Introduction
All businesses are confronted with the general problem of having to make decisions under conditions of uncertainty. Management must understand the nature of demand and competition in order to develop realistic business plans, determine a strategic vision for the organization, and determine technology and infrastructure needs. To address these challenges, forecasting is used. According to Makridakis (1989), forecasting future events can be characterized as the search for answers to one or more of the following questions:
X What new economic, technical, or sociological forces is the organization likely to face in both the near and long term?
X When might these forces impact the firm¡¦s objective environment?
X Who is likely to be first to adapt to each competitive challenge?
X How much change should the firm anticipate both in the short run and the long run?
In this paper, I will provide an overview of forecasting methods and compare and contrast these various methods. The paper will then focus on how Mattel, one of the nations largest toy manufacturers, uses demand forecasting under conditions of uncertainty ¡V most specifically those relating to the pattern and rate at which customers demand products.
What is Forecasting?
In Operations Management, demand forecasting is defined as ¡§the business process that attempts to estimate sales and the use of products so that they can be purchased, stocked, or manufactured in appropriate quantities in advance to support the firm¡¦s value adding activities.¡¨(Ross, 1995). Forecasting is a process that transforms historical time-series data and/or qualitative assessments into statements about future events. This process can produce either qualitative or subjective projections. Note that no forecasting process can consistently provide perfect forecasts. Any forecast that perfectly estimates subsequent events should raise cause for alarm, as this is probably indicative of improprieties such as ¡§cooking the books¡¦ or reporting performance data that shows conformance with plans versus actual events (Makridakis, 1989).
Forecasting Methods
There are four basic types of forecasting methods: qualitative, time series analysis, causal relationships, and simulation.
Qualitative Techniques
Qualitative techniques are subjective or judgmental and based on estimates and opinions (Chase, 2005). These forecasts reflect people¡¦s judgments or opinions and suggest likely conditions, such as people¡¦s opinion about whether it will rain today. These forecasts are preferred when there is a desire to engage individuals within the organization with a key business process. A potential pitfall of this technique is that some individuals base their judgments of future events on historical data, which may not provide relevant demand patterns that are stable enough to warrant their use to forecast future events.
Strategic planning is crucial for the success of all business endeavors. Analyzing currents trends in technology, consumer markets, competition, and the workforce can play a pivotal part in whether or not the organization can survive. Overtime, strategic planning strategies must be modified in order to compensate for changes in the industry. Goals and strategic planning often necessitate change to ensure that the organization is performing at peak level, while offering the most beneficial and quality services to consumers.
Operating on a declining seasonal sales cycle, SureCut Shears has the potential to encounter some challenges, one being a failure to repay any short-term liabilities. A modernization plan has contributed to this liquidity dilemma. These challenges will be addressed later in this essay. Toy World, Inc has a specific and difficult market to compete in, toys. What is popular today not might be popular tomorrow; making it difficult to predict sales or revenues which impact the cost of storing inventory and purchasing of raw materials.
1. Context: In early September’08 Giant Consumer Products, Inc. (GCP) realized that Frozen food division, which had been growing at 2.8% (compounded annual growth) rate since 2003 to 2007 and accounted for almost 33% of GCP’s overall business volume, is not doing well now. The sales as well revenue volume is around 3.9% behind the target. Most specifically marketing margin (key parameter for GCP business) was also under plan by 4.1%. GCP had been doing well in wall-street but performance of past couple of quarters has increased the worries of GCP i.e. whether GCP will able to maintain its profitable growth.
Addressing the trials of operating in a continually changing environment and realizing forecasts can only
Understanding the changes in the market and the growth of e-commerce prompted the organization to invest heavily in its supply chain management forecasting and management system. The development of a network of distribution centers and Direct Fulfillment Centers to position the company to capitalize on the growing e-commerce market indicate a strong understanding of the need to adapt to changing market forces. The company spent over $300 million on new distribution center facilities in 2014 alone, and continues to expand to maintain efficiency in product movement (Cassidy,
54). The first step in forecasting is to develop the opportunity or threat with different alternative conclusions, which is most useful when using a brainstorming method (Ginter et al., 2013, p. 54). In addition, there is a need to identify the associations between the tendencies, changes, predicaments, and or likelihood of events and the environmental categories (Ginter et al., 2013, p. 54), such as the judicial/political environment of the Affordable Care Act. In doing so, it will allow management to see the possibilities of how these issues can affect the future of the company. In turn, this allows the management team to build a better strategic plan, so that the healthcare business has longevity in the fast-paced environment. However, one must assess all the information proposed from the scanning, monitoring, and forecasting of the potential threats or opportunities to the healthcare
... demand as a function of marketing variables, such as price or promotion. These involve building specialized forecasts such as market response models or cross price elasticity estimates to predict customer behavior at certain price points. By combining these forecasts with calculated price sensitivities and price ratios, a Revenue Management System can then quantify these benefits and develop price optimization strategies to maximize revenue.
Target Corporation needs to increase product availability based on the customer needs using a forecasting and supply chain
Rees, J. (2012). Prescriptive strategic planning in the current economic climate and possible alternative approaches. 1-6.
Sethi, S, Yan, H, & Zhang, H. (2005) Inventory And Supply Chain Management With Forecast Updates New York, NY : Springer.
...om product forecasting exercise, this will help customers in getting a better deal from suppliers (Mellahi, K., Johnson, M., 2000).
Commercial firms use Price Elasticity to manage pricing and production decisions, especially in industries where the growth in sales and revenues are the primary measure of a firm’s success. Knowledge of the Price Elasticity for a product or service enables managers to determine the pricing strategy required to get the sales results desired. For example, a firm with a product with a relatively high elasticity would know that a large sales increase can be created with a small price decrease. Conversely, a firm with an inelastic product knows that changes in pricing would have minimal effect on sales.
The field of medicine is another high subscriber to this forecasting technique. Potential diagnoses are frequently made based on a patient’s history or that of his ancestors and the calculated likelihood of him/her acquiring certain conditions. Statistics and probability aid in the decision making process of which test may be required for a given symptom and how a possible outbreak may be detected and contained. Strategies for isolating and dealing with diseases are often made with the aid of statistics on the percentage of a population that may have been infected and the probability of its escalation.
It is inside of the human beings nature to trade with each other since their apparition there are million of years. From the middle age to nowadays societies, the use of the currency as mean of trade become popular among societies and more people were able to establish commerce of different articles. Having Decided to open a small ice cream stand on campus called “Ice-Campused” to apply my business and economical skill I noticed that there are days where ice creams remain unsold but other days where there are not enough ice creams for the number of customers. Knowing that Fluctuating Demand corresponds to the demand in the commerce sector, which rises and falls sharply in response to changing economic conditions and consumer spending patterns there are several factors, which cause the shifts in demand.
Forecasting can be classified into qualitative and quantitative. Qualitative techniques are subjective or judgmental and are based on estimates and opinions. The Delphi technique, a common form of qualitative forecasting, allows experts to create an effective forecast under conditions of extreme uncertainty. Time?s series forecasting, a quantitative technique, uses a statistical analysis of past sales in order to effectively predict future outcomes, but can be limited under conditions of uncertainty (Chase, 2003, p.364).