Subjective Forecasting or Objective Forecasting which are you?
Regardless of what your business is, knowing what products and services will sell, to whom, for how much, and in what quantity is vital to any business' success. Every business needs to plan carefully in order to maximise their revenue and profits. Forecasting and Planning is the best way of predicting the future for your business. Without proper forecasting it is not possible to anticipate and predict what is required to fulfil your objectives.
The most commonly used methods of forecasting and planning used by business in the UK & Ireland are either subjective or objective. The subjective method is used when contemplating buying new items while the objective method is more appropriate for frequently used items.
Subjective or judgmental forecasting is best used for your business when a product does not have an order history, for example, new products or product upgrades. It is also possible to use this method for forecasting and planning existing products when your business has time constraints and where it is not possible to use objective forecasting. We find that without the use of forecasting and planning software subjective forecasts can be subject to biases like optimism and overconfidence. Therefore without forecasting and planning software the main disadvantage of this type of forecasting is the possibility of misleading information, which could prove costly to the business.
Objective forecasting is most often used by business in the UK and Ireland on existing product lines. This involves research and analysis to determine what you need based on empirical data. In order to gather the most accurate data on future product usage, you should:
- Examine historical data
- Identify and interpret trends
- Analyse existing usage
- Factor in known changes in future demand
Objective forecasting can be viewed as less risky than subjective methods, as it relies on past performance and quantitative facts to create more accurate forecasts. In order to prepare a forecast you need to consider:
- Lead times - could be anything from a week up to four months. You need to know what your time frame is
- Predicted usage - weekly, monthly, or yearly. Are there any 'special events' or peaks and troughs?
- Expert advice/market analysis reports
- Customer information - what are the trends? Who are you targeting? What age group?
- What are the risks involved if it is a new product?
- Who are your competitors?
- Are they perishable or non-perishable items?
- Budget
- Availability - are the items readily available from the supplier?
- Product price - are your prices competitive? Are your margins sustainable? What savings can be made?
- Safety stock level - what is the minimum amount you would like to hold in inventory at any given time?
If you are looking for further guidance on how to forecast for new products, check out our free whitepaper on New Product Sales Forecasting