FORECASTING METHODS

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Forecastingistheprocessofmakingstatements
abouteventswhoseactualoutcomes(typically)
havenotyetbeenobserved.
Predictionisasimilar,butmoregeneralterm.

Riskanduncertaintyarecentraltoforecastingand
prediction;itisgenerallyconsideredgood
practicetoindicatethedegreeofuncertainty
attachingtoforecasts.

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Forecasting

Marketing:Forecastssalesfornewand
existingproducts.
Production:usessalesforecaststoplan
productionandoperations;sometimes
involvesingeneratingsalesforecasts

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Time Horizon for Forecasting

Thekeyfactorinchoosingaproperforecasting
approachisthetimehorizonforthedecision
requiringforecasting.Forecastscanbemade
forvarioustimeframes:
1. Short-term
2. Mid-term
3. Long-term

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Short- term Forecasting

Short-term(1dayto3months),managersare
interestedinforecastsfordisaggregateddemand
(forspecificproduct,forspecificgeography,etc)
Littletimetoreacttoerrorsindemandforecast,
sotheforecastsneedtobeasaccurateas
possible.
Timeseriesanalysisisoftenused.
Inabsenceofhistoricaldatamanagersuse
judgementmethods.

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Medium- term Forecasting

Timehorizonformediumterm(3monthsto
24months).
Relatestoaggregateplanning(sales&
operationsplanning).
Mediumtermforecastsisusedtobuildup
seasonalinventory
Bothtime-seriesandcausalmethodsare
used.

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Long-term-Forecasting

Timehorizonexceedstwoyears
Longtermforecastsareusedforprocess
selection,capacityplanning&location
decisions.
Judgementmodels&causalmodelsareused.

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 Forecasting (Objective & Subjective)

Thevariouscategoriesofforecastingmethods
thatareavailabletobusinesses:
Forecastingmethodscanbeeitherobjective
(usingquantitative approaches)or;
Subjective (usingmoreintuitiveorqualitative
approaches),dependingonwhatdatais
availableandthedistanceintothefuturefor
whichaforecastisdesired.

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 Types of Forecasting Methods
1. SubjectiveMethods
Salesforcecomposites
CustomerSurvey
Juryofexecutiveopinion
DelphiMethods

2.ObjectiveMethods
CasualMethods
Time-SeriesMethods
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Qualitative Forecasting

Qualitativeforecastingtechniquesare
subjective,basedontheopinionand
judgmentofconsumers,experts
Theyareappropriatewhenpastdataarenot
available.
Theyareusuallyappliedtointermediate-or
long-rangedecisions.

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Quantitative Forecasting

Quantitativeforecastingmodelsareusedto
forecastfuturedataasafunctionofpast
data;theyareappropriatewhenpastdataare
available.
Thesemethodsareusuallyappliedtoshort-
orintermediate-rangedecisions.

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Subjective Methods

1. Sales force composite:

Marketershavesalesmanagersorrepresentatives
atdifferentsalesterritories(districts/region)and
marketersbelievethatsalesmanagersknowtheir
territorybetterthananybodyelse.
Managersaskrespectivesalesmanagerto
forecastexpectedsalesintheirownterritories.
Thetotalofalltheseestimatesbasicallygives
companyssales/demandforecastfornextperiod.

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2. Customer Survey: Marketersaskbuyersabout
howmanyunitsthattheywouldliketopurchase
fromABCcompanysproductsforcomingperiod
oftime.

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3. Jury of Executive Opinion Method:
IntheJuryofexecutiveopinionmethodofSales
Forecasting,appropriatemanagerswithinthe
organizationassembletodiscusstheiropinions
onwhatwillhappentosalesinthefuture.
Sincethesediscussionsessionsusuallyresolve
aroundexperiencedguesses,theresulting
forecastisablendofinformedopinions.

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4. Delphi Method alsogathers,evaluates,andsummarizesexpert
opinionsasthebasisforaforecast,buttheprocedureismore
formalthanthatforthejuryofexecutiveopinionmethod.
TheDelphi Methodhasthefollowingsteps:
STEP1VariousExpertsareaskedtoanswer,independentlyand
inwriting,aseriesofquestionsaboutthefutureofsalesor
whateverotherareaisbeingforecasted.

STEP2Asummaryofalltheanswersisthenprepared.Noexpert
knows,howanyotherexpertansweredthequestions.
STEP3Copiesofsummaryaregiventotheindividualexperts
withtherequestthattheymodifytheiroriginalanswersifthey
thinkitnecessary.

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STEP4Anothersummaryismadeofthese
modifications,andcopiesagainaredistributed
totheexperts.Thistime,however,expert
opinionsthatdeviatesignificantlyfromthe
normmustbejustifiedinwriting.
STEP5Athirdsummaryismadeoftheopinions
andjustifications,andcopiesareonceagain
distributedtotheexperts.Justificationinwriting
forallanswersisnowrequired.
STEP6Theforecastisgeneratedfromallofthe
opinionsandjustificationsthatarisefromstep5.

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 Objective Methods
1. CasualMethods:
Someforecastingmethodsusetheassumption
thatitispossibletoidentifytheunderlying
factorsthatmightinfluencethevariablethatis
beingforecast.(CauseandEffect)
Forexample,includinginformationabout
climatepatternsmightimprovetheabilityofa
modeltopredictumbrellasales.
Thisisamodelofseasonalitywhichshowsa
regularpatternofupanddownfluctuations.
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2. Time SERIES ANALYSIS METHOD:
Thetimeseriesanalysismethodpredictsthe
futuresalesbyanalyzingthehistorical
relationshipbetweensalesandtime.
Althoughtheactualnumberofyearsincludedin
atimeseriesanalysiswillvaryfromcompanyto
company,asageneralrule,managersshould
includeasmanyyearsaspossibletoensurethat
importantsalestrendsdonotgetundetected.

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Thethreemostcommonhistoricaldatausedare:
Seasonality:Aseasonalpattern(eg.,quarteroftheyear,
monthoftheyear,weekofthemonth,dayoftheweek)
existswhenthedemandisinfluencedbyseasonalfactors.

Trend:Duringthegrowthanddeclinestagesofthe
product-lifecycle,aconsistenttrendpatternintermsof
demandgrowthordemanddeclinecanbeobserved.
Level:Itisdifficulttocaptureshorttermpatternsthatare
notrepetitiveinnature.Inshortrun,sometimesthereisa
swing,whichcouldbeineitherdirection,upwardor
downward,andisusuallyhasmomentumthatlastsfora
fewperiods.

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Importance of sale forecasting
1.Overstockingandunderstockingofmaterialscanbemaintained
byagoodinventorycontrol.
2.Withthehelpofsalesforecasting,salesopportunitiescanbe
foundoutonthebasisoftheforecast.
3.Alltheactivitiesinanorganizationarecontrolledonthebasisof
forecasting.
4.Advertisingandsalespromotionexpensesarebasedonsales
forecasting.
5.Salesforecastingisalsoimportantinthefieldofpersonnel
department.6.SalesforecastingisthebasisforfinancialPlanning.
7.Inthefieldofproduction,withthehelpofsalesforecastingthe
producerisabletoadjusthisproductionschedulesandavoididle
timewhichleadstoefficiency.
8.Supplyanddemandoftheproductscanbeeasilyadjusted.
9.Ithelpsinknowingwhenandhowmuchtobuy.
10.Ithelpsinproductmixdecisions.

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