162, Production and Operations Management 12.6 APPLICATIONS OF FORECASTING Forecasting is used to accurately estimate or predict future trends, such as demand for the next ‘month or year. Earlier in the chapter, we discussed some of the potential areas of management where forecasting can play a significant role (see Section 12,3). Table 12.1 lists the areas and the main application within each area Table 12.1. Application Areas of Forecasting area ‘Application [Accounting Estimation of CostProft Finance ‘Cash flew and funding Human Resource | Hiringrectutngraining’seminar Marketing Pricing (statiefsynamic), strategy Mis. IT services [Operations Production schedules, MRP, agaregale planning, capaciy planning Productservice design | New products and services Banking sectors Risk management [Manufacturing sector | Estimating demand 12.7 QUALITATIVE TECHNIQUES OF FORECASTING Qualitative forecasting techniques generally employ the opinion of experts to generate forecasts. A key advantage of these methods is that they can be applied when historical data are not available. Moreover, even when historical data are available, significant changes in ‘environmental conditions affecting the relevant time series may make the use of past data inrelevant and questionable in forecasting future values of the time series. Qualitative forecasting, ‘methods offer a way to generate forecasts in such cases. 12.7.1 Important Quali Some important qualitative forecasting methods are described in the following sections Delphi technique The Delphi technique uses a panel of experts to produce a forecast. Each expert is asked to provide a forecast specific to the need at hand. After the initial forecasts are made, each expert reads what every other expert wrote and is. of course, influenced by their views. A subsequent forecast is then mad by cach expert. Each expert then reads again what every other expert ‘wrote and is again influenced by the perceptions of the others Historical background of Delphitechnique: ‘The Delphimethod belongs tothe subjective intuitive methods of foresight. Delphi was developed in the 1950s by the RAND Corporation, Santa Monica, California, in operations research. Fred Woudenberg reported that the name Delphi’ was coined by Kaplan, an associate professor of philosophy at the UCLA working for the RAND Corporation in a research effort directed at improving the use of expert predictions, in policy making, Kaplan referred to the ‘principle of the oracle” as a statement that does not have the property of being “true” or “false”. Thus, Delphi. for the moder foresight method. is more than a simple brand name, The name can be traced back to Delphi, a sacred place in ancient Greece, which people used to visit to get answers to their queries by donating some gold. These answers, uttered by priests or priestesses, were called oracles. In the modern DelphiForecasting 163 method also, expert's opinion are taken to estimate future data of any item/problem having no past record, Therefore, the journey of Delphi method is traced back to 600 BC, Tablel2.2 presents the historical evolution of the modern Delphi method. Table 12.2 Historical Journey of Delphi Method Year Description (600 BC (Oracle, Delphi Greece 1980 First study and implemented in Miltary research 1964 ‘Comprehensive study in Delph, USA. 1970 15 Japanese Delphi study, STA 1990-91 ‘5 Japanese Delphi study 1992-03 “1 Comprehensive German Delph eludy, Delphi 83 199405 “apanese-German mini Delph study 1996 8® Japanese Delph study 1997-08 2 Comprehensive German Delph study, Delphi 98 "2000-01 FUTURE: the Delphi stucy process is going on where ler counties are nveWved Definition of Delphi: ‘The Delphi method is based on structural surveys and makes use of the intuitive available information of the participants, who are mainly experts. Therefore, it delivers qualitative as well as quantitative results. Delphi technique is a survey is steered by a monitor group, comprises several rounds of a group of experts, who are unknown to each other ‘and the aim is to reach at a consensus, After each survey round, a standard feedback about the statistical group judgement is calculated from median and quartile of single prognoses and if possible, the arguments and counter-arguments of the extreme answers are fed back. The ‘essentials points of the Delphi technique are as follows’ i, Delphi is an expert survey conducted in two or more rounds. ii, Starting from the second round, a feedback is given (about the results of previous rounds) to the experts participating in the survey iii, The same experts assess the same matters once more, being influenced by the opinions of the other experts. One expert sees the opinion of another and if he/she is influenced by the comments of the other, he/she is requested to review his/her comments in the light of other comment. This is done to bring more accuracy in the judgement. iv. Contents of Delphi studies are always about those issues on which information does not exist. Else there are more efficient methods of forecasting v, Delphi isa judgement-based process with uncertain aspects, where the judgement is based ‘on the expert's experience and subject knowledge. vi. Experts are involved, who on the basis of their knowledge and experience, are able to assess the future in a competent way. During the rounds, they have the opportunity to gather new information. vii, Delphi method, being a qualitative approach, the emphasis is more on the experience of the expert than the results of mathematical models, viii, Delphi tries to make use of self-fulfilling and self-destroying prophecies in the sense of shaping or even creating the future When to use Delphi: The Delphi method is mainly used when long-term issues have to be assessed. As itis a procedure to identify statements (or topics) that are relevant for the future.164 Production and Operations Management it reduces the complex knowledge to a single statement and makes it possible to judge upon. ‘Therefore, its use in combination with other methodologies like scenarios, technology list or ‘others can be interesting, On the other hand, in more complex issues, when the themes cannot be reduced that much or when thinking and discussions in alternatives are the major target, Delphi is not the method of choice. For example, consider the situation in which a company ‘ora ministry has to decide which of two research programmes to support, A or B. Programme A is proposed from faculty A and industry A and the peers fiom discipline A have given their reviews, Programme B in conjunction with industry B originates from faculty B and the peers of discipline B have made up their minds, Everybody did her or his best, but how to decide between them is somewhat not so straightforward, Organizing a Delphi process: There ate different possibilities to organize a Delphi process. However, before starting, you should answer the following questions: + What is my objective? + How many resources (manpower, money...) do I have? + Is Delphi the right choice? + How can I formulate the statements? + What are my questions? As mentioned before, the usual way is a combination of methods as the topics have to be formulated especially, a process that already needs methods like creativity procedures or ‘can even be combined with scenatios or future workshops. In the following, a more standard procedure is described, It starts with the organization of the process as such. In Figure 12.1, this is illustrated by the “real” example of the Delphi "98 (Hunter and Storz, 2006) in Germany Organisation ofthe Delphi-Process Steering Committe® wos YN A 5 c D E F ExportPanels Yager Sento Send to experts Results, Analysis, Discussion Figure 12.1 Organization of a Delphi Survey ‘Source: Hunter and Stor 2008) ‘The first step is to find a steering committee (if you need one) and a management team with sufficient capacities for the process. Then expert panels to prepare and formulate the statements are helpful unless it is decided to let that be done by the management team. The ‘whole procedure has to be fixed in advance: Do you need panel meetings or do the teams workForecasting 165 virtually’ Is the questionnaire electronic or on paper? This means that logistics (from Internet programming to typing the results from the paper versions) have to be organized. Will there be follow-up workshops, interviews, presentations? If yes, these also have to be organized and. pre-pared. Printing of brochures, leaflets, questionnaire, reports have also be considered. The last organizational point is the interface with the financing organization if this is different from the management team Formulating topics: When the organization is roughly defined, the fields of the Delphi should be decided on, In some cases, one thematic field is enough, in many cases it is wished to get an overview so that more fields are decided on and handled in a flexible way. There is always the possibility to add or disclose or re-name fields. To give some examples, the Delphi "98 fields were: + Information and communication + Service and consumption ‘+ Management and production + Chemistry and materials + Health and life processes + Agriculture and nutrition + Environment and nature + Energy and resources + Construction and dwelling + Mobility and transport ‘Then, the topics have to be formulated. This is a time-consuming, process. It has to be clear, ‘where the topics stem from, The easiest way is desk research and to take topics from literature and surveys that are available. However, the more creative way isto find working groups who have the task to structure the field and formulate topics. One can start from seratch, but itis very difficult to focus the themes, then. Therefore, the more efficient way is to find an already ‘existing material from research, Then brainstorming, brain writing or other ercative activities ‘can add themes. When there is the critical mass of topics, then you need a filter system. What are the topics that are relevant for your specific Delphi with your specific objectives? Here ‘you can already make some formal or informal judgments (from discussion to giving points or school notes, even computer semi-anonymous topic selection is possible). It is recommended. not fo have more than 50 topics per questionnaire but it also depends on the question onc intends to ask Analysis of Delphi results: In most Delphi surveys, a lot of statistical data is gathered which can be used in differemt ways. But comments are also often asked and can help to interpret the statistics or be analysed in a qualitative way. Especially the combination of Delphi and scenarios makes many qualitative presentations possible. A Delphi manager should think about the way to analyse in advance because this has implications on the criteria and the whole design of the questionnaire as described above Nominal group technique ‘The nominal group is similar to the Delphi technique in that it utilizes a group of participants. usually experts. Afler the participants respond to forecast-related questions, they rank their responses in order of perceived relative importance, Then the rankings are collected and166 Production and Operations Management aggregated, Eventually, the group should reach a consensus regarding the priorities of the ranked issues, Sales force's opinion The sales staff is often a good source of information for future demand, They may be asked for their input and aggregate their responses into a sales force composite forecast. Caution should be exercised when using this technique as the members of the sales force may not be able to distinguish between what customers say and what they actually do. Also, ifthe forecasts will be used to establish sales quotas, the sales force may be tempted to provide lower estimates. Executive opinions ‘Sometimes senior-level managers meet and develop forecasts based on the knowledge of their areas of responsibility. This is sometimes referred to as a jury of executive opinion. Market researchisurveys In market research, consumer surveys are used to establish demand. Such marketing research. involves a questionnaire that solicits personal, demographic, economic and marketing information. Researchers collect such information in person at retail outlets and malls, where the consumer can experience taste, fel, smell and sce a particular product. The rescarcher must be careful that the sample of people surveyed is representative of the desired consumer target. 12.7.2 Merits and Demerits of Qualitative Techniques The merits and demerits of the qualitative techniques of forecasting can be summed up as follows (Table 12.3) Table 12.3 Qualitative Forecasting Technique: Merits and Demerits Warts Demerits Abilty to predict changes in patterns |Ablty to forecast inaccurately f forecasters only consider recently perceived information. Allow decision makerste incorporate | nab to forecast if there is complex information, Fich data sources consisting oftheir Intution, experience and expert Judgement ‘The ability to forecast accurately can be reduced due to forecasters tendency to infer relationships in the absence ofa pattern Abily to forecast accurately may be reduced when a forecaster tris to justify 2 forecast that proves to be inaccurate. ‘Quaitatve forecasting techniques are expensive and time intensive. Source: Hogar) ana Makdak 1981) 12.8 QUANTITATIVE TECHNIQUES OF FORECASTING Itis another method of forecasting used to predict demand, costs, profit, prices, etc., by using analysis of past data, Quantitative forecasting can be applied when the following conditions exist: + Information about the past is available. + This information can be quantificd in the form of numerical data. + Itcan be assumed that some aspects of the past pattern will continue into the future. It is also known as the assumption of continuityForecasting 167 12.8.1 Important Quantitative Methods ‘Some important quantitative forecasting methods are described in the following sections. Time series method ‘Time series analy sis predicts future demand from past data, A time series isa sct of time ordered. ‘observations on a variable during successive and equal time periods. For example, demand in units for successive and equal time period of month, i., demand in January, February, March, April, May, ete. There are some interactive components used in time series, such as levels, trends, seasonal variations, cyclical variations and random variations as shown in Figure 12.2 + Levels indicate the scale or magnitude of a time series. ‘+ Trend identified the rate of growth or decline ofa series over time. Raw Data Trend Component ‘Seasonal Component Cycle Component Random Component ° 4 2 a 4 Tine (years), ——= Figure 12.2 Various Components of a Time Series + Seasonal variations consist of annually recurring movements above and below the trend line. + Demand fluctuates in a repetitive pattern from year to year. + Seasonal periodic peaks and valleys should occur at the same time every year + Seasonal variations should be of larger magnitude than the random variations, + Cyclic variations are long-term oscillations or swings about a trend line. The eycles may vary with respect to the time of occurrence. the length of the phases and the amplitude of the Muctuations.