Selecting a forecasting method

Published on by Joannes Vermorel.

The choice of a forecasting technique is significantly influenced by the stage of the product life cycle and sometimes by the type of firm or the industry for which a decision is being made.

In the beginning of a product life cycle, relatively small expenditures are made for research and market investigation. During the product introduction phase, these expenditures start to increase. Whereas, In the rapid growth stage, because decisions involve considerable amounts of money, a high level of accuracy is desirable. And after the product has entered the maturity stage, decisions are much more routine, involving marketing and manufacturing. These are important considerations in choosing a sales forecast technique.

After evaluating the particular stages of the product along with firm and industry life cycles, a further probe is necessary. Instead of selecting a forecasting technique by using whatever seems applicable, decision-makers should determine what is most appropriate. Some techniques are quite simple and inexpensive; others are extremely complex, require significant amounts of time to develop, and may be quite expensive. Some are best suited for short-term projections; others are better prepared for inter-mediate or long-term forecasts.

The choice of technique or techniques depends on the following criteria:]

  1. How much will it cost to develop the forecasting mode compared with the potential gains resulting from its use? The choice is one of benefit-cost trade-off.
  2. How complicated are the relationships that must be forecast?
  3. Is the forecast for short-run or long-run purposes?
  4. How much accuracy is desired?
  5. Is there a minimum tolerance level of error?
  6. What data are available? Techniques vary in the amount of data they require.

Now, a few comments about one of the methods used:

The Qualitative Approach – the Qualitative or judgmental approach can be useful in formulating short-term forecasts and can also supplement projections based on the use of any of the qualitative methods.

Four of the better know qualitative forecasting methods are Executive Opinions, the Delphi Method, Sales Force Polling and Consumer Surveys.

Beginning with Executive Opinions – with this approach the subjective estimates of executives or experts from sales, production, finance, purchasing and administration are averaged to generate a forecast about future sales.

The Delphi Method – this method is a group technique in which a panel of experts is individually questioned about their perceptions of future events.

Sales Force Polling – some companies use as a forecast source sales people who have continual contact with customers. It is believed that sales people, who are closest to the customers, have significant insights into the future market.

Consumer Surveys – and yet again some companies conduct their own market surveys of consumer purchasing plans. These vary from telephone contact, personal interviews or maybe even questionnaires.

For more detailed information, see also Strategic Business Forecasting, by Jae K. Shim.

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