CHANAKYA NATIONAL LAW

UNIVERSITY
Patna

PROJECT OF PRINCIPLES OF MANAGEMENT

TOPIC FORECASTING IN AN ORGANIZATION
, HOW ITS DONE AND ITS TECHNIQUES

ACKNOWLEDGEMENT
Writing a project is one of the most significant academic challenges, I have ever
faced. Though this project has been presented by me but there are many people
who remained in veil, who gave their all support and helped me to complete this
project.
First of all I am very grateful to my subject teacher Dr. MANOJ MISHRA
without the help and kind support of whom the completion of the project would
have been a herculean task for me. He donated his valuable time from his busy
schedule to help me to complete this project and suggested me from where and
how to collect data. I am thankful for their aspiring guidance, invaluably
constructive criticism and friendly advice during the project work.
I am sincerely grateful to them for sharing their truthful and illuminating views
on a number to the project. I am very thankful to the librarian who provided me
several books on this topic which proved beneficial in completing this project.
Last but not the least, I am very much thankful to my parents and family, who
always stand aside me and helped me a lot in accessing all sorts of resources.

I thank all of them !

TABLE OF CONTENTS
1. INTRODUCTION
2.NEED AND STEPS OF FORECASTING
3.FORECASTING TECHNIQUES AND METHODS
4.ADVANTAGES , DISADVANTAGES AND LIMITATIONS OF
FORECASTING
5.CASE STUDY : FORECASTING IN AN ORGANIZATION
6. CONCLUSION
7. BIBLIOGRAPHY

INTRODUCTION
Forecasting is an futuristic perspective which forms the base of planning in an
organization . Forecasts are predictions , or estimates of future events or
conditions in the environment in which the organization operates . The forecasts
could be calculated guesses or even results of highly sophisticated techniques
.Forecasts enables a manager to anticipate the future and plan accordingly.
Good forecasts are the basis for short ,medium, and long-term planning and are
essential input to all types of service production systems. It is very important to
understand that forecast not only helps the manager to plan the course of action
in an organization but on the other hand it also helps the manager to know that
how he has to execute the plan that he has made .
Forecasting is a prediction of what will occur in the future. It is an uncertain
process that is vital to survival in todays international business environment.
Rapid technological advances have given consumers greater product diversity
as well as more information on which they make their product choices.
Managers try to forecast with as much accuracy as possible, but that is
becoming increasingly difficult in todays fast-paced business world.
HISTORY OF FORECASTING
Forecasting is by no stretch a concept invented by modern man. Dating back to
at least the ancient Egyptian civilization, forecasting has existed in some form
or another. The earliest documented use of forecasting was used by the
Egyptians to predict harvests based on the water level of the Nile River during
the flooding season. This demonstrates, in a very simplistic form,
understanding of a cause-and-effect relationship which is at the heart of
forecasting. It existed in this basic form for thousands of years and was used
predominantly for predicting crop harvests. Then, sometime during the
17th century, a man by the name of Sir William Petty fabricated the idea of a
seven-year business cycle. This concept served as the very first attempt at
forecasting economic matters. The forecasting industry in America developed
sometime around 1910, but was so primitive that it failed to foresee even the
slightest hint about the coming Great Depression.

More modern forecasting ideology came about during the Keynesian

revolution, which took place during the late 1930s. During this time
modernized economic forecasting methods were invented and used after World
War II in Denmark, Norway, and Sweden. This revolution for the Scandinavian
countries proved successful and soon spread first to the UK, and then the rest of
the industrialized world by the 1960s. Modern forecasting was created mainly
as a means for economic prediction, but was quickly adopted by many other
fields for use in predicting their own intrigues.
Today forecasting is used in a wide variety of industries from supply chain
management to politics. All companies employ some form of demand
forecasting in attempt to predict how many people will purchase a given product
or service. The degree of complexity as well as the degree of uncertainty varies
greatly depending on what is being predicted. A simple toy store, for example,
may use forecasting to predict the amount of sales they will have in a given
week, month, or year. Generally an application like this can prove to be fairly
accurate if appropriate historical data is used. On the other hand, trying to
forecast when and where a natural disaster will next occur can be nearly
impossible. As far as complexity goes, methods used to predict sales at the
same toy store are pretty basic and wont require too much time. Other
forecasts may require a large number of man hours in order to sift through data
and to select the proper forecasting tool.
The invention of computers played a large part in the evolution of forecasting.
Advanced software suites and the personal computer made forecasting
techniques more readily available to the average individual than ever before.
Computers have also played a large part in the reduction of forecasting errors,
as well as the speed of calculations. Businesses today all around the world,
from small to large, rely on computers for their forecasting needs.
Business forecasting is a process that businesses use to predict or estimate
future patterns basing on past or current data. It covers such areas as business
resources, sales, product demand or prediction of the overall economy in which
a business operates. The need for forecasting became more pronounced after the
great depression of the 1930s. Before then, businesses simply went around
doing business relying on guesses with no much statistical backing and this
resulted into the great depression that rocked major world economies in the
1930s.
The effort by major business players and economies to correct the mistakes that
led to the great depression necessitated a framework which businesses could use

to accurately predict or estimate future trends and this is how the whole idea of
forecasting became pronounced. Businesses started putting much more
emphasis on the collection of statistics and analysing them with the aim of
protecting themselves from another depression. Businesses also became so
concerned about the future and numerous consultancy firms came up to provide
forecasting help to both governments and businesses.
Since then, forecasting has become a major part of almost every business and
has become one of the ways that businesses use to manage their financial and
human resources. Forecasting has greatly evolved over the years with a variety
of tools being developed just for this purpose. Computer software has also been
developed to help automate and ease the process thus taking it away from the
traditional tools like data mining and surveys.

Characteristics of a good forecast :

- Accurate - some degree of accuracy should be determined to make a
comparisons for other alternative forecasts.
- Reliable - the user should establish some degree of confidence.
- Timely - is necessary to set a certain amount of time in respond to make
some change if necessary.
- Easy to use and understand - users should find the forecast comfortable to
working with.
- Cost-effective - the cost should not be higher than the benefits obtained
from the forecast.1
Forecasting has various benefits, as stated above it helps form the plan and
helps in its execution but at the same time it has a hidden benefit , which is
making the alternate course of action and choosing the best of all alternatives
which yields best profits without compromising with quality of product and at
last adopting it in the adverse situations. Thus , It is a mandatory that all
organizations must do forecasting .

William J. Stevenson

NEED AND STEPS OF FORECASTING

It is important for a number of reasons and that is why , it in needed . First of
all, it is one of the most effective ways for companies to manage their human
resources. Using past records and statistics, businesses can be able to determine
their human resource needs, which sector is lagging behind and which area
needs more recruitment, the labour market trends, what type of workers they
need, the location of workers among others.
It also helps businesses to allocate their financial resources in a better way.
Using past statistics, businesses can be able to decide which area needs more
investment, which sectors are likely to grow and therefore need tapping in to
and the general market trend. Forecasting can also help businesses to budget
and invest their financial resources wisely.
Financial forecasting is very important in any organization because it can be
used for budgeting as well as planning purposes. Financial forecasting is a
continuous process that continues year after year with well thought-out
decisions. Forecasting looks into the future for what is anticipated in the years
to come and can be made from current year and prior year budgets. Forecasting
is also used to estimate requirements that will be necessary for the years to
come. Financial forecasts offer results that are expected because of situations
that have happened in the past.
Forecasting is also important when it comes to developing new products or new
product lines. It helps management decide whether the product or product line
will be successful. Forecasting prevents the company from spending time and
money developing, manufacturing, and marketing a product that will fail.
Stockholder expectations highlight another reason behind the importance of
forecasting. Public companies experience scrutiny and pressure for short-term
performance from investors. Operational results will be examined by investors
and investment analysts, and actual results that differ from forecasts will be bad
for the company and its stock price.2
2 Dr. Randal Hawroth

Forecast also helps executives and analysts to make decisions as regards the
direction that the firm should take. It is one of the tools that aid managers and
executive in business intelligence and these normally use the results from these
forecasts to make strategic business decisions like whether to increase
production or cut down production, whether to set up more plants and branches
or to phase out some of the existing ones, whether to enter a particular market or
not, whether to diversify to more products and services or drop some of the
existing products just to mention a few. All these decisions are normally arrived
at after critically analyzing forecast data.
Since , It is an estimate of what the future will look like that every function
within an organization needs in order to build their current plans. Today, all
organizations operate in an atmosphere of uncertainty. Decisions that are made
by organizations today will affect future outcomes.
Here are a few examples
- The eventualities and contingencies of general economic business
cycles .
- An expansion following enlargement and growth in business involves the
use of additional machinery, personnel, and a re-allocation of facilities.
- Changes in management philosophies and leadership styles.
- The use of mechanical technology .
- Dynamic changes in the quantity or quality of products and/or services
require a change in the organization structure.
The need for forecasting significantly increases in this period of time due to the
rapid changes in technology, government involvement in the econ, social and
political changes, and globalization. It is essential to obtain an estimate of the
changes as accurately as possible for companies to survive, to strive for
operational excellence and to have a competitive advantage.

"When I ask the question - Why is forecasting important to your business? I

am not referring to holding your finger in the air and taking a wild guess. Im
referring to you taking the time to review historical sales data, market trends,
economic statistics and external factors to help predict both your short and long
term business performance.

Imagine for a moment that running your business is like being the captain of an
Airbus A380. As the captain the buck stops with you. It is your responsibility
to give the plane the final clearance before take-off. You have checked all
weather conditions and updated yourself on any forecast changes during the
flight. You are required to delegate orders to the crew in order to maintain the
wellbeing and safety of all passengers. Your crew has ensured that sufficient
supplies are on board along with enough variety to guarantee passengers
satisfaction. You are also responsible for informing passengers of flight progress
and to take into consideration any external factors that may delay or speed up
the journey. Finally, and this is of course not a complete list, you are the one
who will take control should things not go to plan.
It doesnt take a rocket scientist to understand that getting that plane in the air
and it arriving on time takes an enormous amount of teamwork, planning,
experience and foresight. Yes, you may only be running a small business in
comparison but the same principles still apply. Taking the time to forecast and
plan your sales activity will help your business:
Better understand seasonal peaks and troughs
Determine your actual cost of sale
When to order new inventory
What is the best time to launch a new product
Is it the right time to develop a new product
Whether you need additional staff
When can you afford to hire them plus so much more " 3
Getting your predictions right will also take time and experience. As they say,
practice makes perfect or when in doubt, get help. What is important is to
get your figures as accurate as possible. When you are working on your
forecast you will need to have the right information at hand. Below are some
ideas of the type of information you will require.

3 Denise OraSSHED Marketing Manager and Specialis

 List all your fixed costs (rent, phone, salaries, internet, hardware,
software etc).
List all variable costs (raw materials, wages as opposed to salaries, fuel
etc)
Use historical sales data from the last two to three years. Dont forget to
take into account cancelled sales and returns.
Review external factors such as: New contracts/negotiations
Terminating contracts
Staff changes
Industry trends and predictions for your market segment
Competitor activity
Political changes they may effect existing or new Government
contracts
A spreadsheet or online tool to enter all values.
If your business has just started you may find obtaining all of data a little
tricky. The best way is to base your predictions on similar businesses selling
similar products that also sell to the same customer demographic and
geographic location. It may also be advisable to get some expert advice.
If you havent already completed your forecast then now is as good as time as
any to make a start. It is a New Year and by now you should be back in the
swing of things so to speak.
Remember, taking the time to forecast will help you see where your business
has come from, where it is going and how it is performing now. You dont want
to end up flying your plane into an unknown storm that could have been
avoided.

STEPS IN FORECASING
Though Forecasting is an futuristic perspective , but still in order to get best
results out of our forecasts we need to do it in a systematic way. It is done in a
chronological order which mean that only if the first step is completed than we
can move on to the next step.

Step 1: DETERMINIG THE FORECAST'S PUROPOSE

i.Problem definition.
Often this is the most difficult part of forecasting. Defining the problem
carefully requires an understanding of the way the forecasts will be used, who
requires the forecasts, and how the forecasting function fits within the
organization requiring the forecasts. A forecaster needs to spend time talking to
everyone who will be involved in collecting data, maintaining databases, and
using the forecasts for future planning.
ii.

Find the Hidden (variable) Costs

What percentage of your monthly expenses is tied to variable costs? Do

you see regular fluctuations in the costs of materials and supplies? What
about sales and marketing costs? For some small business owners, this is
the single most important area of focus in trying to accurately forecast the
future for their business.

Step 2: ESTABLISH A TIME HORIZON

The forecast that we are making must be time oriented , it should be very
clear that for how much time are we going to stick to this forecast and what are
the tie limits of the implications of the forecast.

Step 3: SELECT A FORECASTING TECHNIQUE

The best model to use depends on the availability of historical data, the
strength of relationships between the forecast variable and any
explanatory variables, and the way the forecasts are to be used. It is

common to compare two or three potential models. Each model is itself

an artificial construct that is based on a set of assumptions (explicit and
implicit) and usually involves one or more parameters which must be
"fitted" using the known historical data

Step 4: Gathering information.

There are always at least two kinds of information required:
(a) statistical data, and
(b) the accumulated expertise of the people who collect the data and use the
forecasts.
Often, it will be difficult to obtain enough historical data to be able to fit a
good statistical model. However, occasionally, very old data will be less useful
due to changes in the system being forecast.

i. Know Your Customers

Who are your customers and how do they use your product or service? What
economic changes would make them buy more or less of your product?
ii.Know Your Customers Customers
If you are a B2B company, then you must take the time to learn about your
customers customers. The more you know about how your product or
service is used, the better you can predict what changes in the marketplace
will affect your business.
iii. Know Your Competition
What is the state of competition in your market place? One of the biggest
mistakes a small business makes is not accurately assessing the competition.
If you have one client that represents at least 30% of your companys total
sales, imagine what it would do to your business if a competitor took them
away from you.

Step 5: Preliminary (exploratory) analysis.

Always start by graphing the data. Are there consistent patterns? Is there
a significant trend? Is seasonality important? Is there evidence of the
presence of business cycles? Are there any outliers in the data that need to
be explained by those with expert knowledge? How strong are the
relationships among the variables available for analysis? Various tools
have been developed to help with this analysis

i. Focus on Certain Economic Indicators

Which of the economic indicators are important to your business and/or
industry? If youre a retail business, consumer spending, unemployment,
housing and lending indicators might be ones to watch particularly in your
region versus the rest of the country.
Step 6: Using and evaluating a forecasting model.
Once a model has been selected and its parameters estimated, the model
is used to make forecasts. The performance of the model can only be
properly evaluated after the data for the forecast period have become
available. A number of methods have been developed to help in assessing
the accuracy of forecasts. There are also organizational issues in using
and acting on the forecasts
STEP 7: MAKE THE FORECAST
After all the information has been gathered , now its time for depicting
and making the forecast. And this forecast will further form the basis of
the plans which the organization is going to make. But the forecasting
process does not end here , there is one more step that we need to follow
even after the forecast has been made.

STEP 8 : MONITOR THE FORECAST

This is the last process of the forecasting in an organization . After all the
steps in forecasting are completed and the forecasting has been made ,the
organization need to monitor the forecasts that have been made. We can
say that this s a control process where we check that whether our
forecasting is right or wrong.

FORECASTING TECHNIQUES AND

METHODS
There are a variety of methods that businesses use to make forecasts. Some are
computer based, running on computer applications while others are simply
based on mathematical models. The advancement in technology has made
forecasting easier than before with lots of companies developing software
specifically designed to help businesses predict the future. However, forecasting
methods generally fall into two categories namely Qualitative and Quantitative
methods.
An organization uses a variety of forecasting methods to assess possible
outcomes for the company. The methods used by an individual organization will
depend on the data available and the industry in which the organization
operates. The primary advantage of forecasting is that it provides the business
with valuable information that the business can use to make decisions about the
future of the organization. In many cases forecasting uses qualitative data that
depends on the judgment of experts.

1. Qualitative methods - These are more suited for short term predictions or
forecasts where the forecast scope is small. They are expert driven and depend
on the general market conditions to predict the future trends. Qualitative
methods are useful for predicting short term success of companies, their
products and services. Models that fall under qualitative method include;
Market research and polling of a large group of people to determine how many
are interested in the product and are willing to try it. Delphi method which
involves asking for opinion from experts and using them to make predictions.
In other words we can say that , this is based on judgement , past experiences ,
opinion and are subjective in nature. They do not rely on any rigorous
mathematical computations.

2. Quantitative methods - Quantitative models of forecasting do not put so much

emphasis on the human aspect but rather concentrate on data collected to predict
future business and resource needs of an organization. They are used for long
term predictions that take months or years. Quantitative models include but are
not limited to; The indicator approach which studies the relationship between
certain economic indicators like the level of GDP, the interest rates, the levels of
unemployment etc. Econometric modelling which is a more mathematical
version of the indicator approach. Time series models which use of collection of
various methods using past data to predict future events.
Thus we can say that these types of forecasting methods are based on
mathematical (quantitative) models, and are objective in nature. They rely
heavily on mathematical computations and include calculative statistics

QUALITATIVE FORECASTING METHODS

Qualitative Methods

Executive
Opinion

QUANTITATIVE
FORECASTING
METHODS
Market
Sales
Force
Survey

Approach in
which a group
of managers
meet and
collectively
develop a
forecast

Composite

Approach that
Approach in
uses
which each
interviews and
Quantitative
salesperson
surveys to
Methods
estimates sales
judge
in his or her
preferences of
region
customer and

Delphi
Method
Approach in
which
consensus
agreement is
reached
among a group
of experts

to assess
Time-Series Models

Time series models look at past

patterns of data and attempt to
predict the future based upon
the underlying patterns
contained within those data.

Associative Models

Associative models (often called

causal models) assume that the
variable being forecasted is
related to other variables in the
environment. They try to project
based upon those associations.

Out of all four most common methods are

I. SUBJECTIVE APPROAHES
II.DELPHI METHOD
III.TIME SERIES METHOD
IV.SMOOTHING METHOD
I.SUBJECTIVE OR INTERACTIVE APPROACHES

These techniques are often used by committees or panels seeking

to develop new ideas or solve complex problems.
They often involve "brainstorming sessions".
It is important in such sessions that any ideas or opinions be
permitted to be presented without regard to its relevancy and without fear of
criticism.

II.DELPHI APPROACH
First applications of the Delphi method were in the field of science and
technology forecasting. The objective of the method was to combine expert
opinions on likelihood and expected development time, of the particular
technology, in a single indicator. One of the first such reports, prepared in 1964
by Gordon and Helmer, assessed the direction of long-term trends in science
and technology development, covering such topics as scientific breakthroughs,
population control, automation, space progress, war prevention and weapon
systems. Other forecasts of technology were dealing with vehicle-highway
systems, industrial robots, intelligent internet, broadband connections, and
technology in education.
Later the Delphi method was applied in other areas, especially those related to
public policy issues, such as economic trends, health and education. It was also
applied successfully and with high accuracy in business forecasting4.

A panel of experts, each of whom is physically separated from the

others and is anonymous, is asked to respond to a sequential series of
questionnaires.

After each questionnaire, the responses are tabulated and the

information and opinions of the entire group are made known to each of the
other panel members so that they may revise their previous forecast response.

The process continues until some degree of consensus is achieved.

The name "Delphi" derives from the Oracle of Delphi. The authors of the
method were not happy with this name, because it implies "something oracular,
4 Basu, Shankar; Roger G. Schroeder (May 1977)

something smacking a little of the occult.The Delphi method is based on the

assumption that group judgments are more valid than individual judgments.
The Delphi method was developed at the beginning of the Cold War to forecast
the impact of technology on warfare.5 In 1944, Different approaches were tried,
but the shortcomings of traditional forecasting methods, such as theoretical
approach, quantitative models or trend extrapolation, in areas where precise
scientific laws have not been established yet, quickly became apparent. To
combat these shortcomings, the Delphi method was developed by Project
RAND during the 1950-1960s (1959) by Olaf Helmer, Norman Dalkey, and
Nicholas Rescher.6 It has been used ever since, together with various
modifications and reformulations, such as the Imen-Delphi procedure.
Experts were asked to give their opinion on the probability, frequency, and
intensity of possible enemy attacks. Other experts could anonymously give
feedback. This process was repeated several times until a consensus emerged.
Main characterstics of Delph Method
Anonymity of the participants
Usually all participants remain anonymous. Their identity is not revealed, even
after the completion of the final report. This prevents the authority, personality,
or reputation of some participants from dominating others in the process.
Arguably, it also frees participants (to some extent) from their personal biases,
minimizes the "bandwagon effect" or "halo effect", allows free expression of
opinions, encourages open critique, and facilitates admission of errors when
revising earlier judgments.
Structuring of information flow

5 JVTE v15n2: The Modified Delphi Technique - A Rotational Modification," Journal of

Vocational and Technical Education, Volume 15 Number 2, Spring 1999, web: VT-eduJVTE-v15n2: of Delphi Technique developed by Olaf Helmer and Norman Dalkey
6 Rescher(1998): Predicting the Future, (Albany, NY: State University of New York Press,
1998)

The initial contributions from the experts are collected in the form of answers to
questionnaires and their comments to these answers. The panel director controls
the interactions among the participants by processing the information and
filtering out irrelevant content. This avoids the negative effects of face-to-face
panel discussions and solves the usual problems of group dynamics.
Regular feedback
Participants comment on their own forecasts, the responses of others and on the
progress of the panel as a whole. At any moment they can revise their earlier
statements. While in regular group meetings participants tend to stick to
previously stated opinions and often conform too much to the group leader; the
Delphi method prevents it.
Role of the facilitator
The person coordinating the Delphi method is usually known as a facilitator or
Leader, and facilitates the responses of their panel of experts, who are selected
for a reason, usually that they hold knowledge on an opinion or view. The
facilitator sends out questionnaires, surveys etc. and if the panel of experts
accept, they follow instructions and present their views. Responses are collected
and analyzed, then common and conflicting viewpoints are identified. If
consensus is not reached, the process continues through thesis and antithesis, to
gradually work towards synthesis, and building consensus.

III.TIME SERIES METHOD

Time-series methods make forecasts based solely on historical patterns in the
data. Time-series methods use time as independent variable to produce demand.
In a time series, measurements are taken at successive points or over successive
periods. The measurements may be taken every hour, day, week, month, or year,
or at any other regular (or irregular) interval. A first step in using time-series
approach is to gather historical data. The historical data is representative of the
conditions expected in the future. Time-series models are adequate forecasting

tools if demand has shown a consistent pattern in the past that is expected to
recur in the future.
For example, new homebuilders in US may see variation in sales from month
to month. But analysis of past years of data may reveal that sales of new homes
are increased gradually over period of time. In this case trend is increase in new
home sales.
Time series models are characterized of four components: trend component,
cyclical component, seasonal component, and irregular component.
Seasonal Component : Regularly occurring, systematic variation in a time series
according to the time of year. Not found in annual data, or data of lower
frequencies.
Trend Component :The tendency of a variable to grow over time, either
positively or negatively.
Cycle: Cyclical patterns in a time series which are generally irregular in depth
and duration. Such cycles often correspond to periods of economic expansion
or contraction. Also know as the business cycle.
Irregular Component : The unexplained variation in a time series.
Trend is important characteristics of time series models. Although times series
may display trend, there might be data points lying above or below trend line.
Any recurring sequence of points above and below the trend line that last for
more than a year is considered to constitute the cyclical component of the time
seriesthat is, these observations in the time series deviate from the trend due
to fluctuations. The real Gross Domestics Product (GDP) provides good
examples of a time series tat displays cyclical behavior. The component of the
time series that captures the variability in the data due to seasonal fluctuations is
called the seasonal component. The seasonal component is similar to the
cyclical component in that they both refer to some regular fluctuations in a time
series. Seasonal components capture the regular pattern of variability in the time
series within one-year periods. Seasonal commodities are best examples for
seasonal components. Random variations in times series is represented by the
irregular component. The irregular component of the time series cannot be

predicted in advance. The random variations in the time series are caused by
short-term, unanticipated and nonrecurring factors that affect the time series.7
Time Series Data is usually plotted on a graph to determine the various
characteristics or components of the time series data.

IV.SMOOTHING METHOD
The use of an algorithm to remove noise from a data set, allowing important
patterns to stand out. Data smoothing can be done in a variety of different ways,
including random, random walk, moving average, simple exponential, linear
exponential and seasonal exponential smoothing. Data smoothing can be used to
help predict trends, such as trends in securities prices.
In statistics and image processing, to smooth a data set is to create an
approximating function that attempts to capture important patterns in the data,
while leaving out noise or other fine-scale structures/rapid phenomena. In
smoothing, the data points of a signal are modified so individual points
(presumably because of noise) are reduced, and points that are lower than the
adjacent points are increased leading to a smoother signal. Smoothing may be
used in two important ways that can aid in data analysis (1) by being able to
extract more information from the data as long as the assumption of smoothing
is reasonable and (2) by being able to provide analyses that are both flexible and
robust.8 Many different algorithms are used in smoothing. Data smoothing is
typically done through the simplest of all density estimators, the histogram.

Three common smoothing methods are:

Moving average
7 Imdadullah. "Time Series Analysis". Basic Statistics and Data Analysis. itfeature.com.
Retrieved 2 January 2014.
8 Simonoff, Jeffrey S. (1998) Smoothing Methods in Statistics, 2nd edition. Springer ISBN
978-0387947167

 Weighted moving average

Exponential smoothing

Moving Average Method

The moving average method consists of computing an average of the
most recent n data values for the series and using this average for forecasting
the value of the time series for the next period.
In statistics, a moving average (rolling average or running average) is a
calculation to analyze data points by creating a series of averages of different
subsets of the full data set. It is also called a moving mean (MM)9 or rolling
mean and is a type of finite impulse response filter. Variations include: simple,
and cumulative, or weighted forms (described below).
Given a series of numbers and a fixed subset size, the first element of the
moving average is obtained by taking the average of the initial fixed subset of
the number series. Then the subset is modified by "shifting forward"; that is,
excluding the first number of the series and including the next number
following the original subset in the series. This creates a new subset of numbers,
which is averaged. This process is repeated over the entire data series. The plot
line connecting all the (fixed) averages is the moving average. A moving
average is a set of numbers, each of which is the average of the corresponding
subset of a larger set of datum points. A moving average may also use unequal
weights for each datum value in the subset to emphasize particular values in the
subset.

A moving average is commonly used with time series data to smooth out shortterm fluctuations and highlight longer-term trends or cycles. The threshold
between short-term and long-term depends on the application, and the
parameters of the moving average will be set accordingly. For example, it is
often used in technical analysis of financial data, like stock prices, returns or
trading volumes. It is also used in economics to examine gross domestic
9 Hydrologic Variability of the Cosumnes River Floodplain (Booth et al., San Francisco
Estuary and Watershed Science, Volume 4, Issue 2, 2006

product, employment or other macroeconomic time series. Mathematically, a

moving average is a type of convolution and so it can be viewed as an example
of a low-pass filter used in signal processing. When used with non-time series
data, a moving average filters higher frequency components without any
specific connection to time, although typically some kind of ordering is implied.
Viewed simplistically it can be regarded as smoothing the data.

Weighted Moving Average Method

The weighted moving average method consists of computing a weighted
average of the most recent n data values for the series and using this weighted
average for forecasting the value of the time series for the next period. The
more recent observations are typically given more weight than older
observations.
The regular moving average gives equal weight to past data values when
computing a forecast for the next period. The weighted moving average allows
different weights to be allocated to past data values10
It can be done by different ways like:
FIFO - Fist In First Out method
As the name suggests, in this method the item that first comes in the company
is sold fist, as result the closing stock generally contains new items.
LIFO- Last In Fist Out method
As the names suggests , in this method the latest i.e new items are sols first, this
method is not considered much good as the closing stock contains all old items

Exponential Smoothing
Exponential smoothing is a technique that can be applied to time series data,
either to produce smoothed data for presentation, or to make forecasts. The time
series data themselves are a sequence of observations. The observed
10 Dr. C LIGHTENER

phenomenon may be an essentially random process, or it may be an orderly, but

noisy, process. Whereas in the simple moving average the past observations are
weighted equally, exponential smoothing assigns exponentially decreasing
weights over time.
Exponential smoothing is commonly applied to financial market and economic
data, but it can be used with any discrete set of repeated measurements. The
simplest form of exponential smoothing should be used only for data without
any systematic trend or seasonal components11
The raw data sequence is often represented by {xt} beginning at time t=0, and
the output of the exponential smoothing algorithm is commonly written as {st},
which may be regarded as a best estimate of what the next value of x will be.
When the sequence of observations begins at time t = 0, the simplest form of
exponential smoothing is given by the formulae:12

where is the smoothing factor, and 0 < < 1

-Using exponential smoothing, the forecast for the next period is equal to the

forecast for the current period plus a proportion (a) of the forecast error in the
current period.
-Using exponential smoothing, the forecast is calculated by:
Ft+1=a Yt + (1- a)Ft
where:
a is the smoothing constant (a number between 0 and 1)
Ft is the forecast for period t
Ft +1 is the forecast for period t+1
Yt is the actual data value for period t

11 "The Holt-Winters Forecasting Method". http://www.ons.gov.uk/ons/guidemethod/user-guidance/index-of-services/index-of-services-annex-b--the-holt-wintersforecasting-method.pdf. Retrieved 3 June 2014.

12 "NIST/SEMATECH e-Handbook of Statistical Methods". NIST. Retrieved 2010-05-23.

ADVANTAGES , DISADVANTAGES
AND LIMITATIONS OF FORECASTING
ADVANTAGES An organization uses a variety of forecasting methods to assess possible
outcomes for the company. The methods used by an individual organization will
depend on the data available and the industry in which the organization
operates. The primary advantage of forecasting is that it provides the business
with valuable information that the business can use to make decisions about the
future of the organization. In many cases forecasting uses qualitative data that
depends on the judgment of experts.
1. Helps to Predict The Future
Forecasting does not provide you with a crystal ball to see exactly what will
happen to the market and your company over the coming years, but it will help
give you a general idea. This will provide you with a sense of direction which
will allow your company to get the most out of the marketplace.
Predicting the future in the wine industry can be very difficult. But by doing so,
a winery can predict future trends and then change their company objectives to
achieve success in this new environment.
2. Keep Your Customers Happy
In order to keep your customers satisfied you need to provide them with the
product they want when they want it. This advantage of forecasting in business
will help predict product demand so that enough product is available to fulfill
customer orders.
By using business forecasting to look ahead, wineries are able to make sure they
always have product available for the customers to purchase. If the shelves are
bare for any length of time, a customer is extremely likely to try another brand.
3. Learn From The Past
Looking at what has happened in the past can help companies predict what will
happen in the future. Thus making the company stronger and most likely more
profitable.

Wineries look at past sales and trends and use that data to try and predict the
future.
4. Keeps Companies Looking Ahead
By forecasting on a regular basis, it forces companies to continually think about
their future and where their company is headed. This will allow them to foresee
changing market trends and keep up with the competition.
Wineries have to keep looking ahead or else they will not be able to meet
demand. Giving their competition even a slight advantage could be devastating.
5. Save on Staffing Costs
One of the advantages of forecasting in business is that it allows companies to
predict how much product will need to be produced to meet customer demand.
From here a company can use this data to accurately determine how many
employees they will need to have on hand to meet the required level of
production.
Many wineries have fairly small profit margins, so it is important to make sure
they have the correct amount of staff on hand and are not employing too many
people.
6. Remain Competitive
A business that does not use forecasting techniques will likely succumb to their
competition in a short time. Having a general idea of what sales to expect in the
following period is very important. This will help a company prepare to meet
customer demand, otherwise the customer will look to fulfill their needs
elsewhere.
The wine industry is extremely competitive. There are literally thousands of
different wineries fighting for the same shelf space. Attracting new customers
with expensive advertising campaigns and flashy labels is very costly. That is
why once a company gets a new customer, they want to do everything in their
power to keep them.
7. Receive Financing
Forecasting is very important in order to receive financing for new startups or to
fund an existing enterprise, a forecast will need to be completed. The lender
needs an estimate on the number of sales you will have within a given time
period before they will consider lending out large sums of money.

Financing is a key component of success for most wineries. Most have loans on
their buildings, equipment, and vineyards. Without this financing, they would
more than likely not be able to operate so this is an essential advantage of
forecasting in business.
8. Reduce Inventory Costs
Forecasting helps predict how much inventory should be on hand at any given
time. By having the right amount of inventory, your company will be able to
save on warehouse and transportation costs. There will also be less risk of
incurring obsolescence costs or having to discount products because you have a
large surplus.
Having the correct amount of inventory on hand is very important for every
winery. White wine can only be kept on the shelf for a couple of years. That is
why it is extremely important to make sure there is not a large surplus of
product.
9. Helps Prepare for a Drop in Sales
A drop in sales is never a good thing for a company, however, this advantage of
forecasting in business reveals sales drops which in turn, can be recognized and
dealt with quickly. Learn how to create a sales forecasting spreadsheet in Excel
right here on Bright Hub.
When a winery has forecasted a drop in sales they will slow down production.
This means having less wine in their tanks or barrels at any given time, and also
less finished goods inventory on hand at their various facilities.
10. Prepare for New Business
By forecasting demand, a company can see if an increase in sales is likely
imminent. This will allow the company to prepare for this increase in business
by providing extra staff or production facilities to meet this new level of
demand.
Wineries will increase wine production and bottling to meet this new demand
and hopefully gain life long customers in the process.
The reason for existence of an organization is Customers, or better
we can say that an organization is By the customers and Of the customers. Thus
making it very clear that most important function of an organization is sales
related. Thus Sales forecasting in an organization is very imortant.

Sales forecasting is an important process for any business owner or proactive

sale- force. Forecasting allows for accurate prediction of future sales based on
past performance. This makes for a more efficient operation since the business
is able to plan future activities. Sales forecasting also plays a key role in the
expansion of a business.
STOCK AND PRODUCT MANAGEMENT
Sales forecasting will allow you to have better control of your inventory. Youll
be able to examine trends to determine your peak selling and slow selling
periods, so youll know how much inventory you need to keep on hand during
the year. This will help prevent lost sales due to out-of-stock situations, as well
as the cost associated with carrying too much inventory.
CUSTOMER INFORMATION
Sales forecasting allows you to spot trends for your individual customers based
on buying patterns. This will help you to spot opportunities to sell beneficial
products to customers they hadnt purchased. Youll also be able to identify
products customers buy frequently so that you can offer special promotions to
increase sales.
USE FOR SALESPEOPLE
Salespeople can use sales forecasting as a planning tool to maximize
commissions and bonuses. By knowing what customers have purchased in the
past during specific times of the year, the salespeople can time their sales calls
so that they they contact customers when they are ready to buy. This ensures
they will be making the best use of their precious time.
Business owners can use sales forecasting to ensure they are adequately staffed.
They can anticipate peak selling periods and hire additional help if necessary.
Conversely, if a slow selling period is looming, they will know if theyre in a
position where they have to reduce worker hours .
Thus , we can say that Forecasting in an organization is very important, out of
which the following are most important ones:

Tracking Sales
Companies uses demand forecasting as a basis for making sales projections.
Sales numbers receive a lot of attention because they are the source of a
company's money stream. By analyzing demand, a business can make
predictions about sales and allocate resources accordingly. For example, if a
retail store expects stronger than usual demand for a particular item during the
holiday season, it can hire more sales staff to accommodate the needs of its
customers.
Strategy
In business, companies seek ways to gain an edge over competitors through
marketing strategies, whether they are offering a product or a service. By
forecasting demand for future periods, a company can alter its business and
marketing strategy to satisfy expected demand by its customer base. For
example, by monitoring consumer demand at specific prices, a business can
stock items that sell well and scale back on items with poor sales. The company
can also use this information to make adjustments to its pricing strategy,
focusing on higher margin items or products that are in high demand. By
following demand closely and making forecasts, the business gains an
advantage over competitors who fail to identify a shift or change in demand
Controlling Costs
Demand forecasting also allows a company to control its production costs. For
example, a company can place an order for raw materials ahead of time to take
advantage of favorable pricing if it forecasts an increase in demand. Demand
forecasting allows a company to budget accordingly, making it more efficient
than it would be in operating on a response basis only. A business can justify a
reduction in spending for advertising and promotion if its demand forecast calls
for it.
Tracking Overall Performance
Every business should assess its performance. This means identifying the things
that it does well and where the business missed the mark. Demand forecasting
gives the company a basis to compare actual demand with management's
expectations. In this way, demand forecasting acts as a check and balance. The
company can identify how far its demand forecast is off from actual demand,
and make adjustments to its business model accordingly. A company's financial

statements provides a scorecard for the company's performance, and demand

forecasting allows a company to produce pro forma financial statements for
planning and tracking overall performance.

DISADVANTAGES An accurate sales forecast helps a company plan effective strategies and develop
meaningful budgets. For example, a retail store might use a sales forecast to
decide how much stock it must keep on hand to serve customers for a month.
But sales forecasts aren't always accurate, which can lead to many
disadvantages. Such as:
Wrong Predictions
The obvious problem facing every company is that markets are unpredictable.
Any sales forecast, however rigorous its analysis of conditions, can be flat-out
wrong. For example, perhaps a companys analysts failed to incorporate
relevant data, such as upcoming legislative changes that change the business
model. Or perhaps unexpected economic factors, such as a falling stock market,
decrease consumer demand across the board, rendering previous forecasts
useless. No matter what steps a company takes, there is always a risk that its
sales forecast is incorrect.
Negative Effects
The carry-over effects of a bad sales forecast can be devastating to a business.
For example, suppose a tax-preparation company forecasts it will have a certain
number of customers the month before taxes are due, basing its forecast on
historical sales numbers. The company might prepare for the influx of
customers by hiring temporary staff, buying extra computers and so forth, only
to realize later that a less-expensive competitor poached many of its customers.
The losses associated with the companys over-preparation might doom the
business, or at least put a large dent in its profits for the year. In other words,
any strategy that depends too heavily on a sales forecast is risky.

Disadvantages of Qualitative Forecasts

Sales forecasts fall into two basic categories, each of which has distinct
disadvantages. Qualitative sales forecasts rely on experts opinions to predict
upcoming sales performance. For example, the jury of executive opinion
approach involves asking a panel of experts from all of a companys
departments to synthesize their insights and expertise to generate a collective
sales forecast. As capable as the experts might be, the disadvantage of this and
other qualitative approaches is subjectivity: opinions, even well-informed ones,
can be wrong, especially if they dont take into account relevant economic data.
Disadvantages of Quanitative Forecasts
The second basic category of sales forecasts is quantitative. Forecasting
techniques in this category use various statistical and data analysis methods to
generate predictions. For example, a statistical demand analysis is a series of
statistical procedures that analyze specific factors, such as price, income,
promotion and population. This and other quantitative techniques can reveal
patterns and identify trends -- but no quantitative method can account for every
variable in a market. As a result, quantitative methods can fail just as easily as
qualitative methods.
Considerations
Every sales forecast method has its disadvantages. One way to compensate for
the various problems is to perform many types of sales forecasts. If a company
combines qualitative and quantitative approaches, for example, it might end up
with a better prediction than either approach alone could have generated.
It is not possible to accurately forecast the future. Because of the qualitative
nature of forecasting, a business can come up with different scenarios
depending upon the interpretation of the data. For this reason, organizations
should never rely 100 percent on any forecasting method. However, an
organization can effectively use forecasting with other tools of analysis to give
the organization the best possible information about the future. Making a
decision on a bad forecast can result in financial ruin for the organization, so an
organization should never base decisions solely on a forecast.

LIMITATIONS
Forecasting , as the name suggest it is related to future so people in present
cant have any control on it which limits the power of forecasting.
Predictions are Not always Correct
As stated above forecasting is future oriented so its just assumptions that we
are making and making decisions on based on something that is not under our
control is nt alays correct.
Human Limitations
Qualitative forecasting often gets information from different departments of a
business, such as the sales force, and even from the product's customers.
Employees who do not cooperate across departments or employees with strong
opinions can skew the results. If the sales force receives incentives for beating
projections, they may even provide low numbers to improve their chances for
rewards. Buyer surveys produce wrong information if customers tell sellers
what they want to hear. For example, sometimes buyers say they will purchase
a certain quantity but do not follow up with purchases.
Limitations of Economic Predictions
Quantitative forecasting uses past numbers as its basis. This type of forecasting
normally includes the effects of the leading indicator series and other complex
economic data. The leading indicator series includes information on stock
prices, unemployment insurance claims and the money supply. Although
forecasting that uses such data is highly mathematical, it makes a crucial
assumption that history predicts the future. If market conditions change
unexpectedly, these methods become less accurate.
Although many businesses use the percentage of sales forecasting method, this
type of forecasting has limitations. First, the assessments made using this
forecasting method only represent rough approximations and generally lack
detail. For example, if a business has a change in fixed assets at some stage in
the forecast, this method would result in a nonprecise forecast estimate.
Additionally, this forecasting method does not consider several types of assets.
Furthermore, because economic climate and demand can change or deteriorate

over time, problems start to arise when applying assumptions of the past to the
present or future using the percentage of sales forecasting method.

CASE STUDY

HYPOTHESIS

For the project, the researcher presumes that Forecasting is one of the
most important functions that an organization has to do. It is very
important to understand that forecasting not only helps in making
different plans but also helps in taking up alternate path in case of
adverse situations. Forecasting forms the base of an organization on
which planning is done and strategies are made. So, forecasting is very
important for any organization.

RESEARCH METHODOLOGY
In this project, the researcher has relied on the Doctrinal Method, which is primarily based
upon books, business magazines and internet resources. The researcher has made a
comprehensive study of the available resources in order to arrive at the conclusion.

CONCLUSION
From the above Research Paper the researcher, comes to a
conclusion that Forecasting is the soul of planning done in an organization,
if there is no forecasting the making of plans is not possible. The primary
advantage of forecasting is that it provides the business with valuable
information that the business can use to make decisions about the future of the
organization .
The forecasts are not limited to any particular department in the organization,
because when the system approach is followed then just one act in any
department affect the all other departments. But we can say that forecasts are
most useful to Sales department. One of the advantages of forecasting in
business is that it allows companies to predict how much product will need to be
produced to meet customer demand. As a result the Production department
knows that how much of the thing must be produced so that things do not get
outnumbered nor there is scarcity of product.
One of the most important feature of Forecasting is that it makes sure that we do
not repeat mistakes that the organization had made in the past , we clearly know
what not to do thus mistakes are immensely reduced by forecasting.
And lastly it also helps in keeping an eye on overall performance of the
organization. . Demand forecasting gives the company a basis to compare actual
demand with management's expectations. In this way, demand forecasting acts
as a check and balance. The company can identify how far its demand forecast
is off from actual demand, and make adjustments to its business model
accordingly.

BIBLIOGRAPHY

Principles and practice of management L.M. PRASAD

Principles of management - MEENAKSHI GUPTA