FORECASTING DEMAND

CHAPTER 7(page251)

INSTRUCTOR: MEHNAZ KHAN

Judgmental forecasts:

• Judgmental forecasting methods are subjective assessments, usually based on the

opinions of experts.

• For inventory management these experts might include suppliers, purchasing

departments, store keepers, salesmen, customers, organizations supplying similar or
related items, trade reviews, government publications, and so on.

• The methods are very flexible and can be used in a wide range of circumstances, but
are not as reliable as quantitative forecasts

• If an organization is about to stock an entirely new item, it has no historical data for a
quantitative method and it must use a judgemental forecast.

• Sometimes, even when there is data, it is unreliable, out of date, or irrelevant to the
future. Then the organization has no alternative but to use a judgemental method.
 The five most widely used methods of judgemental forecasting are:
1. Personal insight.
• This uses a single expert who is familiar with the situation to produce a forecast based on
his or her own judgement.
• This is the most widely used forecasting method – and is the one that managers should
try to avoid.
• It relies entirely on one person’s judgement – as well as their opinions, bias, prejudices,
ignorance and mood.
• Comparisons of forecasting methods clearly show that someone who is familiar with a
situation and uses experience and subjective opinions to forecast will consistently
produce worse forecasts than someone who knows nothing about the situation but uses
a more formal method.
• Personal insight can give good forecasts, but often gives very bad ones and there are
countless examples of experts being totally wrong. So the major weakness of the method
is its unreliability.
• This may not matter for minor decisions, but when the consequences of errors are
important, you should use a more reliable method.
2. Panel consensus.

• One person can make a mistake, but we should get better results by collecting together several
experts and allowing them to talk freely to each other until they reach a consensus.

• When there is no secrecy and the panel are encouraged to talk openly, a genuine consensus
can emerge.

• On the other hand, it can be difficult to get the panel to talk openly, or to combine their
different views into a consensus.

• Although it is more reliable than personal insight, panel consensus still has the major weakness
that everyone – even experts – can make mistakes and the consensus might still be wrong.

• There are also problems of group working, where ‘those who shout loudest get their way’,
everyone tries to please the boss, some people do not speak well in groups, and so on.
• Overall, panel consensus is an improvement on personal insight, but you should view results
from both methods with caution
3. Market surveys.
• Sometimes it is better to ask the people most closely concerned rather than get the
opinion of experts.
• When launching a new product, for example, it might be better to get the opinions of
potential customers.
• This is the basis of market surveys, which collect data from a representative sample of
customers, analyze their views, and then draw inferences about the population at large.
• This tends to be expensive and time-consuming, but it can get good results. You can,
however,

Still find market surveys that have given very poor results, largely because they put too
much reliance on:
• a sample of customers that accurately represents the population;
• carefully worded, useful, unbiased questions
• fair and honest answers;
• reliable analyses of the answers;
• valid conclusions drawn from the analyses.
4. Historical analogy.

• Most products have a finite lifespan, and during this the demand follows a
common pattern with periods of introduction, growth, maturity, decline and
withdrawal

• Historical analogy uses the demand of a similar item that was introduced in the
past to judge the demand for a new item.

• A publisher, for example, forecasts sales of a new book by assuming they

follow the same pattern as a similar book that it published recently.

• The main problems, of course, are finding a recently introduced product that is
similar enough, and fitting the characteristic life-cycle curve to actual demand.
5. Delphi method.

• This is the most formal of the judgmental methods and has a well-defined
procedure.
• A number of experts are posted a questionnaire to ask their opinions.
• This questionnaire avoids the problems of panel consensus, and each reply is
anonymous to avoid the influences of status, etc.
• The replies from these questionnaires are analyzed and summaries are passed
back to the experts.
• Now each expert is asked to reconsider their original reply in the light of the
summarized replies from others.
• They may be convinced by some of the arguments, and adjust their answers for
a second round of opinions.
• This process of modifying responses in the light of replies made by the rest of
the group is repeated several times – usually between three and six. By this
time, the range of opinions should be narrow enough to help with decisions
• The main problems with the Delphi method are designing appropriate questionnaires,
finding a suitable mix of experts, the time involved, and keeping the same group involved
over this time.

• The experts are also likely to give answers that depend on their own responsibilities and
aims rather than objective analyses.

• A lot of anecdotal evidence suggests that these surveys giving disappointing results. Each
of the judgmental methods works best in different circumstances.

• If you want a quick reply, personal insight is the fastest and cheapest method.

• For many inventories, suppliers are the best source of information as they have knowledge
and experience with similar organizations. If you want more reliable forecasts, it may be
worth organizing a market survey or Delphi method