II.

SALES FORECASTING

SALES FORECASTING:

A prediction, projection, or estimate of some future activity, event, or occurrence

It is an estimation of the amount of sales for a specified future period under a proposed
marketing plan or program.
It is a process of estimating a future event by casting forward past data. The past data
are systematically combined in a predetermined way to obtain the estimate of the future.
When estimates of future conditions are made on a systematic basis, the process is
called forecasting.
The figure or statement thus obtained is defined as forecast
Prediction is a process of estimating a future event based on subjective considerations
other than just past data; these subjective considerations need not be combined in a
predetermined way.
Forecasts are a basic input in the decision processes of operations management because
they provide information on future demand.
Forecasts are basis for budgeting, planning capacity, sales, production & inventory,
personnel, purchasing, etc.
Forecasts play an important role in the planning process because they enable managers
to anticipate the future so they can plan accordingly.
Forecasts affect decisions and activities throughout an organization, in accounting,
finance, human resources, marketing, and management information systems (MIS), as
well as in operations and other parts of an organization.

A forecast is an estimate of the level demand to the expected for a production of several
products for some period of time in the future.
Forecast is made of sales ( in Rs.) or physical units under a proposed marketing or program &
under an assumed set of economic & other force outside the unit system).
Forecast should cover a time period at least as long as the period of time required to make the
decision & to put that decision into effect.
Applications/uses/purposes:
There are 3 major purposes.
1) To determine necessity for & the size of plant expansion (Facility Forecast )

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2) To determine intermediate planning for existing products to be manufactured with existing
facilities.
3) To determine Short-time scheduling of existing products to be manufactured on existing
equipments (Product Forecast )

NEED AND BENEFITS:

The near future sales forecast supplies an economic foundation for operation planning,
scheduling, production, inventories and logistics, projecting cash generation and
operating profits.
Long run sales forecast supply the frame-work for corporate investment planning,
sourcing, capital and expansion capacity, executive development
There are two uses for forecasts. One is to help managers plan the system, and the
other is to help them plan the use of the system.
BENEFITS

It aid management greatly in implementing the marketing management approach.

It is a vital tool of marketing planning since adequate planning and effective
deployment of marketing resources are based on sales forecasting data.
Sales forecasting helps to determine various limiting conditions for management
decisions.
It helps to stabilize and regularize outlay and thus cut production costs.
Seasonal, short term and long term fluctuation can be overcome.
It furnishes management with information about what market condition will probably
be like during future period.
Accurate sales forecasting lead to lower selling costs by gearing advertising and
promotional efforts to future sales rather than to recent sales.
Sales forecasting provides a firm basis for evaluating the function and productivity of
various segments of business activity.
Basis for maximum business growth, diversification and expansion.
Helps to integrate the management of controllable & non-controllable factors within
which company operates.

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USES OF FORECASTS IN BUSINESS ORGANIZATIONS:

Accounting. New product/process cost estimates, profit projections, cash

management.
Finance. Equipment/equipment replacement needs, timing and amount of funding/
Borrowing needs.
Human resources - Hiring activities, including recruitment, interviewing, and
training;
Layoff planning, including outplacement counseling.
Marketing. Pricing and promotion, e-business strategies, global competition
strategies.
MIS. New/revised information systems, Internet services.
Operations. Schedules, capacity planning, work assignments and workloads,
inventory
Planning, make-or-buy decisions, outsourcing, project management.
Product/service design. Revision of current features, design of new products or
services.
FEATURES COMMON TO ALL FORECASTS:

Forecasting techniques generally assume that the same underlying causal system that
existed in the past will continue to exist in the future.
Forecasts are not perfect; actual results usually differ from predicted values; the
presence of randomness precludes a perfect forecast. Allowances should be made for
forecast errors.
Forecasts for groups of items tend to be more accurate than forecasts for individual
items because forecasting errors among items in a group usually have a canceling
effect. Opportunities for grouping may arise if parts or raw materials are used for
multiple products or if a product or service is demanded by a number of independent
sources.
Forecast accuracy decreases as the time period covered by the forecast the time
horizon increases. Generally speaking, short-range forecasts must contend with
fewer uncertainties than longer-range forecasts, so they tend to be more accurate.
The forecast should be timely. Usually, a certain amount of time is needed to respond
to the information contained in a forecast. For example, capacity cannot be expanded

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 overnight, nor can inventory levels be changed immediately. Hence, the forecasting
horizon must cover the time necessary to implement possible changes.
The forecast should be accurate, and the degree of accuracy should be stated. This will
enable users to plan for possible errors and will provide a basis for comparing
alternative forecasts.
The forecast should be reliable; it should work consistently. A technique that
sometimes provides a good forecast and sometimes a poor one will leave users with
the uneasy feeling that they may get burned every time a new forecast is issued
The forecast should be expressed in meaningful units. Financial planners need to
know how many dollars will be needed, production planners need to know how many
units will be needed, and schedulers need to know what machines and skills will be
required. The choice of units depends on user needs.
The forecast should be in writing. Although this will not guarantee that all concerned
are using the same information, it will at least increase the likelihood of it. In addition,
a written forecast will permit an objective basis for evaluating the forecast once actual
results are in.
The forecasting technique should be simple to understand and use. Users often lack
confidence in forecasts based on sophisticated techniques; they do not understand
either the circumstances in which the techniques are appropriate or the limitations of
the techniques. Misuse of techniques is an obvious consequence. Not surprisingly,
fairly simple forecasting techniques enjoy widespread popularity because users are
more comfortable working with them.
The forecast should be cost-effective: The benefits should outweigh the costs.
STEPS IN THE FORECASTING PROCESS:

1) Determine the purpose of the forecast: How will it be used and when will it be
needed? This step will provide an indication of the level of detail required in the
forecast, the amount of resources (personnel, computer time, dollars) that can be
justified, and the level of accuracy necessary.
2) Establish a time horizon. The forecast must indicate a time interval, keeping in mind
that accuracy decreases as the time horizon increases:
3) Obtain, clean, and analyze appropriate data: Obtaining the data can involve
significant effort. Once obtained, the
outliers and obviously incorrect data before analysis.

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 4) Select a forecasting technique
Make the forecast
Monitor the forecast: A forecast has to be monitored to determine whether it is
performing in a satisfactory manner. If it is not, reexamine the method, assumptions,
validity of data, and so on; modify as needed; and prepare a revised forecast.
TYPES OF FORECASTS:

Sales Forecasting
Forecasting the need for raw materials and spare parts
Forecasting Staffing Needs
Economic forecasts: Predict a variety of economic indicators, like money
supply, inflation rates, interest rates, etc.
Technological forecasts: Predict rates of technological progress and
innovation.
Demand forecasts: Predict the future demand for
services.
MAIN TYPES OF FORECASTING METHODS:

1. Qualitative methods:
Qualitative forecasting techniques are subjective, based on the opinion and judgment of
consumers and experts; they are appropriate when past data are not available. They are
usually applied to intermediate- or long-range decisions. Examples of qualitative
forecasting methods are informed opinion and judgment, the Delphi method, market
research, and historical life-cycle analogy.

These types of forecasting methods are based on judgments, opinions, intuition,

emotions, or personal experiences and are subjective in nature. They do not rely on any
rigorous mathematical computations

2. Quantitative methods:
Quantitative forecasting models are used to forecast future data as a function of past
data. They are appropriate to use when past numerical data is available and when it is
reasonable to assume that some of the patterns in the data are expected to continue
into the future. These methods are usually applied to short- or intermediate-range
decisions. Examples of quantitative forecasting methods are[citation needed]
last period
demand, simple and weighted N-Period moving averages, simple exponential

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smoothing, poisson process model based forecasting [2] and multiplicative seasonal
indexes. Previous research shows that different methods may lead to different level of
forecasting accuracy. For example, GMDH neural network was found to have better
forecasting performance than the classical forecasting algorithms such as Single
Exponential Smooth, Double Exponential Smooth, ARIMA and back-propagation
neural network
These types of forecasting methods are based on mathematical (quantitative) models,
and are objective in nature. They rely heavily on mathematical computations.

Fig.2.1: Types of forecasting methods

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QUALITATIVE FORECASTING METHODS:

Qualitative Methods

Executive Market Sales Force Delphi

Opinion Survey Composite Method

Approach in which Approach that uses Approach in which Approach in which

a group of interviews and each salesperson consensus
managers meet surveys to judge estimates sales in agreement is
and collectively preferences of his or her region reached among a
develop a forecast customer and to group of experts
assess demand

Fig.2.2: Qualitative forecasting methods

1) Executive Judgment: Opinion of a group of high level experts or managers is pooled.
Forecasts are developed through open meetings with free exchange of ideas form all
levels of management and individuals. The difficulty with this open style is that lower
employee levels are intimidated by higher levels of management.
2) Sales Force Composite: Each regional salesperson provides his/her sales estimates.
Those forecasts are then reviewed to make sure they are realistic. All regional forecasts
are then pooled at the district and national levels to obtain an overall forecast.
3) Market Research/Survey: Solicits input from customers pertaining to their future
purchasing plans. It involves the use of questionnaires, consumer panels and tests of
new products and services. Market research is used mostly for product research in the
sense of looking for new product ideas, likes and dislikes about existing products,
which competitive products within a particular class are preferred, and so on. Again, the
data collection methods are primarily surveys and interviews.
4) Delphi Method: As opposed to regular panels where the individuals involved are in
direct communication, this method eliminates the effects of group potential dominance
of the most vocal members. The group involves individuals from inside as well as
outside the organization.
Typically, the procedure consists of the following steps:

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 o Each expert in the group makes his/her own forecasts in form of
statements.
o The coordinator collects all group statements and summarizes
them.
o The coordinator provides this summary and gives another set of questions to
each group member including feedback as to the input of other experts.
o The above steps are repeated until a consensus is reached.
5) Brainstorming
Brainstorming technique is used to forecast demand, especially for new products. In
this method, many experts sit together and each expert gives his own idea (forecast)
and reason for it. One idea leads to many more ideas. The group of experts will
develop much more ideas than one person

6) Intuition
Intuitive models rely on the experience of the person making the prediction to
accurately forecast future performance or trends, a common approach in business. A
final approach calls for a time series or causal analysis, which then leads to
adjustment based on intuition.

QUANTITATIVE FORECASTING METHODS:

Quantitative Methods

Time-Series Models Associative Models

Time series models look at past Associative models (often called

patterns of data and attempt to causal models) assume that the
predict the future based upon the variable being forecasted is
underlying patterns contained related to other variables in the
within those data. environment. They try to project
based upon those associations.

Fig.2.3: Quantitative forecasting methods

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 TIME SERIES MODELS
Table.2.1: Time series models

Model Description
Naïve
Simple Mean (Average) Uses an average of all past data as a forecast

Uses an average of a specified number of the most

Simple Moving Average recent observations, with each observation receiving
the same emphasis (weight)

Uses an average of a specified number of the most

Weighted Moving Average recent observations, with each observation receiving a
different emphasis (weight)

A weighted average procedure with weights declining

Exponential Smoothing
exponentially as data become older

Technique that uses the least squares method to fit a

Trend Projection
straight line to the data

A mechanism for adjusting the forecast to

Seasonal Indexes
accommodate any seasonal patterns inherent in the data

ILLUSTRATION OF THE NAÏVE METHOD

Naïve method: The forecast for next period (period t+1) will be equal to this
period's actual demand (At).
In this illustration we assume that each year (beginning with year 2) we made a forecast,
then waited to see what demand unfolded during the year. We then made a forecast for the
subsequent year, and so on right through to the forecast for year 7.
Table.2.2: Navie method
Actual
Deman Forecas
Year d t (Ft) Note
(At) s

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 There was no prior demand data on
1 310 --
which to base a forecast for period 1

From this point forward, these

2 365 310
forecasts were made on a year-by-year
basis.

3 395 365

4 415 395

5 450 415

6 465 450

7 465

MEAN (SIMPLE AVERAGE) METHOD

Mean (simple average) method: The forecast for next period (period t+1) will be equal to
the average of all past historical demands.

In this illustration we assume that a simple average method is being used. We will also
assume that, in the absence of data at startup, we made a guess for the year 1 forecast (300).
At the end of year 1 we could start using this forecasting method. In this illustration we
assume that each year (beginning with year 2) we made a forecast, then waited to see what
demand unfolded during the year. We then made a forecast for the subsequent year, and so
on right through to the forecast for year 7.

Table.2.3: Moving Average models

Actual
Demand Forecast
Year (At) (Ft) Notes

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 This forecast was a guess at the
1 310 300
beginning.
From this point forward, these forecasts
2 365 310.000 were made on a year-by-year basis
using a simple average approach.
3 395 337.500
4 415 356.667
5 450 371.250
6 465 387.000
7 400.000

SIMPLE MOVING AVERAGE METHOD

Simple moving average method: The forecast for next period (period t+1) will be equal
to the average of a specified number of the most recent observations, with each observation
receiving the same emphasis (weight).
In this illustration we assume that a 2-year simple moving average is being used. We will
also assume that, in the absence of data at startup, we made a guess for the year 1 forecast
(300). Then, after year 1 elapsed, we made a forecast for year 2 using a naïve method
(310). Beyond that point we had sufficient data to let our 2-year simple moving average
forecasts unfold throughout the years.
Table.2.4: Simple Moving Average models
Actual
Demand Forecast
Year (At) (Ft) Notes
This forecast was a guess at the
1 310 300
beginning.
This forecast was made using a naïve
2 365 310
approach.
From this point forward, these forecasts
3 395 337.500 were made on a year-by-year basis
using a 2-yr moving average approach.
4 415 380.000
5 450 405.000
6 465 432.500
7 457.500

ANOTHER SIMPLE MOVING AVERAGE ILLUSTRATION

In this illustration we assume that a 3-year simple moving average is being used. We will
also assume that, in the absence of data at startup, we made a guess for the year 1 forecast

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 (300). Then, after year 1 elapsed, we used a naïve method to make a forecast for year 2
(310) and year 3 (365). Beyond that point we had sufficient data to let our 3-year simple
moving average forecasts unfold throughout the years.
Table.2.5: Three Year Moving Average models
Actual
Demand Forecast
Year (At) (Ft) Notes
This forecast was a guess at the
1 310 300
beginning.
This forecast was made using a naïve
2 365 310
approach.
This forecast was made using a naïve
3 395 365
approach.
From this point forward, these forecasts
4 415 356.667 were made on a year-by-year basis
using a 3-yr moving average approach.
5 450 391.667
6 465 420.000
7 433.333

WEIGHTED MOVING AVERAGE METHOD

Weighted moving average method: The forecast for next period (period t+1) will be equal
to a weighted average of a specified number of the most recent observations.
In this illustration we assume that a 3-year weighted moving average is being used. We will
also assume that, in the absence of data at startup, we made a guess for the year 1 forecast
(300).
Then, after year 1 elapsed, we used a naïve method to make a forecast for year 2 (310) and
year 3 (365). Beyond that point we had sufficient data to let our 3-year weighted moving
average forecasts unfold throughout the years. The weights that were to be used are as
follows: Most recent year, .5; year prior to that, .3; year prior to that, .2

Table.2.6: Weighted Moving Average models

Actual
Demand Forecast
Year (At) (Ft) Notes

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 This forecast was a guess at the
1 310 300
beginning.
This forecast was made using a naïve
2 365 310
approach.
This forecast was made using a naïve
3 395 365
approach.
From this point forward, these forecasts
4 415 369.000 were made on a year-by-year basis
using a 3-yr wtd. moving avg. approach.
5 450 399.000
6 465 428.500
7 450.500

EXPONENTIAL SMOOTHING METHOD

Exponential smoothing method: The new forecast for next period (period t) will be
calculated as follows:

forecast)

(this box contains all you need to know to apply exponential smoothing)
Ft = Ft-1 + (At-1 Ft-1) (equation 1)

Ft = At-1 + (1- )Ft-1 (alternate equation 1 a bit more user friendly)

The exponential smoothing method only requires that you dig up two pieces of data to apply
it (the most recent actual demand and the most recent forecast).
An attractive feature of this method is that forecasts made with this model will include a
portion of every piece of historical demand. Furthermore, there will be different weights
placed on these historical demand values, with older data receiving lower weights. At first
glance this may not be obvious, however, this property is illustrated on the following page.
DEMONSTRATION: EXPONENTIAL SMOOTHING INCLUDES ALL PAST DATA
Note: the mathematical manipulations in this box are not something you would ever have to do when
applying exponential smoothing. All you need to use is equation 1 on the previous page. This
demonstration is to convince the skeptics that when using equation 1, all historical data will be included
in the forecast, and the older the data, the lower the weight applied to that data.

To make a forecast for next period, we would use the user friendly
alternate equation 1: Ft = At-1 + (1- )Ft-1 (equation
1)
When we made the forecast for the current period (Ft-1), it was made in the

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 following fashion: Ft-1 = At-2 + (1- )Ft-2 (equation 2)
If we substitute equation 2 into equation 1 we get the following:
Ft = At-1 + (1- )[ At-2 + (1- )Ft-2]
Which can be cleaned up to the following:
Ft = At-1 + (1- )At-2 + (1- )2Ft-2 (equation 3)

We could continue to play that game by recognizing that Ft-2 = At-3 + (1- )Ft-3
(equation 4) If we substitute equation 4 into equation 3 we get the following:
Ft = At-1 + (1- )At-2 + (1- )2[ At-3 + (1- )Ft-3]
Which can be cleaned up to the following:
Ft = At-1 + (1- )At-2 + (1- )2At-3 + (1- )3Ft-3

EXPONENTIAL SMOOTHING ILLUSTRATION

In this illustration we assume that, in the absence of data at startup, we made a guess for the
year 1 forecast (300). Then, for each subsequent year (beginning with year 2) we made a
forecast using the exponential smoothing model. After the forecast was made, we waited to
see what demand unfolded during the year. We then made a forecast for the subsequent year,
and so on right through to the forecast for year 7.
This set of forecasts was made using an value of .1
Table.2.7: Exponential smoothing model
Actual
Demand Forecast
Year (A) (F) Notes
This was a guess, since there was no
1 310 300
prior demand data.
From this point forward, these forecasts
2 365 301 were made on a year-by-year basis
using exponential smoothing with =.1
3 395 307.4
4 415 316.16
5 450 326.044
6 465 338.4396
7 351.09564
TREND PROJECTION

Trend projection method: This method is a version of the linear regression technique. It
attempts to draw a straight line through the historical data points in a fashion that comes as
close to the points as possible. (Technically, the approach attempts to reduce the vertical
deviations of the points from the trend line, and does this by minimizing the squared values
of the deviations of the points from the line). Ultimately, the statistical formulas compute a

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