Chapter 4 - Trend Forecasting Flashcards
What is Trend Forecasting?
Trend Forecasting is the process of researching and formulating predictions on consumer’s future buying habits. By identifying the source, tracing the evolution, and recognising patterns of trends, forecasters are able to provide designers and brands with a ‘vision’ of the future.
What is the objective of Trend Forecasting?
Trend forecasting is an overall process that focuses on other industries such as automobiles, medicine, food and beverages, literature, and home furnishings. Fashion forecasters are responsible for attracting consumers and helping retail businesses and designers sell their brands.
What is the importance of Trend Forecasting?
Forecasting is used in almost every area of business today.
- Understanding the seasons, whether the trends are being worked upon for Spring/ Summer or Fall/ Winter
- Studying trends as per the selected season and a closer look on the markets that are being catered
- Understanding the demography of that particular area
- Very importantly, deciding on the product category.
What are the elements of Forecasting?
- Developing the ground work:
It carries out an orderly investigation of products, company and industry. - Estimating future business:
This follows a clear-cut plan for working out future expectancies in the form of natural undertaking with key executives. - Comparing actual with estimated results:
Checking the attained with anticipated results of the business periodically and tracking down reasons for major differences. - Refining the Forecast Process: Once familiarity with estimating the future of the business is gained through practice, sharpening the approach and refining the procedure becomes quite easy.
State the principles of Forecasting.
- Forecasts are rarely perfect. Forecasting the future involves uncertainty. Therefore, it is almost impossible to make a perfect prediction. Forecasters know that they have to live with a certain amount of error, which is the difference between what is forecast and what actually happens. The goal of forecasting is to generate good forecasts on the average over time and to keep forecast errors as low as possible.
- Forecasts are more accurate for groups or families of items rather than for individual items. When items are grouped together, their individual high and low values can cancel each other out. The data for a group of items can be stable even when individual items in the group are very unstable. Consequently, one can obtain a higher degree of accuracy when forecasting for a group of items rather than for individual items. For example, you cannot expect the same degree of accuracy if you are forecasting sales of long-sleeved hunter green polo shirts that you can expect when forecasting sales of all polo shirts.
- Forecasts are more accurate for shorter than longer time horizons. The shorter the time horizon of the forecast, the lower the degree of uncertainty. Data do not change very much in the short run.
Explain the different theories explaining Forecasting.
Business Forecasting: Theory # 1.
Theory of Economic Rhythm: This theory propounds that the economic phenomena behave in a rhythmic manner and cycles of nearly the same intensity and duration tend to recur. According to this theory, the available historical data have to be analysed into their components, i.e. trend, seasonal, cyclical and irregular variations.
The secular trend obtained from the historical data is projected a number of years into the future on a graph or with the help of mathematical trend equations. If the phenomena is cyclical in behaviour, the trend should be adjusted for cyclical movements. When the forecast for a year is to be split into months or quarters then the forecaster should adjust the projected figures for seasonal variations also with the help of seasonal indices.
It becomes difficult to predict irregular variations and hence, rhythm method should be used along with other methods to avoid inaccuracy in forecasts. However, it must be remembered that business cycles may not be strictly periodic and the very assumptions of this theory may not be true as history may not repeat.
Business Forecasting: Theory # 2.
Action and Reaction Approach: This theory is based on the Newton’s ‘Third Law of Motion’, i.e., for every action there is an equal and opposite reaction. When we apply this law to business, it implies that it there if depression in a particular field of business, there is bound to be boom in it sooner or later. It reminds us of the business, cycle which has four phases, i.e., prosperity, decline, depression and prosperity.
This theory regards a certain level of business activity as normal and the forecaster has to estimate the normal level carefully. According to this theory, if the price of commodity goes beyond the normal level, it must come down also below the normal level because of the increased production and supply of that commodity.
Business Forecasting: Theory # 3.
Sequence Method or Time Lag Method:
This theory is based on the behaviour of different businesses which show similar movements occurring successively but not simultaneously. As such, this method takes into account time lag based on the theory of lead-lag relationship which holds good in most cases.
The series that usually change earlier serve as forecast for other related series. However, the accuracy of forecasts under this method depends upon the accuracy with which time lag is estimated.
Business Forecasting: Theory # 4.
Specific Historical Analogy:
This theory is based on the assumption that history repeats itself. It simply implies that whatever happened in the past under a set of circumstances is likely to happen in future under the same set of conditions.
Thus, a forecaster has to analyse the past data to select such period whose conditions are similar to the period of forecasting. Further, while predicting for the future, some adjustments may be made for the special circumstances which prevail at the time of making the forecasts.
Business Forecasting: Theory # 5.
Cross-Cut Analysis:
In this method of business forecasting, the combined effect of various factors is not studied, but the effect of each factor, that has a bearing on the forecast, is studied independently. This theory is similar to the Analysis of Time Series under the statistical methods.
Business Forecasting: Theory # 6.
Model Building Approach:
This approach makes use of mathematical equations for drawing economic models. These models depict the inter-relationships amongst the various factors affecting the economy or business. The expected values for dependent variables are then ascertained by putting the values of known variables in the model. This approach is highly mechanical and this can be rarely employed in business conditions.
What are the steps involved in Forecasting?
- Identify the Problem.
- Collect Information
- Perform a preliminary analysis
- Choose the Forecasting Model
- Data analysis: This step is simple. After choosing a suitable model, run the data through it.
- Verify Model Performance: when the time comes, it is very important to compare your forecast to the actual data. This allows you to evaluate the accuracy of not only the model, but the entire process, and change each step accordingly
What are the major areas of Forecasting?
- Economic development: The economic conditions of the country as well as those of the whole world have significant effect on the operations of an organisation. This will include predictions relating to GNP, currency strength, industrial expansion, job market, balance of payments etc.
- Technological forecasts: These forecasts predict the new technological developments that may change the operations of an organisation. An organisation keeps upto date with new technological developments and readily adopts new methods to improve performance.
- Competition forecasts: It is necessary to predict as to what strategies our competitors would be employing. The competitor may be working to employ a different marketing strategy for the same product or bringing out a substitute for the product which could be cheaper and easily acceptable.
- Social forecasts: These forecasts involve predicting changes in the consumer tastes, demands and attitudes.
- Other forecasts: Other necessary forecasts are predictions about new laws, political events, labour supplies etc. These are all critical areas with impacts on the planning process.
What are the advantages of Forecasting?
1] Assists in Planning One of the biggest advantages of forecasting is that it enables the manager to plan for the future of the organization. Planning and forecasting actually go hand in hand. Without an idea of what the future holds for the company, we cannot plan for it. Thus, forecasting plays a very important role in planning.
2] Environmental Changes When done correctly, forecasts should be able to point out the upcoming changes in the environment. This means that it can allow the company to benefit from such environmental changes. When the changes are favourable to the company it can expand and grow its business. And in conditions that are adverse, it can plan and prepare to protect itself.
3] Identifying Weak Spots Another advantage of forecasting is that it will help the manager identify any weak spots, or ignored areas that the organization may have. Once attention has been drawn to these areas, the manager can put into effect effective controls and planning techniques to rectify them.
4] Improves Co-ordination and Control Forecasting requires information and data from a lot of external and internal sources. This information is collected by the various managers and staff from various internal sources. So almost all units and verticals of the organization are involved in the process of forecasting. This allows for better communication and coordination amongst them.
What are the limitations of Forecasting?
1] Just Estimates The future will always be uncertain. Even if use the best of forecasting techniques and account for every aspect imaginable, a forecast is still just an estimate. One can never predict future events with 100% success. So even the best-laid plans may amount to nothing. This will always remain one of the biggest limitations of forecasting.
2] Based on Assumptions The basis of any forecasting method is assumptions, approximations, normal conditions, etc. This makes these forecasts unreliable. So one must always keep in mind the inherent limitations of forecasting and be cautious in being over-reliant on them.
3] Time and Cost Factors The data and information required to make formal forecasts are generally a lot. And the collection and tabulation of such data involve a lot of time and money. The conversion of qualitative data into quantitative data is also another factor. One must be careful that the time, money and effort pent forecasting must not outweigh the actual benefits from such forecasts.
