'Generally, forecasting means presently making estimations for an event which will occur in the future. therefore, demand forecasting is the estimations of future requirement of services or goods considering the present factors.'
Introduction
Demand forecasting is one of the major management issues which every organization should put into consideration every year. Demand forecasting is made up of two common words, demand and forecasting, where demand means the requirement of a service or product from outside (Siemsen 2015). Generally forecasting means presently making estimations for an event which will occur in the future. therefore, demand forecasting is the estimations of future requirement of services or goods considering the present factors. According to Siemsen (2015) it is a technique which is used by organization to estimate the probability of demands for a service or product in the future. it is done after an analysis of past demands of the service or product based on the present market conditions. Firms should follow scientific methods, events and facts which are related to forecasting. This paper will explore the importance of demand forecasting in an organization and in this case, McDonald’s in Singapore.
1. Importance of Demand Forecasting
This section will consider the importance of demand forecasting in McDonald’s Singapore, which is one of the largest fast food restaurants in the country. There are over 120 restaurants in Singapore, where it serves more than 1.2 million customers weekly. Approximately 9000 employees depend on the success of McDonald’s for their livelihood. Every organization has external and internal risks such as recession, inflation, change of laws by the government, failure of technology and high competition. Therefore, most of the decisions which the organizations make are bound by uncertainty and risky conditions. The management of an organization will lessen the probability of the adverse effects of uncertainty by demanding the sales of their product or the volume of sales of its products in the future.
The concept of demand forecasting would be such that if they sold an estimate of 300, 350 and 400 units of diet soda to customers in the month of August, October and November respectively, then it would mean there will be a demand of a minimum of 350 diet soda units in the month of December. This is however, if the conditions in the market remain the same. Therefore, demand forecasting will assist McDonald’s in making decisions such as purchasing of raw materials, financial management, the process of production and the price limits of price for the products. many organizations make guest estimates for their products, by evaluating how the product is ferrying in the present conditions. There are several benefits of demand forecasting and they include:
i. Fulfilling Organizational Objectives.
Every organization is established with pre-determined objectives. McDonald’s is one of the established organizations in the world, therefore, it would have predetermined objectives to be met every month or each year. Demand forecasting assists organizations in meeting both long terms and short-term objectives (Molnar 2010). Therefore, when McDonald’s opens its doors to customers every day or introduces new products, it has targets which it has to meet, and this is done by estimating the current demands for its products.
For example, if McDonalds targets selling approximately 500,000 units of a vegetarian products such as the Veggie Burger, then it would initiate demand forecasting for the product. If the demand of the new product is low, then the organization will have to make corrective actions to ensure that they meet their organizational objectives. In this case, to initiate more sales, management can take advertising into consideration, or give discounts. If such a condition would not yield results, then the organization will have to cut production of the product to lower loses. However, demand forecasting is necessary to increase profits and growth of the product in the market, so that the organization will meet its objectives.
ii. Budgetary Preparations
Demand forecasting is crucial in making budgetary estimates for expected revenues and costs of production (Kremer, Moritz, & Siemsen 2011). For instance, if the management had forecasted the demand of its vegetarian burger to be 500, 000 units, which is priced at S$ 10 each, then the overall revenue from the product would be S$ 5,000,000. Therefore, the management would be in a better position to budget aspects such as cost of production of each item, and its delivery methods. In this case, demand forecasting would have assisted the organization to make budgetary estimates where they will know how to spend money, and where to save money (Kremer, Moritz, & Siemsen 2011).
iii. Stabilizing Production and Employment
Demand forecasting enables an organization to control its recruitment activities and production levels (Kremer, Moritz, & Siemsen 2011). Producing products as estimated by the demand is essential because it ensures the organization will avoid resource wastage in the restaurant. It also helps the organization to hire adequate human resource according to the requirements of the demands (Kremer, Moritz, & Siemsen 2011). Many organizational objectives are to make profits; therefore, unnecessary costs are avoided at all costs.
For example, when a customer enters into a McDonald’s and order a meal, they may not like to wait for a long period to give their orders. They expect the restaurant to have the meal they desire and expect to get their orders within the shortest time possible. Therefore, an accurate forecasting of the customer traffic in the restaurant will ensure the management has an idea of the products in demand, how it should be stocked and the number of servers for each time of the day. It will also ensure the organization understand how to schedule food production to ensure that they are served in their best states. In restaurants, the demand of food items depends on the time of the day, therefore, an organization will produce the right kinds of food in the right times. A poor forecast might result to service breakdown, an aspect which will hurt the finances of the organization.
iv. Expanding Organizations
According to Chase (2013) demand forecasting is essential in organization in providing data for the expansion of the business. If the demand for the products and services provided is higher, then the organization might consider expending it to other locations. However, if the demand for goods and services provided by the organization is expected to fall, then there will be plans to cut any expansion aspects. For example, McDonald’s world over operates on franchises, therefore, when there is increased traffic in one restaurant, data collected from one restaurant can be used to determine of the restaurant will open another restaurant in the other part of town or closer to it. it can also consider shifting to a bigger place in the city to accommodate customers who frequent the store every day.
v. Making Management Decisions
Demand forecasting is critical in making managerial decisions such as requirement of raw materials, room capacity and traffic inflows, and ensuring availability of capital and labor (Chase, 2013). For example, McDonald’s pricing of its products depending on the location is one of the critical aspects of decision making for the management. Having accurate prediction of future sales is critical in devising the strategies for pricing of goods. It is also essential in management of inventory, such as the reduction of costs to products which are nearing expiring. For example, if a product such as diet coke stock has expiry date being closer, the management can minimize ordering of excess stocks by understanding the expected demand for the product at different time intervals. This is items of seasons, times of day and environmental changes that can affect the demand and the consumption of the product.
B. Methods of Demand Forecasting
There are several techniques and methods of forecasting demand. The one which the organization utilizes depends on aspects such as time period of forecast, costs involved, market volatility or stability and skills of employees with forecasting skills. Some of the methods used are highly quantitative or qualitative. These methods include:
a. Buyer Intention Survey
An organization can request their customers to communicate their intentions of buying in a future period. This requires the management targeting prospective buyers and asking them if they will buy their goods or services within a certain time period, an if so, how many units will be made (Morwitz, Steckel, and Gupta 2007). This is a method which is specifically for industrial type of goods, and mainly features luxury goods.
Morwitz, Steckel, and Gupta 2007 observes the advantages of buyer intention survey as
i. It is suitable demand forecasting of industrial products.
ii. It is essential for forecasting new products in the market, such that people are asked if they would buy such a product. This is usually done before the product is produced in large scale to ensure that it is marketable product.
Disadvantages of Buyer Intention survey
i. It is time consuming and very expensive to carry out.
ii. It can be negatively affected by biases such that some buyers might exaggerate their intentions and requirements to buy or wonder about expected shortages.
iii. It is not viable in forecasting for house hold items because buyers can have divided preferences and irregular buying intentions. This is because the possibility of the buyer in foreseeing future buying can be sometimes wishful thinking.
b. Collective Opinion Method/ Sales Force Composite Method
In this technique, sales agents are required in estimating the expected sales in the territories they are mandated in a given time period (Khan 2014). These individual time forecasts are then combined to create a demand forecast for the whole company. This technique is applied with the belief that these sales persons are closest to the buyers and have direct access to the customer contacts. Khan (2014) notes the advantages and disadvantages of the method as
Advantages of Collective Opinion Method
The demand forecast is based on first-hand information of the sale agents; therefore, it is credible.
In the industrial market, this method can be useful in forecasting the sale of new products.
It is a simple method to execute.
Disadvantages of Collective Opinion Method
The method is highly subjective where it depends on the tastes and opinion of buyers
A sales agent can lower the estimates if the estimates will be used to determine their sales quotas.
The salesperson my fail to consider the external aspects which can impact the future demand of the product.
Some sales agents may be more into making of sales rather than forecasting sales which might be deemed as needless paperwork.
c. Jury of Executive Opinion Method/Executive Judgement
This involves averaging and combining of sales projections done by the management in various departments of an organization to come up with a forecast (Sanders and Manrodt 2003). If they are knowledgeable and experienced about the aspects which influence sales, and the factors are based on current market developments, this technique works. Sanders and Manrodt (2003) note the advantages and disadvantage of the method as:
Advantages
i. It is economical to carry out and it is quick.
ii. It is more valid than the forecasts done from sales force method and consumer surveys.
Disadvantages
i. It lacks empirical reality because it is very subjective.
ii. It can result to pessimism and optimisms of the management rates recent demand forecast experiences more that those of the past.
d. Delphi Demand Forecasting Method
This is a technique which entails the management seeking the advice of experts in a certain aspect of organization repeatedly until they have a consensus on the appropriate (Armstrong and Green 2005). The coordinate of the group continuously gives the participants with responses from the previous prompts or questions. In the case, the coordinator gives each participants the responses of the others including the reasons that led to their conclusions. Each of the expert participant then reacts to the information given by others and considers it as per his knowledge. this Delphi Method was developed by Gorden, Dalkey and Olaf Helmer in the 1940s (Armstrong and Green 2005). it has been instrumental in demand forecasting of technological products such as predicting changes in technology in the future.
e. Time Series Analysis
This is a technique which is based on extrapolation, which involves projecting a past relationship or trend into the future (Burger, Dohnal, Kathrada, and Law 2001). this is done with the precept that the future will repeat itself. However, the main problem of this method is that history does not always repeat itself in the longer term. It is usually a quantitative variable observation collected by the organizations over time. However, Burger, Dohnal, Kathrada, and Law 2001 argue that this method is dependent on some factors such as:
i. Long term trends which entails the general direction or the overall movement of data which ignores any short-term effects such as seasonal or cyclical variations. This is usually projected in school enrolments where probably for the last 100 years, school enrollments have been on the rise. However, it is a feasible trend despite having few years of stagnant enrollment.
ii. Seasonal variations where the same aspects happen each time of the year and repeat themselves year after year.
iii. Cyclical movements where they are long term aspects of oscillation of operations of business and therefore converted into data to project the future. these cycles may take years to pan out, with some of the oscillations taking a 3 years, 6 years, or decades.
Therefore, all of these methods are used by organizations to forecast demands of their goods are services to ensure that they are prepared of any occurrences within business operations.
In conclusion, future demand forecasting is an indispensable tool in developing of organizational frameworks for its growth and development. McDonald’s remains one of the most successful fast food franchises because it takes into consideration the aspects of demand forecasting. It is critical for all organization, whether for profit, or non-commercial organizations to take into consideration different methods of demand forecasting to ensure it gets accurate data to be utilized by the management. Uncertainty reduction will make an organization more confident in dealing with the external environment, or aspects beyond their control. Demand forecasting is essential to all those who undertake the process to ensure that they adapt to changing circumstances or uncertain future.
Part 2. How Climate Change Affects its Decision-Making Process.
The climate change phenomenon poses a greater opportunities and risks to the natural and human systems worldwide. In this case, Singapore is no exception because disasters which are weather related have cause adverse effects to organizations and businesses in the country. all over the world, there are concerted efforts by various organizations to find ways of mitigating climate change. Business and for-profit organizations therefore need to have policies and strategies which respond and adapt to the various aspects of climate change. Droughts, which happens for longer periods than other disasters such as tsunamis, hurricanes and floods have all been part nature’s cycle impacting human organizations in various ways (Berkhout, Hertin, and Gann 2006). On the other aspect, global warming does not have alter the cause of natural disasters, rather it escalates the likelihood and the intensity of how natural disasters will affect organizations. therefore, this section of the paper will explore how considering climate change in the insurance industry, (Manulife Singapore Insurance) can enable them to sustainably adapt to climate changes and overcome its effects.
In general terms, many insurance companies have dedicated little attention to issues of climate change. This occurs because many of the organizations do not base their operational adaptability to climate changes and the natural environment. On the flip side, some companies have unfortunately made efforts in denying climate change and its effects, let alone initiating strategies in adapting to it. however, other companies have determined that disruptions in weather will be more frequent and severe, which makes it imperative for organizations to consider climate change adaptation. In this case, environmental change adaptations consider organizational aspects and contexts to deal with environmental variable complexity. Climate change anticipatory adaptation is born out of interactions from both endogenous and exogenous factors. These factors vary across organizations and industry sectors and determines the level of preparedness for the effects of climate change by organizations. For example, reinsurance and insurance companies have been in the front line in anticipating the effects of climate change due to the extreme financial implications which weather changes would have to their industry. This is especially to the health sector facilitation which would incur cost associated with the effects of adverse epidemics and weather conditions to the human populations.
There are several issues to consider why some organization excel or lag in Anticipatory Adaptation to Climate Change (AACC). These aspects are:
a. Climate change and organizational adaptation
Organization and climate change adaptation is ussually a merger of environmental determinism and strategic choices of the organization. The dynamic process of adaptation is as a result of the type of power, relative strength or the dependency between the business and the environment. In a natural context of management, human actions can provide adjustments to the expected effects of climate change (Orsato, Barakat, and de Campos 2017). The differences between companies on climate change adaptation is on the large-scale aspects of how it affects production costs and distributions, access to resources, impact on the infrastructure of the company, and supply chain resources access. These are the aspects which are safe guarded by insurance companies and therefore, there is need for these companies to factor the risks posed by climate change in the operations of businesses (Orsato, Barakat, and de Campos 2017). This is to avoid issues of overcompensation of physical and liability risks at their expense, which can in the long run dwindle their profitability. This is by either increase in the frequency of adverse weather occurrences, its intensity, or systemic changes to extreme weather conditions.
b. Competence building and organizational change
The need for improving efficiency and adapting to climatic change determined the need for organizational learning on the matter. For companies to remain innovative and competitive, organizations need to align their activities, strategies and process, to the changes of the environment (Eakin, Lemos, and Nelson 2014). Therefore, organizational learning is not a unique aspect to climate change and its related adaptions. This is because the concept of learning is essential to the continued nature of organization changes and dynamic environments. The ability to leaning and adapt is fundamental to the long-term success and performance of any insurance organization. Therefore, the reasons as to why some organizations are better than others in organizational learning explains why some will fail in the long run and others will excel (Eakin, Lemos, and Nelson 2014). Insurance organizations that will fail to focus on climate changes in its decision making will fail to seek options to reduce risks which will improve their resilience on the effects of natural catastrophes to their client companies or organizations.
c. AACC and Organizational Learning
In aspects of uncertainty such as climate change, organizational learning serves as a way of companies retaining and improving ways of increasing productivity, competitiveness, and innovation (Argote and Miron-Spektor 2011). Therefore, when climate changes prevalence increases, the need for learning increases also. In this case Argote and Miron-Spektor (2011) observes that, when AACC occurs more frequently, insurance companies need to seek non-traditional and specific knowledge on ecology and natural sciences for several reasons.
i. Long term and unpredictable consequences of climate change are usually hard to anticipate because climate change adaptation models are inconclusive and are not well suited for making decisions.
ii. It is difficult to assess definite knowledge on these uncertainties because it is subject to complexity and chaos. This is not limited to the aspects of natural disasters but the effects of greenhouses which may affect climate in the future.
Therefore, even the companies with the best adaptation systems for climate change are unable to fully anticipate the consequences of global climate change. Failure to this will have adverse effects in the operations and running of the organization to achieve its objectives and long-term goals. There is need for organizations to create plans for AACC to remain competitive and survive adverse effects of climate change.
Why businesses should focus on climate change adaption in decision making
The insurance industry plays a pivotal role in climate change adaptation because it is one of the players uniquely positioned in understanding the risks posed by climatic changes to the communities (Golnaraghi, 2018). This is because insurance organization such as Manulife, play a double role of being a long-term investor that funds the economy and act as risk managers to guarding the assets of citizens. Therefore, it mandates in the society is to ensure that it devises creative risk transfer actions to lessen the economic consequences of uncertainty. In consideration with the aspects of climate change, Manulife insurance and other such organizations are precarious position more than ever. This is because if they do not integrate the aspect of climate change in their business models, they will suffer liability, physical and transitions risks (Gurenko, 2015). Therefore, it is necessary for insurance companies to anticipate climate changes to for their economic survival.
One of the reasons why insurance companies especially Manulife insurance company, should factor climate change in its decision making is because diverse climatic changes happens across the globe and differ in regions. Manulife Singapore is a subsidiary of the larger Manulife financial based on Ontario Canada (Dealing 2015). Therefore, given its global nature, it is bound to factor different climatic zones in which it operates and means that the company will face different impact of climate change in its different locations. Locally, there are diverse climate change occurrences which can increase its physical and liability risks (Botzen 2013). It is essential for Manulife Singapore, to intergrate its strategies with those of local entities to ensure it is fully aware of the policies affecting climate change.
It is essential for insurance companies such as Manulife Singapore to find and create better decisions making tools while dealing with issues of climate change. this is because there is need for the organization to find ways of minimizing the current risks, and prevent new risks such as flood protection, land zoning, robust building codes, retrofitting among others (Golnaraghi 2018). this will lessen the impact of liability risks to the company such that those companies who would have suffered damage or loss from effects of climate change would seek compensation. Finding measures to protect the occurrence of future risks of climate changes should be at the center fold of Manulife Singapore risk assessment strategies and policies. Collaborating and seeking information from other sectors will facilitate factoring of potential climate risks and lay adaptation or mitigation frameworks for their client bases(Gurenko 2015).
While laying the framework for future strategies in handling the perils of climate change, there is need for the Manulife Singapore to understand the underlying key drivers for their client’s vulnerability. Singapore is a low lying, densely populated island but with impeccable socio-economic efficiency and infrastructure (Doshi 2015). However, it is vulnerable to adverse effects of climate change. one of the issues is the rise of sea levels resulting from melting polar ice sheets which is caused by greenhouse effects (Botzen 2013). Carbon-emissions have been termed as one of the risk factors which result to the rise of sea levels, which makes Singapore to be at risk of sea level rise. Most governments have taken measures to ensure that reduction of carbon foot prints in the atmosphere as a way of combating rising temperatures (Ho and Chuah 2017). Such changes in policy has adverse effects to insurance companies due to transition risks posed by their clients.
Transitional risks are the economic risks which would stem from the activities of transitioning to lower carbon emission economy. Changes in technology, policies, physical and market risks would trigger the evaluation of large-scale assets as opportunities and costs become apparent (Golnaraghi 2018). This may lead to assets being stranded, an issue which would make insurance companies lose finances. Therefore, while laying the frameworks, the management of Manulife Singapore must take into consideration that climate is one of the many drivers which result to community and business vulnerability.
The management of insurance companies have an obligation of forecasting future vulnerabilities which would negatively affect the operations and profitability of their businesses. Without which, many of the companies would sink into financial loss because they failed to lay the framework into adapting to the changes (Gurenko 2015). There is need for Manulife to engage with other stakeholder in creating a feasibly plans for risks posed by climate change. this is because taking a narrow view of the effects of climate change would increase the risks of its clients being exposed to climate change vulnerabilities. For example, in Singapore there have been fluctuating temperatures which has adverse effects to human health (Ho and Chuah 2017).
Therefore, understanding the medical perils of temperature fluctuation, the insurance company can increase premiums to cater for the increased health risks from increased temperatures. Heat waves are some of the significant causes for heat strokes and hyperthermia(Gurenko 2015). Frequent flooding can increase cases of water borne diseases which may affect communities and their health. Therefore, there is need for Manulife Singapore to engage with other stakeholder in decision making to identify such risks, lay frameworks and policies to provide substantive insurance to their clients. Viewing risks in a broader fashion would increase the chances of implementing insurance policies which would have positive impacts to its growth and development (Gurenko 2015).
Climate change is a collective responsibility where all sections of the society will be affected by it in one way or the other. There are major catastrophes of climate change which would have adverse effects to all insurance companies in the country (Botzen 2013). therefore, it is essential for Manulife Singapore to engage with other stakeholders in the insurance facilitation sector to come up with feasible plans in handling these catastrophes. For example, a heat wave can have adverse effects to agriculture, which would in turn affect food and raw materials for industries and have adverse effects to human health and dieting. Such as ripple effect would be disastrous to a single insurance entity. In some cases, Berkhout, Hertin, and Gann (2006) argue that effective strategies for climate change adaptation may be an opportunity for competitive advantages. Therefore, Manulife Singapore must incorporate and reach out to other partners before making decisions or changing policies. This is in terms of having information sharing, and other adaptation techniques which would facilitate sound decision’s making.
To conclude one of the major aspects to adapting to climate change in Singapore is working towards a low carbon emission economy. For this case, transition risks pose a greater challenge to insurance companies more than physical and liability risks. Therefore, it is essential for Manulife Singapore insurance to have a formidable decision-making process, which will incorporate all aspects which pose risks and vulnerabilities to their clients. This is because having resilience to climate change will salvage it from the perils of insurability to clients. More action is needed which will involve more strategies and ideas being developed. For Manulife insurance to survive the risks posed by climate change, it must incorporate all factors regarding climate change in its decision-making processes.
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