Question

List the advantages and disadvantages of both forecasting and qualitative forecasting?

Answer 1

FORECASTING is essentially a process of analyzing the past and present business movements and trends to obtain some idea or clues regarding future trends and business movements. Forecasting is looking into the future so that we can accordingly plan for it.

Advantages of forecasting are as follows:

1. Decision making: The primary advantage of forecasting is that it provides the business with valuable information that the business can use to make decisions about the future of the organization.

2. Environmental Changes: Forecasting if done properly 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 favorable 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 the weak spots: It helps 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

Disadvantages of Forecasting are as follows:

1. Future is unpredictable: The future will always be uncertain. Even if we 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 spent forecasting must not outweigh the actual benefits from such forecasts.

QUALITATIVE FORECASTING:

Advantages of Qualitative forecasting are as follows:

1. Predictive Ability: The main advantage of qualitative forecasting is its ability to predict changes in sales patterns and customer behavior based on the experience and judgment of senior executives and outside experts. Management can use the qualitative inputs in conjunction with quantitative forecasts and economic data to forecast sales trends.

2. Flexibility: Qualitative forecasting gives management the flexibility necessary to use non-numerical data sources, such as the intuition and judgment of experienced managers, sales professionals and industry experts. This can improve the quality of a forecast because quantitative data cannot capture nuances that years of experience can detect.

3. Ambiguity: Qualitative forecasting is useful when there is ambiguous or inadequate data.  It can use results from comparable companies and estimates of market size to predict future sales, but it is the judgment and intuition of the founders that will guide most of the key decisions

Disadvantages of Qualitative Forecasting are as follows:

1. Unexpected Occurrences: Small business managers reduce the uncertainty of business planning by using qualitative forecasting techniques. Although each technique is unique, they share certain features that affect the accuracy of forecasts. For example, all qualitative forecasts assume that certain market characteristics that existed in the past will exist in the future. Unfortunately, during each operating period, the market can be positively or negatively affected by unexpected occurrences, such as weather events, changes in tax code.

2. Invalid Expert Opinions: A company’s planning horizon is clouded with unknowns. In times of political and economic uncertainty, historical data may be obsolete, although current data may not be available. In such cases, in developing a forecast, a small business may rely on the opinions of company leaders, industry experts or market surveys. Unfortunately, if the opinion of one person, whose view prevails, is incorrect, the forecast is incorrect.

3. Forecaster Bias: A company uses qualitative forecasting techniques to attempt to approximate customer demand using “soft information,” such as personal opinions. Unfortunately, it's difficult to eliminate the forecaster’s personal bias from the data that underlies the forecast.

4. Inaccurate Forecasts: Uncertainties complicate the planning process for a small business owner or manager. Qualitative forecasts enable a manager to decrease some of this uncertainty to develop plans that are fairly accurate but still inexact