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Midlands State University

Faculty of Commerce

Department of Business Management

Name. Chapanda Kudakwashe Gracious


Reg No. R0645087
Level. 4.2 (PDP)
Programme. Business Management

BM403 Assignment
Question. FORECASTING TECHNIQUES

Due date. 8 March 201


I went to United Panel Beaters located in Gweru light industry. The company offers panel
beating services, that is their job is to repair damage to the bodywork of vehicles. From
the researches that I did with the company I discovered that the company did some
forecasting in trying to predict their future demand. Heizer and Render (1991) defined
forecasting as the art and science of predicting future events.

Forecasting techniques used by united panel beaters.


The United Panel Beaters in Gweru uses a naïve approach to forecast their future
demand. This is the simplest method of forecasting and it assume that demand in the next
period is just equal to demand in the most recent period. For example if the company had
23 jobs this week their forecast will be also 23 jobs for next week.

The forecasted and actual demand for the company


Forecasted demand (jobs) Actual demand from 1 to
6 March 2009 (jobs)
Monday 5 3
Tuesday 4 4
Wednesday 4 3
Thursday 4 2
Friday 6 5
Saturday 8 6
Total 31 23

As from the table above the forecasted demand for the week (31jobs) was mainly based
on what had happened the previous week. However there was a great variance between
the actual demand and forecasted demand that is (23-31=-8).

Analysis of the naïve approach


The naïve approach is the most cost-effective and efficient objective forecasting model. It
at least provides a starting point against which the more sophisticated models can be
compared. The main advantages of this forecasting technique are:
• It produces rapid results this helps the management to have a rough idea of how
many spare parts they should buy to meet the demand. This also allows the
management to employ enough people to meet the demand.
• The technique can easily accommodate frequent updates. Considering that we
have a very unstable economic environments, so many changes are taking place
leading to some fluctuations in demand. So using more recent data seem to be
more beneficial than historical data.
• Another advantage of this method is that it is very inexpensive to implement and
maintain. No computer nor quantitative capabilities are required hence the
company need not to employ expensive workers adding to the costs of their
services.
Disadvantages of the technique
• The approach often provides a limited practical level of accuracy. It does not take
into consideration other factors that may affect demand such as liquidity issues,
holidays, politics, economy and factors. Currently it can be noted that people in
Zimbabwe are experiencing liquidity problems. This means the demand for car
repair services are very low. The company must also consider the issue of
holidays when many people will be traveling and the likelihood of accidents.

Judgmental technique
The company also use judgmental technique to forecast their demand. This method takes
the opinion of small group of high level managers. There are normally individuals or
groups within the organization whose judgment and opinions regarding the future are as
valid or more valid than those of outside experts. Top managers are the key group
involved in the development of forecasts for strategic plans. They are generally most
familiar with their firms’ own capabilities and resources.
The main disadvantage of this method is that the view of one manager perhaps the most
senior executive can bias the entire jury.

Forecasting demand for united panel beaters using other quantitative methods
Moving average
Moving averages are useful if we can assume that market demands will stay fairly steady
over time. The simple moving average method uses several demand values during the
recent past to develop a forecast. This tend to smooth out the random increases and
decreases of a forecast that uses only one period.
Forecasting using two-day and three-day averages
Actual Forecast for 8-13 Forecast for 8-13
demand 1-6 March (jobs) 2- March (jobs) 3-
March (jobs) day moving day moving
average average
Monday 3
Tuesday 4 (3+4)/2 = 3.5
Wednesday 3 (4+3)/2 = 3.5 (3+4+3)/3 = 3.3
Thursday 2 (3+2)/2 = 2.5 (4+3+2)/3 = 3
Friday 5 (2+5)/2 = 3.5 (3+2+5)/3 = 3.3
Saturday 6 (5+6)/2 = 5.5 (2+5+6)/3 = 4.7
Total 23

Exponential smoothing
Exponential smoothing is one of the most popular and frequently used forecasting
technique. Exponential smoothing requires minimal data. Only the forecast for the
current period, the actual demand for the current period and a weighting factor called
smoothing constant are necessary. A smoothing constant is the weighting factor given to
the most recent data in exponential smoothing forecasts.

The basic exponential smoothing formula can be shown as follows:


New forecast = last period’s forecast
+ smoothing constant (last period actual demand – last period forecast)
Forecast using exponential approach (0.3 and 0.5 constant)
Forecasted Actual Forecasted Forecasted
demand for demand 1-6 demand for 1-6 demand 1-6 March
1-6 March march (jobs) March 0.3 0.5 constant
constant
Monday 5 3 5+0.3(3-5) = 4.4 5+0.5(3-5) = 4
Tuesday 4 4 4+0.3(4-4) = 4 4+0.5(4-4) = 4
Wednesday 4 3 4+0.3(3-4) = 3.7 4+0.5(3-4) = 3.5
Thursday 4 2 4+0.3(2-4) = 3.4 4+0.5(2-4) = 3
Friday 6 5 6+0.3(5-6) = 5.7 6+0.5(5-6) = 5
Saturday 8 6 8+0.3(6-8) = 7.4 8+0.5(6-8) = 7
Total 23 28.6 26.5
Qualitative methods
Delphi method
This method is a group process that allows experts, who may be located in different
places, to make forecasts. It is more structured and time consuming and requires the
involvement of a larger number of people than the judgmental technique. The Delphi
method is a procedure for acquiring informed judgments and opinions from
knowledgeable individuals using a series of questionnaires to develop a consensus
forecast about what will occur in the future.
Advantages
If used effectively the method eliminates the problem of senior management biases.
Disadvantages
The technique is more structured and time consuming. The environment which the
companies are operating currently is very unstable so we need a method that is quick to
respond to changes in the market.

Consumer market survey


This method solicits input from consumers regarding their future purchasing plans. A
survey may be conducted by sales or market research representatives polling clients by
mailing questionnaires, telephone conducts, or by personal interviews.
Advantages
This method is very reliable since the questionnaires will be filled by the potential
customers. It is the demand that we want to forecast so we should include the customers
in our forecasting.
Disadvantages
Not only is the method time-consuming, expensive, and difficult to prepare for, but the
results may end up being unreliable and subject to consumer change of heart.