MBA SEM-1 GROUP-4

GUIDED BY: PREPARED BY:DR. JAY BADIYANI FENIL SHAH DHARMESH SOLANKI MEGHAVI JANI SUBMITTED TO: DEPARTMENT OF BUSINESS ADMINISTRATION FACULTY OF MANAGEMENT BHAVNAGAR

FORECASTING AND DECISION MAKING

Meaning Forecasting is a process of predicting or

estimating the future based on past and present data. Forecasting provides information about the potential future events and their consequences for the organization. It may not reduce the complications and uncertainty of the future. However it increases the confidence of the management to make important decisions. Forecasting is the basis of premises. Forecasting uses many techniques. Therefore, it is also called as Statistical Analysis.

FORECASTING

DEFINITIONS:

Neter and Wasserman state “Business forecasting refers to the statistical analysis of the past and current movement in the given time series so as to obtain clues about the future pattern of those movements.”

‘‘It is the systematic attempt to assume future so that the organization can be able to know the problems and opportunities and turn them into plan of action.’’

Features of forecasting

1. Forecasting is concerned with future events.2. It shows the probability of happening of future

events.3. It analyses past and present data.4. It uses statistical tools and techniques.5. It uses personal observations.

Steps in forecasting

1. Analyzing and understanding the problem2. Developing sound foundation3. Data collection4. Data reduction5. Analyzing data6. Estimating future events7. Comparing results8. Follow up action

Importance of forecasting

1. Forecasting provides relevant and reliable information about the past and present events and likely the future events.

2. It gives confidence to the managers for making important decisions.

3. It is the basis for making planning premises.4. It keeps managers active and alert to face

the challenges of future events and the changes in environment.

Limitations of forecasting

1. The collection and analysis of data about the past, present and future involves a lot of time and money. Therefore, managers have to balance the cost of forecasting with its benefits. Many small firms don't do forecasting because of the high cost.

2. Forecasting can only estimate the future events. It cannot guarantee that these events will take place in the future. Long-term forecasts will be less accurate as compared to short-term forecast.

3. Forecasting is based on certain assumptions.

If these assumptions are wrong, the forecasting will be wrong. Forecasting is based on past events. However, history may not repeat itself at all times.

4. Forecasting requires proper judgment and skills on the part of managers. Forecasts may go wrong due to bad judgment and skills on the part of some of the managers. Therefore, forecasts are subject to human error.

Types of Forecasting

Organizations use three major types of forecasts in planning future operations.

1. Economic forecasts: It addresses the business cycle by

predicting inflation rates, money suppliers, housing starts, and other planning Indicators.

2. Technological forecasts: These are concerned with rates of

technological progress, which can result in the birth of exciting new products, requiring new plants and equipments.

3. Demand forecasts: These are projections of demand for a

company’s products or services. These are forecasts, also called sales forecasts, drive a company’s production, capacity, and scheduling systems and serve as inputs to financial, marketing, and personnel planning.

Methods of Forecasting

Methods of Forecasting

Qualitative

Executive Opinion

Market survey

Sales force composite

Delphi Method

Quantitative

Time-Series Models

Associative Models

Qualitative Methods Qualitative forecasting uses experience and

judgment to establish future behaviours.

1. Executive Opinion

2. Market Survey

3. Sales Force Composite

4. Delphi Method

Quantitative Method Quantitative forecasting uses historical data to

establish relationships and trends which can be projected into the future.

1. Time series models Assumes information needed to generate a forecast is

contained in a time series of data. It also assumes the future will follow same patterns as the past.

1) The Naive Model The Naive Model is simple and flexible. It provides

a baseline to measure other models. It also attempts to capture seasonal factors at the expense of ignoring trend.

Demand in next period is same as demand in

most recent period. This method is usually not good.

2) Moving Average Method

(a) The Simple Moving Average Method In this method the forecast is the average of the last n

observations of the time series.

Simple Moving Average=Σ Demand in previous n periods n

(b) Weighted Moving Average Method In this method historical values of the time series

are assigned different weights when performing the forecast.

Advantages of Moving Average Method

◦ Easily understood◦ Easily computed◦ Provides stable forecasts

Disadvantages of Moving Average Method

◦ Requires saving lots of past data points: at least the N periods used in the moving average computation

◦ Lags behind a trend◦ Ignores complex relationships in data

4) Exponential Smoothing Method It is a moving average technique that requires a

minimum amount of past data.

Ft+1 = Ft + a(At - Ft)

This method uses a smoothing constant α with a value between 0 and 1 (usual range 0.1 to 0.3)

A is high when more weightage is given to recent data and α is low when weightage is given to recent data.

This method is widely used in business and an important part of computerized inventory control systems.

Time series components

1. Trend Persistent, overall upward or downward

pattern. Changes due to population, technology, age,

culture, etc. Typically several years duration.

2. Seasonal

Regular pattern of up and down fluctuations. Due to weather, customs, etc. Occurs within a single year. 3. Cyclical Repeating up and down movements. Affected by business cycle, political, and economic

factors. Multiple years duration. Often causal or associative relationships.

0 5 10 15 20 25

4. Random Erratic, unsystematic, ‘residual’ fluctuations. Due to random variation or unforeseen events. Short duration and non-repeating. A B C D E F

2. Associative Models This model Used when changes in one or more

independent variables can be used to predict the changes in the dependent variable.

Such models usually consider several variables that are related to the quantity being predicted. Once these related variables have been found, a statistical model is build and used to forecast the item of interest, e.g.; the sells of Dell PCs may be related to the Dell’s advertising budget, the company’s prices, competitor’s prices and promotional strategies. In this case PCs sales would be called the dependent variable and the other variables would be called the independent variables.

Meaning The English word ‘Decision’ originated from

the Latin word ‘Deciso’ which means “ to cut from.”

‘To Decide’ means “To come to a conclusion” or “To pass a resolution.”

Decision making means to select a course of action from two or more alternatives. It is done to achieve a specific objective or to solve a specific problem.

DECISION MAKING

Definitions

According to George R Terry, “Decision making is the selection based on certain criteria from two or more alternatives.”

 According to Heinz Weihrich and Harold Koontz,

“Decision making is defined as the selection of course of action among alternatives; it is the care of planning.”

Characteristics of Decision making1. Decision making implies choice2. Continuous activity/process 3. Mental/intellectual activity4. Based on reliable information5. Goal oriented process6. Means and not the end7. Relates to specific problem8. Time consuming activity9. Needs effective communication10.Pervasive process11.Responsible job

Advantages of Decision making

1. Decision making is the primary function of management

2. Decision making facilitates the entire management process

3. Decision making is the continuous managerial function

4. Decision making is essential to face new problems and challenges

5. Decision making is delicate and responsible job

Types of Decision Making

1. Programmed and non-programmed decision

Programmed decisions are normally of repetitive nature and are taken within the broad policy structure. This decisions have short run impact and are taken by lower level managers.

Non-programmed decisions are of non-repetitive nature. Their need arises because of some specific circumstances. Such decisions are taken by top management.

2. Major and minor decisions Major decisions are which are taken for whole organization.

Minor decision means which decisions are taken for minor decision making.

3. Routine and Strategic decisions Routine decisions or tactical decisions are taken in the context

of day to day operations of the organization. Mostly they are of repetitive nature and do not require much analysis and evaluation and can be made quickly.

Strategic or basic decisions relate to policy matters and usually

involve large investment or expenditure of funds. These decisions are mostly non-repetitive in nature. A slight mistake in these decisions is bound to injure the entire organization.

4. Policy and operative decisions Policy decisions are taken by top management and they mostly

relate to basic policies. Such decision have long term impact. Operative decisions relate to the day-to-day operations of the

enterprise. They are generally taken by middle and lower level management who are more closely related with the supervision of actual operations.

5. Organizational and personal decisions

The executive makes organizational decision, when he acts formally as a company officer. Such decisions reflect the basic policy of the company.

Personal decisions relate to the executive as an individual and not as a member of an organization.

6. Individual and group decisions Individual decisions are taken by a single individual

in the context of routine or programmed decisions where the analysis of variables is simple and for which broad policies are already provided.

Group decisions are already taken by a group or a standing committee constituted for this specific purpose. Such decisions are very important for the organization because they involve the participation of a large number of persons.

Process of decision making

Decision-making involves a number of steps which need to

be taken in a logical manner. This is treated as a rational or scientific 'decision-making process' which is lengthy and time consuming. Such lengthy process needs to be followed in order to take rational/scientific/result oriented decisions. Decision-making process prescribes some rules and guidelines as to how a decision should be taken / made. This involves many steps logically arranged. It was Peter Drucker who first strongly advocated the scientific method of decision-making in his world famous book 'The Practice of Management' published in 1955. Drucker recommended the scientific method of decision-making which, according to him, involves six steps:

Time and human relationship in Decision

making

Time and human relationships are crucial elements in the process of making decision. Decision making connects the organization’s present circumstances to actions that will take the organization into the future. Decision making also draws on the past; past experiences positive and negative play a big part in determining which choices managers see as feasible or desirable. Objectives of the future are thus based in part of past experiences.

In some cultures, human relationships take on even more importance in deciding about business dealings than they do in the United States. For example, the Chinese believe that even the most comprehensive plan will always involve unforeseen problems. To solve these one must rely on a network of relationships. Therefore, the Chinese are more interested in a long standing and sincere commitment to working together than in apparently perfect contracts that appear to contain no loopholes. The Chinese believe that a signed contract marks the end of the first stage in business dealings, not a final agreement. With his or her signature, a signatory to any contract automatically establishes himself or herself as a friend with a responsibility to help maintain a win-win agreement if difficulties arise. It is considered not only a business necessity but also a matter of reputation and face.

http://kalyan-city.blogspot.com/2011/08/what-is-forecasting-meaning-features.html

Forecasting methods and applications –Authors : Spyros Makridakis, Steven C Wheelwright, Rob J Hyndman

http://www.managementstudyguide.com/what-is-decision-making.htm

http://www.genesismc.co.uk/blog/drucker-effective-decision/

http://kalyan-city.blogspot.com/2010/06/decision-making-process-in-management.html

http://www.citeman.com/4584-time-and-human-relationships-in-decision-making.html#ixzz3JJ4jnMFM

Book of Management – James A.F.Stoner

THANK YOU