Over time running a business has increased in complexity and variety of tasks. With that, forecasting has become a much fiddlier task as well, and what proves to work for a manufacturing business, will not work for a company that supplies software. Thus, many different forecasting techniques have been developed in recent years.
But how does one go about choosing a forecasting technique? Well, first we need to gain the better understanding of the range of forecasting possibilities and what you are going to achieve by forecasting.
Choosing a forecasting technique
To select a forecasting method, one has to consider the following factors:
- Why are you creating a forecast?
- What kind of historical data do you have available and how much of it?
- How accurate would you like your forecast to be?
- What is the value of the forecast for your business?
- How much time can do you have to run a forecast?
And for those companies that supply specific material products, one must consider the following factors:
- The stage of the product’s lifecycle;
- The availability of the historical data;
All of these questions will help you and your business allocate the appropriate amount of funds and time required to produce a forecast that meets your business requirements the best and thus choosing an appropriate forecasting technique.
Further, once you have established the reasons for doing a forecast, there are three cornerstone types of forecasting techniques that you need to know:
Qualitative forecasting technique uses data like an expert opinion, forecasters or managers judgement and knowledge of the market. This forecasting technique is based purely on intuitive judgement and subjective probability estimates, which can be problematic in many cases, however, useful when you lack any historical data or for unique market conditions.
The second forecasting technique focuses entirely on patterns and pattern changes thus rely entirely on historical data.
Quantitative forecasting technique is used to forecast the future as a function of a past. This technique is the most appropriate when you have reasonable historical data available and when it is reasonable to assume that some of the patterns in the data are expected to continue into the future. Due to the volatile nature of many markets, quantitative forecasting technique is mainly used for short and mid-term decisions. We have discussed forecasting accuracy with only historical data here, but to put it simply, the market will fluctuate and therefore will your sales, especially if you have a supply chain.
A casual model, is merely a mixture of both forecasting techniques – quantitative and qualitative.
This model is most commonly run in the organisations that have a lot of data available to them. So where there is enough historical data, market research and any other factors that would relevant to the business forecasts or might impact the business during the forecasting period. This is the most sophisticated forecasting technique available!
This technique expresses the numerical value of any impact factors to the forecast, which is the most comprehensive way of forecasting.
At the end of the day, forecasting is a little bit like mathematic art. And we can only give you and your business brief insight into forecasting, and the rest you have to explore by yourself (or we will write about it soon, so subscribe to our newsletter to get notified!)