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Q.3 Explain the importance of business forecasting. List & explain the steps in the PERT planning process.


Answer:
Importance of Business Forecasting
Because of the variation of the economic and business conditions over time, managers must find ways to keep abreast of the effects that such changes will have on their organizations. One technique which is very much useful in planning for the future needs is the forecasting. Although numerous forecasting methods have been devised, they all have one common goal – to make predictions of the future events so that the projections can then be incorporated into the planning and strategy process. The need for forecasting encompasses the modern society.
Forecasting is highly essential in our modern society to take necessary precautionary action. For example, officials in government must be able to forecast such things as unemployment, inflation, industrial production, and expected revenues from personal and corporate income taxes in order to formulate policies.
Marketing executives of a large retailing corporation must be able to forecast product demand, sales revenues, consumer preferences, inventory and so on, in order to make timely decisions regarding current and future operations and to assist in strategic planning activities. The directors of an airline must be able to fill equipment and personnel needs based on forecasts of the number of passengers and revenues. Administrators of a college or university must make forecasts of student enrolments and consider the trends in curricula that are based on technological developments in order to plan for the construction of dormitories and other academic facilities, plan for student and faculty recruitment, and make assessments of other needs. There are two common approaches to forecasting – qualitative and quantitative. Qualitative forecasting methods are especially important when historical data are unavailable. Qualitative forecasting methods are considered to be highly subjective and judgmental.
Quantitative forecasting methods make use of historical data. The goal of these methods is to study what has happened in the past in order to better understand the underlying structure of the data and thereby provide a way of predicting future values. Quantitative forecasting methods can be subdivided into two types – time-series and casual. Time-series forecasting methods involve the projection of future values of a variable based entirely on the past and present observations of that variable. For example, the daily
closing prices of a particular stock on the New York Stock Exchange constitute a time series. Other examples of economic or business time series are the monthly publication of the Consumer Price Index, the quarterly statements of gross domestic product (GDP), and the annually recorded total sales revenues of a particular company.
Casual forecasting methods involve the determination of factors that relate to the variable to be predicted. These include multiple regression analysis with lagged variables, econometric modelling, leading indicator analysis, diffusion indexes, and other economic barometers.

Steps in the PERT Planning Process
PERT planning involves the following steps –
1. Identification of the specific activities and the milestones
2. Determination of the proper sequence of the activities
3. Construction of a network diagram
4. Estimation of the time required for each activity
5. Determination of the critical path
6. Updating of the PERT chart as the project progresses
1. Identification of the Specific Activities and Milestones
The activities are the tasks that are required to be completed in the project. The milestones include the events marking the beginning and the end of one or more activities. It is helpful to list the tasks in a table that in later steps can be expanded to include information on the sequence and duration.
2. Determination of the Activity Sequence
This step may be combined with the activity in the identification step since the activity sequence is evident for some tasks. Other tasks may require more analysis in order to determine the exact order in which they must be performed.
3. Construction of the Network Diagram
Using the activity sequence information, a network diagram can be drawn showing the sequence of the serial and parallel activities. For the original activity-on-arc model, the activities are depicted by arrowed lines and milestones are depicted by circles of ‘bubbles’. Manual drawings may require several drafts for correct portrayal of the relationships among the activities. Software packages simplify the step by automatically converting thr tabular information into a network diagram.
4. Estimation of the Activity Times
Weeks or days are commonly used unit of time for activity completion, but any consistent unit of time can be used. A distinguishing feature of PERT is its ability to deal with uncertainty in activity completion times. For each activity, the model usually includes three time estimates – Optimistic time – Generally optimistic time represents the shortest time in which the activity can be completed. It is the common practice to specify optimistic times to be three standard deviations from the mean so that there is approximately a 1% chance that the activity will be completed within the optimistic time.
Most likely time – Most likely time is the completion time having the highest probability. This time is different from the expected time.
Pessimistic time – The pessimistic time is the longest time that an activity might require. Three standard deviations from the mean are commonly used for the pessimistic time.
PERT assumes a beta probability distribution for the time estimates. For the beta distribution, the expected time for each activity can be approximated using the following weighted average –
Expected time = (Optimistic + 4 X Most likely + Pessimistic) / 6
This expected time may be displayed on the network diagram.
To calculate the variance for each activity completion time, if three standard deviation times were selected for the optimistic and pessimistic times, then there are six standard deviations between them, so the variance is given by – [(Pessimistic – Optimistic)/6]2.

5. Determination of the Critical Path
The critical path is determined by adding the times for the activities in each sequence and determining the longest path in the project. The critical path determines the total calendar time required for the project. If activities outside the critical path speed up or slow down (within limits), the total project time does not change. The amount of time that a non-critical path activity can be delayed without delaying the project is referred to as slack time.
If the critical path is not immediately obvious, it may be helpful to determine the following four quantities for ach activity –
•ES – Earliest Start Time
•EF – Earliest Finish Time
•LS – Latest Start Time
•LF – Latest Finish Time
These times are calculated using the expected time for the relevant activities. The earliest start and finish times of each activity are determined by working forward through the network and determining the earliest time at which an activity can start and finish considering its predecessor activities.
The latest start and finish times are the latest times that an activity can start and finish without delaying the project. LS and LF are found by working backward through the network. The difference in the latest and earliest finish of each activity’s slack. The critical path then is the path through the network in which none of the activities have slack. The variance in the project completion time can be calculated by summing the variances in the completion times of the activities in the critical path. Given this variance, one can calculate the probability that the project will be completed by a certain date assuming a normal probability distribution for the critical path. The normal distribution assumption holds if the number of activities in the path is large enough for the central limit theory to be applied.
Since the critical path determines the completion date of the project, the project can be accelerated by adding the resources required to decrease the time for the activities in the critical path. Such a shortening of the project sometimes is referred to as project crashing.

6. Updating of the PERT chart as the Project Progresses
Adjustments in the PERT chart are to be made as the project progresses.
As the project unfolds, the estimated times can be replaced with the actual times. In cases where there are delays, additional resources may be needed to stay on schedule and the PERT chart may be modified to reflect the new situation.

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