Reliable forecasts are required for a variety of operations conducted by business firms and other organizations. A sales forecast, as an example, is an estimate of the level of demand for a product or for several products for some period of time in the future. To be meaningful for management, sales forecasts must project demand in terms of measurable units of a product. A sales forecast when prepared on an annual basis tends to be a time series forecast. A sales forecast when prepared on a monthly or quarterly basis also may be a seasonal forecast (Chase, Jacobs, & Aquilano, 2003).
A number of procedures exist, by which forecasts may be developed. Some, such as subjective opinion forecasts, are not acceptable for use in most contemporary organizations. A somewhat more sophisticated forecasting procedure which may be acceptable is the index-based forecast. Unfortunately, these forecasts are only as good or as bad as the index that serves as the foundation, and as good or as bad as the degree of correlation between the actual demand and the forecast based on the index (Bryman & Bell, 2004).
One categorization scheme for forecast methods is the grouping of methods as either qualitative in nature or quantitative in nature. Qualitative forecasting methods are essentially opinion estimates, which may be quite accurate at times. One type of opinion involves linking something new with something old to develop an historical analogy. As an example, one may be of the opinion that a new product is comparable to an older product, and then may extend the analogy to assume that demand for the new product may be assumed to be similar to the demand for the older product. Another popular qualitative forecasting method involves the use of focus groups, wherein a focus group is assembled that is presumed to be representative of all people who are interested in a proposed new product. The members of a focus group are brought together to...