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QUESTION 6
Title:
MBA6012 W5A1
Paper Details
Discussion Question
A company is considering what forecasting method to use for coming time periods. The company has used something of a qualitative (consensus-based) forecasting method in the past, and is wanting to know if a more formal, quantitative forecasting method would be appropriate for them. Consider the following data from recent time periods:
Time period
Forecast
Actual Demand
Three quarters ago
225
230
Two quarters ago
240
270
Last quarter
275
295
This quarter
You will determine.
?
Briefly address each of the following bullets:
Discuss what method of forecasting you view to be most appropriate given the data given above. Explain why you believe your chosen forecasting method to be the most appropriate.
Select an appropriate value for alpha, and calculate an exponential smoothing forecast for this quarter. Discuss the relationship between the alpha value that you selected and the forecast value that you calculated. In other words, if you had selected a lower value for alpha, how would the calculated value be different, and if you had selected a higher value for alpha, how would the calculated value be different?
Assume that, at the end of this quarter, we could report that the demand for this quarter was actually 275 (just like last quarter). Would this information cause you to rethink the alpha value that you selected? If so, how would it impact the value that you would have selected for alpha?
The final paragraph (three or four sentences) of your initial post should summarize the one or two key points that you are making in your initial response.
After multiple people have posted the alpha value that they selected and the forecast that they calculated, compare your calculated value with those of your classmates. Whose value was most accurate? Why do you think the person with the most accurate forecast had the most accurate forecast?
Your initial posting should be about 1 page (400 to 500 words) in length.
| Subject | Business | Pages | 3 | Style | APA |
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Answer
Introduction
In business forecasting is an important activity as it provides a basis with which to base costs and revenues. Accurate forecasting makes it possible to accurately predict business revenues and associated costs thereby able to forecast the expected profits. One main disadvantage of forecasting is that sometimes it is based on past performance and data which is historical. If the data is inaccurate and frequently changes so does the forecast (Thomassey, 2010). The longer the time period of a forecast the higher the likelihood of inaccurate forecasts due to expected changes in sales stability and financial conditions.
Many businesses undertake forecasting to improve decision making. Therefore, inaccuracies need to be minimized in the presence of different categories of risks. Quantitative or qualitative or a combination of both quantitative or qualitative forecasting techniques can be used to improve the accuracy of forecasts. In this assignment, the best forecasting method is quantitative. Simple exponential smoothing is one of those quantitative methods that relies on past data and use it to calculate one period ahead. This can be done over all the time periods for which the forecasts are required. This method places less weight on older data and more weight on recent data in calculating the next period forecast which is prudent as it is based on real historical data.
Its formula is as follows
Ft=α*At-1 + (1-α)*Ft-1
Ft=Forecast for period t
Ft-1= Forecast for period t-1
At-1= Actual demand in period t-1
Α = Smoothing Constant
Table 1: Data for use in forecasting
|
Time period |
Actual |
Forecast |
|
Three Quarters ago |
225 |
230 |
|
Two Quarters ago |
240 |
270 |
|
Last Quarter |
275 |
295 |
|
This Quarter |
Therefore, forecast for period t for alpha= 0.8 will be calculated as follows
Ft=0.8*275 + 0.2*295
Ft=279
The forecast calculated is highly dependent on the actual demand for the previous period. If I had selected a lower value it will be less dependent on the actual value and start depending more on the forecast. In this case a higher alpha gives a lower forecast because actual is lower while a lower alpha gives a higher forecast as it starts to depend on the forecast which is higher.
If the demand reported is 275 just like last quarter I will reconsider my alpha because it seems that the demand wholly depended on the previous demand thus will use an alpha of 0.9 or 1.0.
In summary, proper forecasting require proper determination of past performance. It also depends on accurate estimation of the changes expected in the demand in future. Higher expectation will result into usage of higher alpha values in the calculation while lower demand expectations will result into usage of lower alpha values.
References
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Elsas, R., Flannery, M. J., & Garfinkel, J. A. (2014). Financing major investments: information about capital structure decisions. Review of Finance, 18(4), 1341-1386. Thomassey, S. (2010). Sales forecasts in clothing industry: The key success factor of the supply chain management. International Journal of Production Economics, 128(2), 470-483. Van Horne, J. C., & Wachowicz, J. M. (2008). Fundamentals of financial management. Pearson Education.
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