FORECASTING METHODS

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Forecasting is the process of making statements
about events whose actual outcomes (typically)
have not yet been observed.
Prediction is a similar, but more general term.

Risk and uncertainty are central to forecasting and

prediction; it is generally considered good
practice to indicate the degree of uncertainty
attaching to forecasts.

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Forecasting

Marketing: Forecasts sales for new and

existing products.
Production: uses sales forecasts to plan
production and operations; sometimes
involves in generating sales forecasts

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Time Horizon for Forecasting

The key factor in choosing a proper forecasting

approach is the time horizon for the decision
requiring forecasting. Forecasts can be made
for various timeframes:
1. Short- term
2. Mid- term
3. Long- term

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Short- term Forecasting

Short- term (1 day to 3 months), managers are

interested in forecasts for disaggregated
demand ( for specific product, for specific
geography, etc)
Little time to react to errors in demand forecast,
so the forecasts need to be as accurate as
possible.
Time series analysis is often used.
In absence of historical data managers use
judgement methods.

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Medium- term Forecasting

Time horizon for medium term (3 months to

24 months).
Relates to aggregate planning (sales &
operations planning).
Medium term forecasts is used to build up
seasonal inventory
Both time-series and causal methods are
used.

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Long-term-Forecasting

Time horizon exceeds two years

Long term forecasts are used for process
selection, capacity planning & location
decisions.
Judgement models & causal models are used.

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 Forecasting (Objective &
Subjective)
The various categories of forecasting methods
that are available to businesses:
Forecasting methods can be either objective
(using quantitative approaches) or;
Subjective (using more intuitive or qualitative
approaches), depending on what data is
available and the distance into the future for
which a forecast is desired.

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 Types of Forecasting Methods
1. Subjective Methods
Sales force composites
Customer Survey
Jury of executive opinion
Delphi Methods

2. Objective Methods
Casual Methods
Time-Series Methods
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Qualitative Forecasting

Qualitative forecasting techniques are

subjective, based on the opinion and
judgment of consumers, experts
They are appropriate when past data are not
available.
They are usually applied to intermediate- or
long-range decisions.

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Quantitative Forecasting

Quantitative forecasting models are used to

forecast future data as a function of past
data; they are appropriate when past data are
available.
These methods are usually applied to short-
or intermediate-range decisions.

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Subjective Methods

1. Sales force composite:

Marketers have sales managers or
representatives at different sales territories
(districts/region) and marketers believe that
sales managers know their territory better than
anybody else.
Managers ask respective sales manager to
forecast expected sales in their own territories.
The total of all these estimates basically gives
companys sales/demand forecast for next
period.
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2. Customer Survey: Marketers ask buyers about
how many units that they would like to purchase
from ABC companys products for coming period
of time.

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3. Jury of Executive Opinion Method:
In the Jury of executive opinion method of Sales
Forecasting, appropriate managers within the
organization assemble to discuss their opinions
on what will happen to sales in the future.
Since these discussion sessions usually resolve
around experienced guesses, the resulting
forecast is a blend of informed opinions.

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4. Delphi Method also gathers, evaluates, and
summarizes expert opinions as the basis for a forecast,
but the procedure is more formal than that for the jury
of executive opinion method.
The Delphi Method has the following steps:
STEP 1 Various Experts are asked to answer,
independently and in writing, a series of questions
about the future of sales or whatever other area is being
forecasted.
STEP 2 A summary of all the answers is then prepared.
No expert knows, how any other expert answered the
questions.
STEP 3 Copies of summary are given to the individual
experts with the request that they modify their original
answers if they think it necessary.

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STEP 4 Another summary is made of these
modifications, and copies again are distributed
to the experts. This time, however, expert
opinions that deviate significantly from the
norm must be justified in writing.
STEP 5 A third summary is made of the opinions
and justifications, and copies are once again
distributed to the experts. Justification in writing
for all answers is now required.
STEP 6 The forecast is generated from all of the
opinions and justifications that arise from step 5.

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 Objective Methods
1. Casual Methods:
Some forecasting methods use the assumption
that it is possible to identify the underlying
factors that might influence the variable that is
being forecast. (Cause and Effect)
For example, including information about
climate patterns might improve the ability of a
model to predict umbrella sales.
This is a model of seasonality which shows a
regular pattern of up and down fluctuations.
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2. Time SERIES ANALYSIS METHOD:
The time series analysis method predicts the
future sales by analyzing the historical
relationship between sales and time.
Although the actual number of years included in
a time series analysis will vary from company to
company, as a general rule, managers should
include as many years as possible to ensure that
important sales trends do not get undetected.

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The three most common historical data used are:
Seasonality: A seasonal pattern (eg., quarter of the
year, month of the year, week of the month, day of
the week) exists when the demand is influenced by
seasonal factors.

Trend: During the growth and decline stages of the

product-life cycle, a consistent trend pattern in
terms of demand growth or demand decline can be
observed.
Level: It is difficult to capture short term patterns
that are not repetitive in nature. In short run,
sometimes there is a swing, which could be in either
direction, upward or downward, and is usually has
momentum that lasts for a few periods.

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Importance of sale forecasting
1. Overstocking and under stocking of materials can be maintained
by a good inventory control.
2. With the help of sales forecasting, sales opportunities can be
found out on the basis of the forecast.
3. All the activities in an organization are controlled on the basis of
forecasting.
4. Advertising and sales promotion expenses are based on sales
forecasting.
5. Sales forecasting is also important in the field of personnel
department. 6. Sales forecasting is the basis for financial Planning.
7. In the field of production, with the help of sales forecasting the
producer is able to adjust his production schedules and avoid idle
time which leads to efficiency.
8. Supply and demand of the products can be easily adjusted.
9. It helps in knowing when and how much to buy.
10. It helps in product mix decisions.

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