predict a variety of economic indicators, like money supply, inflation rates, interest rates, etc. * Technological forecasts * Predict rates of technological progress and innovation. * Demand forecasts * Predict the future demand for a company’s products or services. Since virtually all the operations management decisions (in both the strategic category and the tactical category) require as input a good estimate of future demand, this is the type of forecasting that is emphasized in our textbook and in this course. TYPES OF FORECASTING METHODS Qualitative methods: These types of forecasting methods are based on judgments, opinions, intuition, emotions, or personal experiences and are subjective in nature. They do not rely on any rigorous mathematical computations. Quantitative methods: These types of forecasting methods are based on mathematical (quantitative) models, and are objective in nature. They rely heavily on mathematical computations. QUALITATIVE FORECASTING METHODS Qualitative Methods ...

Words: 8098 - Pages: 33

A Manager’s Guide to Organizational Behaviour

...1.0 Introduction Henri Fayol described five functions of management as forecasting, planning, organizing, coordination, and commanding (Parker and Philip 2005). Leadership on the other hand focuses on ideas, influences others, values, authority, taking responsibility. Leadership has evolved from traditional trait leadership to modern multifaceted type leadership (Hellriegel and Slocum 2011). Hellriegel and Slocum (2011) believe that leadership is learnt and not taught. This study seeks to supplement the role of a manager with guidance in organizational behaviour. The framework of learnings and models identified in this document provides a manager with some of the tools that are needed for him to influence employees to achieve optimum performance and attain the organizational goals. The models are adapted from theory and research done by various scholars. The guidelines provided herein include: • Individual differences • Perception and attributions • Motivating employees • Learning productive behaviour. A manager must possess six competences to effectively apply the learnings and techniques in the workplace. These competences are self-competency, diversity, across cultures, communication, teams and change. Competences provide the foundation for an individual in the performance of his role in the organization (Hellriegel and Slocum 2011). 2.0 Individual differences Individual differences are the ways which makes each person differ from each other. Individual...

Words: 3305 - Pages: 14

Forecasting

...Forecasting Brandman University Operations Management September 19, 2014 Introduction Forecasting is a necessary task in the world of business, but which method works best? Now there might not be a one size fits all for forecasting, but there are methods that work best for particular situations. Throughout this paper a scenario will be picked for the qualitative and quantitative methods, this will show merits and shortcomings of both techniques and procedures. Analysis First to be examined is the qualitative method of forecasting. According to BusinessDictionary.com, the qualitative forecasting technique is defined as an “estimating method that relies on expert human judgment combined with a rating scale, instead of on hard (measurable and verifiable) data” (BusinessDictionary, 2014). In the maintenance world of the Air Force, the use of qualitative forecasting is used on a daily basis. For example, with a new fiscal year coming the upper echelon of management will be trying to predict where to allocate funds, more specifically at the base I am stationed at, Travis Air Force Base. Working directly with the Air Force Reserve I see how money is spread amongst the squadrons, which then is allocated to the flights. Working in a maintenance shop, damage airplanes are what secure funding. However, we can really predict how heavily damaged a jet will be when it rolls in, this is when qualitative forecasting comes into play. Many factor can come into play when......

Words: 653 - Pages: 3

Forecasting

...4/13/2015 Forecasting ­ Research Papers ­ Hapikampr Login Join The Research Paper Factory Join Search Browse Saved Papers Search over 100,000 Essays Home Page  »  Business and Management Forecasting In: Business and Management Forecasting Forecasting HSM/260 University of Phoenix 06/20/2013 Exercise 9.1 The following data represent total personnel expenses for the Palmdale Human Service Agency for past four fiscal years: 20X1 $5,250,000 20X2 $5,500,000 20X3 $6,000,000 20X4 $6,750,000 Forecast personnel expenses for fiscal year 20X5 using moving averages, weighted moving averages, exponential smoothing, and time series regression. For moving averages and weighted moving averages, use only the data for the past three fiscal years. For weighted moving averages, assign a value of 1 to the data for 20X2, a value of 2 to the data for 20X3, and a value of 3 to the data for 20X4. For exponential smoothing, assume that the last forecast for fiscal year 20X4 was $6,300,000. You decide on the alpha to be used for exponential smoothing. For time series regression, use the data for all four fiscal years. Which forecast will you use? Why                         Moving Averages Fiscal Year                           Expenses          Please login to view the full essay... Essay's Statistics Submitted by: hapikampr Date shared: 08/07/2013 10:35 AM Words: 707 Pages: 3 20X2                                     $ 5,500,000           ......

Words: 400 - Pages: 2

Forecasting

...Forecasting Tammy Powell HSM/260 December 19, 2014 Adrianne Franklin Exercise 9.3 Moving Averages 20X2-20X4 $18,250,000 / 3 = $6,083,333 Weighted Moving Averages 20X2 $5,500,000 1 $5,500,000 20X3 $6,000,000 2 $12,000,000 20X4 $6,750,000 3 $20,250,000 __ ___________ 6 $37,750,000 20X5 $37,750,000 /6 = $6,291,667 Exponential Smoothing NF = LF + a (LD – LF) NF = $6,300,000 + 0.95($6,750,000 - $6,300,000) = $6,300,000 + 0.95(45,000) = $6,300,000 + (42,750) = $6,342,750 Exercise 9.3 Moving Averages 20X2-20X4 $41,750,000 / 3 = $13,916,667 Weighted Moving Averages 20X2 $14,250,000 1 $14,250,000 20X3 $14,000,000 2 $28,000,000 20X4 $13,500,000 3 $40,500,000 __ ___________ 6 $82,750,000 20X5 $82,750,000/6 = $13,791,667 Exponential Smoothing NF = $13,000,000 + 0.95($13,500,000 - $13,000,000) = $13,000,000 + 0.95(500,000) = $13,000,000 + (475,000) = $13,475,000 Moving averages are the easiest to do without a computer and is fast, but less accurate. Add the three most recent years, and divide by three. Weighted moving averages are simple, but require more time. The most recent year gets the highest weight. The oldest data is one and one multiplies the total. The next year is two, and two multiplies the total. The most current data weight is three, and multiplied by three. Finally, use the total of all years, and dived by...

Words: 291 - Pages: 2

Forecasting

...Forecasting LANCELOT PALMER HSM/260 July 5, 2015 Florence Wisn Forecasting Exercise 9.1 The following data represent total personnel expenses for the Palmdale Human Service Agency for past four fiscal years: 20X1 $5,250,000 20X2 $5,500,000 20X3 $6,000,000 20X4 $6,750,000 For moving averages and weighted moving averages, use only the data for the past three fiscal years. For weighted moving averages, assign a value of 1 to the data for 20X2, a value of 2 to the data for 20X3, and a value of 3 to the data for 20X4. Forecast personnel expenses for fiscal year 20X5 using moving averages, weighted moving averages, exponential smoothing, and time series regression. Moving Averages Fiscal Year Expenses 20X2 $5,500,000 20X3 $6,000,000 20X4 $6,750,000 20X2-4 $18,250,000 20X5 $18,250,000/3 = $6,083,333 Weighted Averages Fiscal Year Expenses Weight Weighted Score 20X2 $5,500,000 1 $5,500,000 20X3 $6,000,000 2 $12,000,000 20X4 $6,750,000 3 $20,250,000 6 $37,750,000 20X5 $37,750,000/6 = $6,291,667 Exponential Smoothing ...

Words: 908 - Pages: 4

Forecasting

...Forecasting is an important aspect in today’s business world. Every day businesses strive or lose, depending on the successfulness and accurateness of their forecasting. For successful forecasting, the forecaster needs to have a clear understanding of the current business activities, past trends, and the company’s business strategy. Case 5 exhibits key principles on the way financial forecasting is done. Understanding the Financial Relationships of the Business Enterprise Forecasters use current information to predict the future business activities of the company. This information is found on the financial statements of the company. For example, the balance sheet provides a snapshot of the business’ assets, liabilities and equity at a specific point in time, whereas the incomes statement provides a view of the flow of costs during a specific time frame. Financial ratios measure the relationships between various items on the financial statements. By comparing various ratios with those of previous years, trends can be identified. Because many financial ratios tend to be perserved over time, these ratios are very valuable for the forcaster. The forecaster can estimate only one financial statement line item and, by applying this number to the various ratios, he can make a complete forecast. Grounding Business Forecasts in the Reality of the Industry and Macroenvironment An accurate forecast is made by recognizing not only internal data, but also external data. The......

Words: 510 - Pages: 3

Forecasting

... Forecasting Student name Institution Forecasting Explain how forecasting is used in the real world. Provide a specific example from your own line of work, or a line of work that you find particularly interesting For humankind, the estimation of the future is a task that has to be done on a daily basis. The economic world issues the forecasting to assisting in the planning and making accurate decision concerning an economic activity. This is because resources are scarce and therefore they have to spend in the most beneficial way. Besides economic forecasting is used in the daily weather reports to determine what the weather will be. Forecasting also assist in the transport sector to schedule flights based on the said weather forecast. In the investment world, the potential investors rely heavily on the forecast concerning their intended investor form. These forecasts are usually made by the investment experts as well as the government concerning the expected behavior of the stock market as well as the financial markets. The analysis depends on the past performance to help predict the future. This data is carefully analyzed to help project into the future of the business. It is believed that the future and the past share common similarities as the future are heavily dependent on the past. However, for the investors to make accurate decisions, they must have ala the relevant information concerning the firm they are focusing on. The data has to be accurate and......

Words: 684 - Pages: 3

Forecasting

...Forecasting Accurate forecasting was the key element for our company’s success. We were able to forecast the demand and avoid overproduction. Even though all our products were stocked out at the end of the year, we did not lose much sales because the forecast was accurate and our plant utilization was maximized to the complete second shift. The pricing of the products was another major factor for our forecasting. We priced our products by looking at our sales revenue, income statement, R&D spending and the competition in each segment. Our product Cake for example, was dominating the traditional segment in the last few years. We sold almost 4000 units in 2016. We could use the revenue that generated from sales and spend portion of it on R&D. Since this product was dominating the segment and high awareness, we believe we could receive more sales if we increase the price. At the end of 2007, we sold 500 more units than the year before. However, we decreased the price of our products that are in more competitive markets. In the high end segment, we spent more R&D cost on Cid and Cid2. Cid was the segment leader, and we tried to make Cid2 a close competitor within the company. We also decreased the price since the competitors had listed lower prices for their products. By doing that, we gained more customers awareness and helped us gain more sales. When we make decision for unit sales forecast, we looked for the growth rate in each segment. This number shows......

Words: 436 - Pages: 2

Forecasting -

...What is Forecasting? Forecasting is the process of making statements about events whose actual outcomes have not yet been observed. Forecasting can be seen as a planning tool for managers to attempt to cope with the uncertainty of the future. Managers are constantly trying to predict the future, making decisions in the present that will ensure the continued success of their firms. Managers use forecasts for budgeting purposes. A forecast aids in determining volume of production, inventory needs, labor hours required, cash requirements, and financing needs. A variety of forecasting methods are available. However, consideration has to be given to cost, preparation time, accuracy, and time period. The manager must understand clearly the assumptions on which a particular forecast method is based to obtain maximum benefit. 1 Types of Forecasts Short Term Short-range forecasts typically encompass the immediate future and concern the day to day operations of a firm. A short-term forecast usually only covers a period of a few months and can be considered an “operating” forecast. Medium Term Medium-range forecasts typically span a few months up to a year. A forecast of this length can be considered “tactical” in nature. Long Term Long-range forecasts typically encompass a period longer than 1 to 2 years. These forecasts are considered strategic and are generally related to management’s attempt to plan new products or build new facilities. 2 Forecasting Methods Time......

Words: 630 - Pages: 3

The Passing Bells | Murray Alper | Kitakubu Katsudou Kiroku