These forecasts provided acceptable accuracy for the time they were made, however, since the major goal then was only to estimate the penetration rate and the ultimate, steady-state level of sales. As necessary, however, we shall touch on other products and other forecasting methods. For example, priority pattern analysis can describe consumers’ preferences and the likelihood they will buy a product, and thus is of great value in forecasting (and updating) penetration levels and rates. North and Donald L. Pyke, “‘Probes’ of the Technological Future,” HBR May–June 1969, p. 68. Finally, through the steady-state phase, it is useful to set up quarterly reviews where statistical tracking and warning charts and new information are brought forward. 7. Many new products have initially appeared successful because of purchases by innovators, only to fail later in the stretch. What is the purpose of the forecast—how is it to be used? Forecasting methods are one of the analytical techniques listed under tools and techniques for the PMI process to monitor and control project work.Some examples mentioned in the PMBOK (section 126.96.36.199 of the 5th edition) are time series, scenario building, and simulation. One that does a reasonably good job of forecasting demand for the next three to six periods for individual items. One that forecasts total bulb demand more accurately for three to thirteen periods into the future. A hard date when sales will level to “normal,”, For component products, the deviation in the growth curve that may be caused by characteristic. All rights reserved. The reason the Box-Jenkins and the X-11 are more costly than other statistical techniques is that the user must select a particular version of the technique, or must estimate optimal values for the various parameters in the models, or must do both. An extension of exponential smoothing, it computes seasonals and thereby provides a more accurate forecast than can be obtained by exponential smoothing if there is a significant seasonal. © 2021 ZDNET, A RED VENTURES COMPANY. The first uses qualitative data (expert opinion, for example) and information about special events of the kind already mentioned, and may or may not take the past into consideration. In 1965, we disaggregated the market for color television by income levels and geographical regions and compared these submarkets with the historical pattern of black-and-white TV market growth. Unfortunately, most forecasting methods project by a smoothing process analogous to that of the moving average technique, or like that of the hypothetical technique we described at the beginning of this section, and separating trends and seasonals more precisely will require extra effort and cost. Tracking the two groups means market research, possibly via opinion panels. We expect that computer timesharing companies will offer access, at nominal cost, to input-output data banks, broken down into more business segments than are available today. As we have already said, it is not too difficult to forecast the immediate future, since long-term trends do not change overnight. The backbone of the organization’s understanding of the project, its management, its plan, and its objective; Top 5 Types of Project Management Reporting Tool. To estimate the date by which a product will enter the rapid-growth stage is another matter. Some of the requirements that a forecasting technique for production and inventory control purposes must meet are these: One of the first techniques developed to meet these criteria is called exponential smoothing, where the most recent data points are given greater weight than previous data points, and where very little data storage is required. But, more commonly, the forecaster tries to identify a similar, older product whose penetration pattern should be similar to that of the new product, since overall markets can and do exhibit consistent patterns. Add this growth rate (whether positive or negative) to the present sales rate. The basic tools here are the input-output tables of U.S. industry for 1947, 1958, and 1963, and various updatings of the 1963 tables prepared by a number of groups who wished to extrapolate the 1963 figures or to make forecasts for later years. Thus the manufacturer can effect or control consumer sales quite directly, as well as directly control some of the pipeline elements. A project that is subject to budget control uses two types of budgets: original and remaining. Over the short term, recent changes are unlikely to cause overall patterns to alter, but over the long term their effects are likely to increase. Resource forecasting for projects is different from human resource management or resource capacity planning. 3. In the early stages of product development, the manager wants answers to questions such as these: Forecasts that help to answer these long-range questions must necessarily have long horizons themselves. Column 4 shows that total expenditures for appliances are relatively stable over periods of several years; hence, new appliances must compete with existing ones, especially during recessions (note the figures for 1948–1949, 1953–1954, 1957–1958, and 1960–1961). This is the method: In special cases where there are no seasonals to be considered, of course, this process is much simplified, and fewer data and simpler techniques may be adequate. At CGW, in several instances, we have used it to estimate demand for such new products, with success. A graph of several years’ sales data, such as the one shown in Part A of Exhibit VII, gives an impression of a sales trend one could not possibly get if one were to look only at two or three of the latest data points. Trend forecasting takes the current project spending and extrapolates that rate of spending until the end of the project. Then, if the result is not acceptable with respect to corporate objectives, the company can change its strategy. We have found that an analysis of the patterns of change in the growth rate gives us more accuracy in predicting turning points (and therefore changes from positive to negative growth, and vice versa) than when we use only the trend cycle. Note: Scales are different for component sales, distributor inventories, and distributor sales, with the patterns put on the same graph for illustrative purposes. In practice, we find, overall patterns tend to continue for a minimum of one or two quarters into the future, even when special conditions cause sales to fluctuate for one or two (monthly) periods in the immediate future. ), Part C shows the result of discounting the raw data curve by the seasonals of Part B; this is the so-called deseasonalized data curve. Not directly related to product life-cycle forecasting, but still important to its success, are certain applications which we briefly mention here for those who are particularly interested. We justified this procedure by arguing that color TV represented an advance over black-and-white analogous to (although less intense than) the advance that black-and-white TV represented over radio. Such points are called turning points. You need to consider things at a more granular level. This is the case for gas turbines, electric and steam automobiles, modular housing, pollution measurement devices, and time-shared computer terminals. In sum, then, the objective of the forecasting technique used here is to do the best possible job of sorting out trends and seasonalities. Forecasting Revenue for a Fixed Price Project. For example, we will study market dynamics and establish more complex relationships between the factor being forecast and those of the forecasting system. How successful will different product concepts be? Within five years, however, we shall see extensive use of person-machine systems, where statistical, causal, and econometric models are programmed on computers, and people interacting frequently. 2. What’s They are naturally of the greatest consequence to the manager, and, as we shall see, the forecaster must use different tools from pure statistical techniques to predict when they will occur. As one can see from this curve, supplier sales may grow relatively sharply for several months and peak before retail sales have leveled off. Data on distributor inventories gave us some warning that the pipeline was over filling, but the turning point at the retail level was still not identified quickly enough, as we have mentioned before, because of lack of good data at the level. There are more spectacular examples; for instance, it is not uncommon for the flow time from component supplier to consumer to stretch out to two years in the case of truck engines. A causal model is the most sophisticated kind of forecasting tool. A time series is a group of data that’s recorded over a specified period, such as a company’s sales by quarter since the year 2000 or the annual production of Coca Cola since 1975. Conversations with product managers and other personnel indicated there might have been a significant change in pipeline activity; it appeared that rapid increases in retail demand were boosting glass requirements for ware-in-process, which could create a hump in the S-curve like the one illustrated in Exhibit VI. Many organizations have applied the Delphi method of soliciting and consolidating experts’ opinions under these circumstances. Once these factors and their relationships have been clarified, the forecaster can build a causal model of the system which captures both the facts and the logic of the situation—which is, after all, the basis of sophisticated forecasting. This is accomplished by recognizing the realities of estimating accuracy, given the information on which it is based, and adjusting estimates for changes in scope or in the conditions of performance. Thus our statements may not accurately describe all the variations of a technique and should rather be interpreted as descriptive of the basic concept of each. Eventually we found it necessary to establish a better (more direct) field information system. ALL RIGHTS RESERVED. Basically, computerized models will do the sophisticated computations, and people will serve more as generators of ideas and developers of systems. The economic inputs for the model are primarily obtained from information generated by the Wharton Econometric Model, but other sources are also utilized. Two CGW products that have been handled quite differently are the major glass components for color TV tubes, of which Corning is a prime supplier, and Corning Ware cookware, a proprietary consumer product line. That is, simulation bypasses the need for analytical solution techniques and for mathematical duplication of a complex environment and allows experimentation. We combined the data generated by the model with market-share data, data on glass losses, and other information to make up the corpus of inputs for the pipeline simulation. What are the alternative growth opportunities to pursuing product. The continuing declining trend in computer cost per computation, along with computational simplifications, will make techniques such as the Box-Jenkins method economically feasible, even for some inventory-control applications. Further out, consumer simulation models will become commonplace. Long- and short-term production planning. 2. The success patterns of black-and-white TV, then, provided insight into the likelihood of success and sales potential of color TV. Each has its special use, and care must be taken to select the correct technique for a particular application. Econometric method: Perhaps the most sophisticated forecasting tool, the econometric method involves estimating quantitative relationship derived from economic theory. Significant changes in the system—new products, new competitive strategies, and so forth—diminish the similarity of past and future. While there are a wide range of frequently used quantitative budget forecasting tools, in this article we focus on the top four methods: (1) straight-line, (2) moving average, (3) simple linear regression, and (4) multiple linear regression. Although the X-11 was not originally developed as a forecasting method, it does establish a base from which good forecasts can be made. To be sure, the color TV set could not leave the introduction stage and enter the rapid-growth stage until the networks had substantially increased their color programming. They use human judgment and rating schemes to turn qualitative information into quantitative estimates. The major part of the balance of this article will be concerned with the problem of suiting the technique to the life-cycle stages. Still, the figures we present may serve as general guidelines. If it can be changed, they should then discuss the usefulness of installing a system to track the accuracy of the forecast and the kind of tracking system that is appropriate. In this case, there is considerable difficulty in achieving desired profit levels if short-term scheduling does not take long-term objectives into consideration. Qualitative forecasting methods, often called judgmental methods, are methods in which the forecast is made subjectively by the forecaster. The appropriate techniques differ accordingly. We found this to be the case in forecasting individual items in the line of color TV bulbs, where demands on CGW fluctuate widely with customer schedules. It may also directly incorporate the results of a time series analysis. Here the manager and forecaster must weigh the cost of a more sophisticated and more expensive technique against potential savings in inventory costs. Our expectation in mid-1965 was that the introduction of color TV would induce a similar increase. (In the next section we shall explain where this graph of the seasonals comes from. While there can be no direct data about a product that is still a gleam in the eye, information about its likely performance can be gathered in a number of ways, provided the market in which it is to be sold is a known entity. As the chart shows, causal models are by far the best for predicting turning points and preparing long-range forecasts. Making refined estimates of how the manufacturing-distribution pipelines will behave is an activity that properly belongs to the next life-cycle stage. Although the forecasting techniques have thus far been used primarily for sales forecasting, they will be applied increasingly to forecasting margins, capital expenditures, and other important factors. All the elements in dark gray directly affect forecasting procedure to some extent, and the color key suggests the nature of CGW’s data at each point, again a prime determinant of technique selection since different techniques require different kinds of inputs. To estimate total demand on CGW production, we used a retail demand model and a pipeline simulation. The technique should identify seasonal variations and take these into account when forecasting; also, preferably, it will compute the statistical significance of the seasonals, deleting them if they are not significant. Third, one can compare a projected product with an “ancestor” that has similar characteristics. Simulation is an excellent tool for these circumstances because it is essentially simpler than the alternative—namely, building a more formal, more “mathematical” model. The flow chart should also show which parts of the system are under the control of the company doing the forecasting. To avoid precisely this sort of error, the moving average technique, which is similar to the hypothetical one just described, uses data points in such a way that the effects of seasonals (and irregularities) are eliminated. They are educated guesses by forecasters or experts based on … Our knowledge of seasonals, trends, and growth for these products formed a natural base for constructing the equations of the models. One should note, however, that there is some instability in the trend line for the most recent data points, since the X-11, like virtually all statistical techniques, uses some form of moving average. Some of the techniques listed are not in reality a single method or model, but a whole family. The technique selected by the forecaster for projecting sales therefore should permit incorporation of such “special information.” One may have to start with simple techniques and work up to more sophisticated ones that embrace such possibilities, but the final goal is there. It should be able to fit a curve to the most recent data adequately and adapt to changes in trends and seasonals quickly. The costs of some procedures depend on whether they are being used routinely or are set up for a single forecast; also, if weightings or seasonals have to be determined anew each time a forecast is made, costs increase significantly. Part B shows the seasonal factors that are implicit in the raw data—quite a consistent pattern, although there is some variation from year to year. Exhibit II Flow Chart of TV Distribution System. The costs of using these techniques will be reduced significantly; this will enhance their implementation. However, a number of companies are disaggregating industries to evaluate their sales potential and to forecast changes in product mixes—the phasing out of old lines and introduction of others. Using Billing Types. This information is then incorporated into the item forecasts, with adjustments to the smoothing mechanisms, seasonals, and the like as necessary. However, special flag signals like “substantially increased network color programming” are likely to come after the fact, from the planning viewpoint; and in general, we find, scientifically designed consumer surveys conducted on a regular basis provide the earliest means of detecting turning points in the demand for a product. A manager generally assumes that when asking a forecaster to prepare a specific projection, the request itself provides sufficient information for the forecaster to go to work and do the job. For example, Quantum-Science Corporation (MAPTEK) has developed techniques that make input-output analyses more directly useful to people in the electronics business today. For example, the type and length of moving average used is determined by the variability and other characteristics of the data at hand. When you create a project budget, you must specify the original and remaining budget forecast models that were created in the Forecast modelspage. The multi-page chart “Basic Forecasting Techniques” presents several examples of this type (see the first section), including market research and the now-familiar Delphi technique.1 In this chart we have tried to provide a body of basic information about the main kinds of forecasting techniques. The executive and the forecaster must discuss these fully. A panel ought to contain both innovators and imitators, since innovators can teach one a lot about how to improve a product while imitators provide insight into the desires and expectations of the whole market. The forecasts were accurate through 1966 but too high in the following three years, primarily because of declining general economic conditions and changing pricing policies. Some examples of the type of information that must be weighed when making a complete forecast are examples such as the estimate at completion, or in other words, the estimate to complete. Systematic market research is, of course, a mainstay in this area. Since a business or product line may represent only a small sector of an industry, it may be difficult to use the tables directly. Frequently, however, the market for a new product is weakly defined or few data are available, the product concept is still fluid, and history seems irrelevant. This fluidity can be bucketed under risk breakdown structure that is found as a part of the feasibility study or it can be a purely financial assessment that you consider as you study markets, inflation or a sudden influx of revenue. Whereas it took black-and-white TV 10 years to reach steady state, qualitative expert-opinion studies indicated that it would take color twice that long—hence the more gradual slope of the color-TV curve. The forecasts using the X-11 technique were based on statistical methods alone, and did not consider any special information. Input-output analysis, combined with other techniques, can be extremely useful in projecting the future course of broad technologies and broad changes in the economy. Also, the feasibility of not entering the market at all, or of continuing R&D right up to the rapid-growth stage, can best be determined by sensitivity analysis. (A later investigation did establish definite losses in color TV sales in 1967 due to economic conditions.). TeamAmp is the first cognitive example of forecasting in management. Techniques vary in their costs, as well as in scope and accuracy. For this same reason, these techniques ordinarily cannot predict when the rate of growth in a trend will change significantly—for example, when a period of slow growth in sales will suddenly change to a period of rapid decay. By identifying critical areas of management and forecasting the requirement of different resources like money, men, material etc., managers can formulate better objectives and policies for the organisation. Stone and R.A. Rowe, “The Durability of Consumers’ Durable Goods,” Econometrica, Vol. The main advantage of considering growth change, in fact, is that it is frequently possible to predict earlier when a no-growth situation will occur. In today’s project management world, forward-thinking managers and leaders don’t adhere to a single methodology—they become well-versed in … We should note that when we developed these forecasts and techniques, we recognized that additional techniques would be necessary at later times to maintain the accuracy that would be needed in subsequent periods. Going through all of these approaches is beyond the scope of this blog post. And because trends tend to change gradually rather than suddenly, statistical and other quantitative methods are excellent for short-term forecasting. In a highly volatile area, the review should occur as frequently as every month or period. A sales forecast at this stage should provide three points of information: the date when rapid sales will begin, the rate of market penetration during the rapid-sales stage, and the ultimate level of penetration, or sales rate, during the steady-state stage. Project management is a process that involves several component aspects such as initiation, planning, executing, controlling, and closing. When the retail sales slowed from rapid to normal growth, however, there were no early indications from shipment data that this crucial turning point had been reached. The causal model takes into account everything known of the dynamics of the flow system and utilizes predictions of related events such as competitive actions, strikes, and promotions. Consider what would happen, for example, if a forecaster were merely to take an average of the most recent data points along a curve, combine this with other, similar average points stretching backward into the immediate past, and use these as the basis for a projection. A common objection to much long-range forecasting is that it is virtually impossible to predict with accuracy what will happen several years into the future. Adequate data seemed to be available to build an econometric model, and analyses were therefore begun to develop such a model for both black-and-white and color TV sales. This clarifies the relationships of interacting variables. It may be impossible for the company to obtain good information about what is taking place at points further along the flow system (as in the upper segment of Exhibit II), and, in consequence, the forecaster will necessarily be using a different genre of forecasting from what is used for a consumer product. When it is not possible to identify a similar product, as was the case with CGW’s self-cleaning oven and flat-top cooking range (Counterange), another approach must be used. Again, if the forecast is to set a “standard” against which to evaluate performance, the forecasting method should not take into account special actions, such as promotions and other marketing devices, since these are meant to change historical patterns and relationships and hence form part of the “performance” to be evaluated. People frequently object to using more than a few of the most recent data points (such as sales figures in the immediate past) for building projections, since, they say, the current situation is always so dynamic and conditions are changing so radically and quickly that historical data from further back in time have little or no value. Forecasting and tracking must provide the executive with three kinds of data at this juncture: Medium- and long-range forecasting of the market growth rate and of the attainment of steady-state sales requires the same measures as does the product introduction stage—detailed marketing studies (especially intention-to-buy surveys) and product comparisons. In an EVM analysis, quite a number of time and cost forecasting techniques are available, but it is however a cumbersome task to select the right technique for the project under study. The first three core concepts for forecasting can be summarized by the use of three related project systems: 1. Time series analysis helps to identify and explain: (Unfortunately, most existing methods identify only the seasonals, the combined effect of trends and cycles, and the irregular, or chance, component. Simulation also informs us how the pipeline elements will behave and interact over time—knowledge that is very useful in forecasting, especially in constructing formal causal models at a later date. How shall we allocate our R&D resources over time? Furthermore, where a company wishes to forecast with reference to a particular product, it must consider the stage of the product’s life cycle for which it is making the forecast. This humping provided additional profit for CGW in 1966 but had an adverse effect in 1967. Tactical decisions on promotions, specials, and pricing are usually at their discretion as well. When you use the Cost control page to view the current status of project costs, use the forecast models that were selected for the original and remaining budget. Because substantial inventories buffered information on consumer sales all along the line, good field data were lacking, which made this date difficult to estimate. 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