TEACHING THE BASICS OF SALES FORECASTING TO BUSINESS STUDENTS

A. Bruce Clark, Ph.D., Texas Southern University, P. O. Box 218655, Houston, TX 77218, 281-579-9103
Abstract: The American Marketing Association found that 74% of companies use a judgmental, correlation/regression or time series forecasting technique. Time series approaches, in general, and double exponential smoothing models, in particular, have broad industry appeal. Thus, we use a two-part spreadsheet project to teach double exponential smoothing. In Part 1, students prepare a baseline forecast on monotonically/uniformly increasing data. Then, in Part 2, they determine multipliers, before preparing daily baseline forecasts for two representatives, and then applying the multipliers to get realistic projections. Because sales forecasting software costs $20,000 to $34,000, this project potentially offers tremendous value to administrators and managers.

INTRODUCTION
To better plan their use of resources, 74% of 587 major business firms surveyed by the American Marketing Association used "formal forecasting systems," according to Kress and Snyder (1994). The forecasts generated by these systems, in turn, accounted for the success of 92% of the companies that Makridakis (1990) examined. The reason these systems accounted for the success of so many companies is because they allowed them to better predict the needs of different groups so they could decide how to best serve those groups (Zick and Widdows, 1995). Since those who understand forecasting will more likely have successful careers, it makes sense for business professors to dedicate at least some class time teaching forecasting (Winer 2000), which is the rationale for this article. In fact, this author can think of several situations where former students at two different universities obtained outstanding jobs with FORTUNE 500 companies, as well as career advancements, due to their understandings of double exponential smoothed forecasting. However, before introducing a classroom project, that involves this particular forecasting technique, a brief overview of forecasting will be provided. Although companies use many types of forecasting systems, there are three basic categories according to Kress and Snyder (1994) and Winer (2000). First are judgmental approaches, which include sales force composite, buyer surveys, juries of experts, Delphi methods, scenario building, technological forecasting, cross impact studies, analog/similar-store approaches, and simulation. Their strength is ease of implementation, while their weakness is that their outcomes are based on politics rather than what is best from a business standpoint (Zick and Widdows, 1995). Second are correlation/regression approaches, which include methods as diverse as linear, nonlinear, LOGIT, and PROBIT approaches. Their strength is that they forecast based on other variables that have in essence "already been forecast." For instance, direct marketers often build a LOGIT predictive model based on a sample mailing. They then give every household in the population a probability score between zero and one of buying the product(s), so they can mail to those predicted to be profitable or at least break even. Yet, their weaknesses are their dependence upon other variables and their not showing sales trends. Third are time series approaches, which include single and double moving averages, single and double exponential smoothing, Holts two-parameters exponential smoothing and the Winters triple exponential smoothing method. The weakness is that they do not show the influence of other variables. However, their strengths are that they require limited data input and can rapidly show trends. Thus, they are arguably the most widely used approach in corporate America (Winer 2000), which is why are focus will be here. The simplest time series model is the single moving average, which involves simply summing a series of values and then divides by the number of values. However, this approach provides a flat forecast that does not show any trend. Therefore, "moving average forecasters" often use a double moving average, where they calculate a trend by subtracting a number from an immediately succeeding number. Then for the forecast one can use the base value plus an "average trend component." Yet, while easy to understand, double moving average forecasters must determine how many periods to go back and must recognize that it treats the first period used as equal to the last period in importance. However, this does not seem reasonable in that the most recent periods decisions likely have a greater impact on the next period, when compared to several periods ago, and while one can apply weighting coefficients, it takes considerable effort to determine their magnitudes. Although the "moving average approaches" are the least complicated of the time series approaches, hybrid Box-Jenkins, which incorporate regression and time series methods, fall on the other end of the "difficulty continuum." The reason is they rely on autocorrelations, meaning the association between a variable at one time period and that same variable at some other time period, which means Box-Jenkins techniques handle almost any type of time series data and provide accurate short-range forecasts. Even so, Box-Jenkins models are not widely used due to their: (1) complexity, (2) inability to yield accurate long-term projections, and (3) requiring 6+ years of data if seasonal influences are present. Furthermore, new Box-Jenkins models are needed whenever sales data is updated, which means constant maintenance, due to the "instability" of the parameter estimates. In between Box-Jenkins and moving averages are exponential forecasting time series techniques, which are "better than" judgment, econometric regression, and Box-Jenkins methods (Guerts and Kelly 1986). On one hand, single exponential smoothing, like single moving average, does not reflect trends. On other hand, Winter's triple exponential smoothing procedure, provides a

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forecast that increases or decreases at accelerating or decelerating rates. Yet, because it often "greatly overshoots" or "greatly undershoots" reality, it is rarely used (Kress and Snyder 1994). Instead, personal experience has revealed that double exponential smoothing techniques are preferred by leading marketing research companies like A. C. Nielsen, and leading consumer goods corporations like Anheuser Busch. Thus, since many students desire to work for such companies, this paper will focus on double exponential smoothing systems. Nevertheless, it will be mentioned that when readers understand double exponential smoothing, they will also comprehend triple (e.g., Winters) exponential smoothing. Similarly, when students understand how to use one set of parameters (i.e., coefficient weights) for both the first and second smooth, they can envision how to use two different sets of weights, as done with Holt's technique. As an added benefit to learning these sales forecasting techniques, students can be told that they are receiving an incredible value. The reason is that the Southwest Demand Solutions' web site, on September 15, 2002, listed the "normal installation" price for sales forecasting software at $20,000 for a single user system and $34,000 for a multiple user system.

TEACHING STUDENTS TO BUILD SALES FORECASTING SYSTEM

To teach double exponential smoothing, personal experience has shown that it is best to teach students how to prepare a baseline forecast, before teaching them how to add multiplier effects. Yet, before beginning process, one must understand that the formula for the first smooth and second smooth. These equations are as follows: St+1=Xt +(1-)St St+1=St+(1-)St (1) (2)

In these equations, St+1 represents the first smooth for period "t+1," Xt is the actual sales figure during period "t," St represents the first smooth for the preceding period, St represents the second smooth for the preceding period and is a weighting coefficient (Kotler 1997). Similarly, the sales forecast, S, for t+m periods in the future is that of a straight line and it is: St+m=a+bm In this latter formula, the a and b are: a=2St+1St+1 b=[/(1-)][St+1St+1] (4) (5) (3)

Yet, before one can get the "a" and "b" values, the values for St+1 and St+1 must be obtained. Moreover, the weighting coefficient needs to be set (Lilien and Kotler 1983). As shown in Appendix 1, students are given fifteen days of monotonically/uniformly increasing historical data. Using the data for the first fourteen days, the most recent day is predicted. Then, by comparing the predicted last day's sales to its actual sales, the proper value is determined. In this case, the value of 3046 is the most recent actual value. To aid understanding, students can be told that setting an value is similar to setting an engines timing. Nevertheless, while weighting coefficients vary for different companies, the acceptable range of is from 0.05 to 0.30. This means that 5% to 30% of the determination of a period's sales come from the immediately preceding period. Similarly, when one goes back two periods, the influence ranges from 4.75% (i.e., 95% of 5%) to 21% (i.e., 70% of 30%). While students generally understand merits of not putting much weight on "ancient history," the logic can be reinforced with a home purchase analogy, since most house buyers focus more upon their current earnings than their high school income. Another useful fact is that an value is closer to 0.05 when one has large amounts of data. Thus, when this author built forecasting systems relying on five years of daily data, the values were 0.05, which makes sense when one explains, using an analogy, that older individuals less likely weight any recent event very heavily. Whenever, one builds a forecasting system the data should be graphed to examine what it looks like, and when one does this for contrived data in Appendix 1, he/she sees smooth, monotonically (i.e., uniformly) increasing pattern. Since this is the case, the value in cell E10 is set equal to that in D10. Likewise, value in F10 is set equal to that in E10. This is done to "jump start" the process. Next, the value in E11 is equal to *D10+(1-)*E10, and the F11 value is equal to *E10+(1-)*F10. In fact, if an alpha value is placed in cell G10, one can then enter the formula =$G$10*D10+(1-$G$10)*E10 in cell E11, and copy and paste this into cells E11 through F24. Next, comes determination of the "a" value to place in cell E26. Specifically, the "a" is set equal to (2*E24)-F24. Likewise, the "b" value in E27 is set equal to [$G$10/(1-$G$10)]*[E24-F24], and the forecast value that goes into cell E28 is E26+E27*1. Lastly, E29 is set equal to E28-D24. Then, after entering formulas, different values are entered into cell G10. The goal is to find the value that yields a difference (i.e., cell E29) closest to zero. In industry, the value is usually determined to the onehundredths place and occasionally to the one-thousandths place, and while an alpha value normally does not change much (if at all) over time, most consumer goods companies annually check this weighting coefficient. As indicated in directions, it is often helpful to have students submit the results for multiple values. However, in Appendix 2, only the value results of 0.13 are shown. The reason is that this is the value used in Appendix 3, where one drops the t-14 sales

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value in order to run the model using the same number of periods as were used to build the model. As indicated by Appendix 3, one again jump starts process, enters appropriate formula in cell E6 and copies this formula into cells E6 to F19 and, as revealed, cells D5, E5, E6, F5, F6, and F7 all have the same value, since it "takes time to get the process rolling." However, after one has the proper entries, the calculations of a and b, as equal to 2*E19-F19 and [$G$5/(1-$G$5)]*[E19-F19] are straightforward. Then, for the next period forecast (i.e., cell F26 in Appendix 3, which represents t+1), the value equals D21+D22, while for two periods forward (i.e., cell F27), the value equals F26+$D$22. This latter formula of =F26+$D$22 can then be copied and pasted into cells F28 through F32. Lastly, one should plot the data to see how well the system is working, and if one graphs the t-14 through t+7 values, the plot reveals that the baseline forecasting system works quite well. While instructors can put several twists on the project at this juncture, the methodology used by leading syndicated marketing firms and consumer goods companies to handle daily variations provides an informative variation. One reason is that it teaches students about how to calculate "multipliers." Additionally, having two sales representatives provides another dilemma. This being the case, the first step for the problem in Appendix 4 is to plot the data to see what it looks like. When this is done, the problem, as alluded to in its directions, is seen to be very similar to the problem shown in Appendices 1, 2 and 3, except that one has to first control for the day of week influences. Thus, the logic is that of "dividing and conquering," meaning one has to control for the growth rate before addressing the day of week issue, which is why the percentage increase in sales is calculated. This is done by subtracting first, from second, week sales. The difference is then divided by the first week's sales. In this case, the second week's sales are 76632 (i.e., 13496 + 13630 + 13437 + 12802 + 5149 + 2852 + 15266), and the first week's sales are 75492 (i.e., 13255 + 13402 + 13226 + 12615 + 5081 + 2817 + 15096). After the growth rate for the one week period is obtained, this value is divided by seven to yield the average percentage sales increase per day. Once this is done, one must remember what day is being predicted in the determination of the value section. In this particular example, one is predicting a "Tuesday value." Thus, one assigns a growth multiplier value of "1" to Monday, before working back from that day. This is shown by the growth multiplier for Sunday being 1.002157 which is 0.2157% higher than the "1" value. Then for Saturday (i.e., going back two days from Monday) the multiplier is 1.004315 (i.e., 1+2*0.002157). This pattern continues until six days back (i.e., going back to the Tuesday) it is 1.012944 (i.e., 1+6*0.002157). While one can use a compound growth rate function, rather than "simple interest rate type" calculation, and while this is a slightly better approach, personal experience has shown that this additional "mathematical kink" often causes students to lose sight of process. Therefore, "simple interest rate approach is instead used in this example. Following this, one obtains each day's sales for two weeks. In the case of the 30362 value for Monday, it represents 15096+15266. Yet, it should be noted that, for the Tuesday value, students often erroneously add the 13632 value. In so doing, they forget that first fourteen days are used to build a model to predict "most recent day." To reduce this tendency, we have a week column with the values 1, 2 and 3. Using the growth multiplier, the adjusted sales column is obtained. In essence, one determines how large sales would have been in previous days, if the firm, for instance, had same advertising, brand loyalty, shelf-space or, in this case, sales force efficiency as at "present." Thus, the 27097.26 value equals 26751 times 1.012944. Next, after determining each day's adjusted sales values, these seven values are totaled and divided by seven to get the average value of 21887.54. Taking this latter number and dividing by 27097.26 yields 0.807740. Similarly the reciprocal of this last value is 1.238022. The other values in the "average/adjusted" and "adjusted/average" columns are likewise determined, before removing the day of week effects from the actual sales using the seven (i.e., average/adjusted) multipliers. The sales with the day of week effects removed for the Representative 1 and Representative 2 sales are shown. The 5168.73 value, for instance, equals the 6399 value times 0.807740. Once one determines the sales with day of week effects removed, the appropriate value is found using both sales representatives, with the value determined to the one-thousandths place. As shown, the projections for the two representatives are each compared to their actual values. These differences are then summed and the alpha that yields a sum of differences closest to zero is chosen. At this juncture, students can be asked to see whether they can legitimately use one value and one set of multipliers for both representatives. If the projection for each representative is, let's say, "no more than say 5% off" from the actual value, then there is probably little to be gained from using two sets of multipliers or two different values. (Readers might find it interesting to note that the daily multipliers and growth rates were based upon a "real consulting project" that this author performed that was simplified for teaching purposes.) Based upon personal experience at this nations largest research firms, it may be helpful to note that while different products, territories and brokers will very often have different multipliers, one normally needs only one value. In a like vein, it should be mentioned that when companies are developing such systems they are normally much more concerned about predicting "bread and butter" products, than their "fringe" items. Similarly, it should be noted that for unstable daily data, an individual might want to aggregate it. This might involve summing individual sales representative's data to "the office level" or comparing actual sales for an extended period to a forecast for an extended period, meaning one might want to compare total sales for an entire month to the aggregated daily predictions. This is especially the case for retailers, where inclement weather or a holiday can drastically impact a given day's sales. Yet, because these are not concerns of this project, one can, as before, immediately forecast a baseline forecast using the data with the day of week influences removed. This baseline forecast is then "adjusted" using the adjusted/average multipliers that account for the day of week effects, before one plots the results that readily show the developed system working quite well.

OTHER MORE ADVANCED ASSIGNMENTS

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Although the first two portions of this project give students the skills needed to handle many, if not most, corporate forecasting situations, additional "twists" are possible. Along with multipliers for seasonal, holiday, salesperson, time zone, territory, type of customer, brand, and packaging differences, one can incorporate business cycle, economic, exchange rate, and even weather effects. An example of the latter is performed by natural gas pipeline companies, which have "degree day" multipliers that adjust for temperature effects upon natural gas consumption. Moreover, for large pipeline databases, another interesting project is to see how many different multipliers are really needed. In other words, students might be asked to examine which days of the week are statistically different from other days. In a like vein, the results for February of one year might differ from the February of another year due to a difference in the number of work days versus weekend days, and the presence or absence of a Leap Year. To further compound a problem, students can be given situations with multicollinearity. For instance, promotions and holidays can simultaneously occur. Another very interesting twist is to examine price promotion and post-promotion effects. Based on personal experience, for most consumer products, the optimum promotional period is six weeks, since a longer duration leads to individuals assuming that a price reduction is permanent, rather than temporary. In such cases, sales normally peak at the midpoint of a price promotion, with the height of the peak being roughly 10% higher than what the sales would otherwise be. Subsequently, there is a post-promotion decrement that lasts for about two weeks. From the first to second post promotional week the sales go from approximately 1.0% below "average" to about 0.5% below the norm. The reason that the peak is "relatively larger than the valley" is that a company captures sales that would otherwise go to its competitors during a promotional period. However, during the two-week post-promotion period, the loss in sales is associated with the "on deal stockpiling" of brand-loyal patrons. Yet, another interesting "twist" is to have students build "reasonability defaults" into their systems to prevent "negative sales" or absurd growth rates for new product introductions. In fact, whenever such systems are designed for companies, these safeguards are almost always incorporated. However, when it comes to these overrides, one should try not to hard-code information, but instead derive them from the data of other products, or at a minimum have an "input screen." Likewise one might want to have students build confidence interval logic into their systems that is derived from a comparison of actual and projected values. Explained differently, students can develop a "zone" where predicted sales are likely to occur with say 80%, 90% or 95% accuracy, with the "band" becoming wider, as one goes "further out." The implications, of these bands, can be seen by a real situation that this author encountered. A client claimed that its business was not seasonal based on a comparison of the June and December results during a single year. However, this did not make sense, since its business was strongly tied to the "moving industry," and most households seemingly relocate during the summer when children are not in school. A subsequent analysis showed why the June to December sales appeared "flat." On the one hand, the company was growing its market share. However, on the other hand, the industry did indeed have a seasonal element, where sales per client declined from June to December. In essence these two factors "canceled each other." Further analysis, of this company's ten sales representatives, showed that eight had increasing sales. On the other hand, two had, with a 95%+ probability, decreasing sales. Therefore, the company, in keeping with the New Testament parable of the talents, terminated the two poor performing sales representatives, and reassigned their accounts to the eight solid performers. The result of this business decision was that the morale of the eight representatives increased, as did their commissions. Thus, the eight representatives made more money than they had ever made before. Simultaneously, the company reduced the base salaries that it was paying by 20%, and its sales increased by 28% during next year. Thus, everyone was a "winner," except the "deadbeat employees." Yet another interesting assignment is to have students build systems that "fit multiplicative regression equations," and then solve for component multipliers. As an example, this author built a system for a "soup manufacturer" that made chicken noodle, chicken rice, and turkey rice products, along with other soups. However, it did not have a turkey noodle soup. Nevertheless, by determining turkey and chicken multipliers, as well as noodle and rice multipliers, the sales of what became a successful turkey noodle product were predicted long before it was ever made. Thus, students, in more advanced courses, can be taught to build regression equations that determine the relative influences of components and package sizes. In so doing, they can then determine where to best focus a company's new product activities.

CONCLUSIONS
The project just presented provides students with a good understanding of forecasting systems, which has led to better job offers and decisions that helped advance careers, according to feedback received. Moreover, even if students decide to hire expert(s) to build their forecasting systems, they will at least have a better appreciation of double exponential smoothing approaches. In the process, they will realize the strengths of double exponential smoothing which are that it (1) uses historical data to predict the exact same variable and (2) shows trends, which allow managers to rapidly spot problem areas like declining sales or market share, as well as opportunities. Nevertheless, there are times when other approaches are more appropriate. For instance, judgmental techniques may be better when employee involvement positively affects motivation, and hence sales. Similarly, Box-Jenkins methods may be better when highly accurate short-term forecasts are desired and calibration efforts are not a primary concern, while correlation/regression approaches may be best when studies are done to discover the attributes of likely buyers so that they can be better targeted. Thus, student feedback has shown that it is important to address these issues in order that they develop better understandings of the strengths and weaknesses of each forecasting technique. The reason is to empower them to know the best approach for a particular situation and the sources where they can, if need be, obtain more information. Even if former students later decide that it is best to hire an expert, or to buy a sales forecasting package, the insights gained in this project should prove helpful in those decisions.

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APPENDIX 1
Assignment Sheet Given to Students A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 B SMOOTHED USING FIRST PREDICT COMPARING FOR ALPHA ALPHA 0.01 WORDS, IF RESULTS. C OUTPUT 14 DAYS 15TH DAY 15 0.01 BELOW BEST LASTLY Day t-14 t-13 t-12 t-11 t-10 t-9 t-8 t-7 t-6 t-5 t-4 t-3 t-2 t-1 Last Day What is What is Forecast Minus Actual D VALUES BUILD DAY. TO ITS ABOVE THE ALPHA SHOW Sales 2958 2968 2978 2987 2995 3003 3010 3017 3023 3028 3033 3037 3041 3044 3046 "a"? "b"? Forecast (last day) E FOR 15 DAYS FORECASTING GET BEST FORECAST. BEST ALPHA BEST ALPHA. IS 0.10 SHOW RESULTS FOR 1st Smooth F ARE MODEL ALPHA SHOW AND IN 0.11 BEST 2nd Smth G SHOWN. TO BY RESULTS FOR OTHER AND 0.09 ALPHA. Alpha-used

APPENDIX 2
Choice of Best Alpha Value A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 B SMOOTHED USING FIRST PREDICT COMPARING FOR ALPHA ALPHA 0.01 WORDS, IF RESULTS. C OUTPUT 14 DAYS 15TH DAY 15 0.01 BELOW BEST LASTLY Day t-14 t-13 t-12 t-11 t-10 t-9 D VALUES BUILD DAY. TO ITS ABOVE THE ALPHA SHOW Sales 2958 2968 2978 2987 2995 3003 E FOR 15 DAYS FORECASTING GET BEST FORECAST. BEST ALPHA BEST ALPHA. IS 0.10 SHOW RESULTS FOR 1st Smooth 2958 2958 2959.3 2961.7 2965.0 2968.9 F ARE MODEL ALPHA SHOW AND IN 0.11 BEST 2nd Smth 2958 2958 2958 2958.2 2958.6 2959.5 G SHOWN. TO BY RESULTS FOR OTHER AND 0.09 ALPHA. Alpha-used 0.13

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16 17 18 19 20 21 22 23 24 25 26 27 28 29

t-8 t-7 t-6 t-5 t-4 t-3 t-2 t-1 Last Day What is What is Forecast Minus Actual

3010 3017 3023 3028 3033 3037 3041 3044 3046 "a"? "b"? Forecast (last day)

2973.3 2978.1 2983.2 2988.3 2993.5 2998.6 3003.6 3008.5 3013.1 3042.78 4.43 3047.21 1.21

2960.7 2962.3 2964.4 2966.8 2969.6 2972.7 2976.1 2979.7 2983.4

APPENDIX 3
Forecast of Sales for Next Week A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 B Below are the first Next are the a & C & second b values Day t-13 t-12 t-11 t-10 t-9 t-8 t-7 t-6 t-5 t-4 t-3 t-2 t-1 Last Day t+1 What is a? What is b? Forecasts, D smooth and the Sales 2968 2978 2987 2995 3003 3010 3017 3023 3028 3033 3037 3041 3044. 3046 N.A. 3045.92 4.05 for next E results for forecasts 1st Smth 2968 2968 2969.3 2971.6 2974.6 2978.3 2982.4 2986.9 2991.6 2996.4 3001.1 3005.8 3010.4 3014.7 3018.8 F the best for next 2nd Smth 2968 2968 2968 2968.2 2968.6 2969.4 2970.6 2972.1 2974.0 2976.3 2978.9 2981.8 2984.9 2988.2 2991.7 G Alpha. 7 days. -used 0.13

7 days, Future Day 1 2 3 4 5 6 7

for best Expected Sales 3050.0 3054.0 3058.1 3062.1 3066.2 3070.2 3074.3

alpha are:

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APPENDIX 4
Second Portion of Project Assume you work for a Houston-based manufacturer of refinery equipment, which is sold by your two sales representatives. Because it is very expensive for you to inventory components, it is highly important that your firm know how much the two sales representatives will sell during the next seven days. Since you have a college degree, your boss has asked you to give her your best forecast of the sales for the two representatives for the next week. When you graph the output for each representative's sales, the daily patterns, and growth rates appear similar. Thus, you believe one set of multipliers and also one alpha will work. Moreover, a trustworthy colleague (who quickly solved the problem) told you that the correct alpha is either 0.163 or 0.136, and that he forecast the total sales (for both representatives) seven days out to be 13,758. Using the below sales data, what projections for next seven days will you give to your boss? Obs. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Week 1 1 1 1 1 1 1 2 2 2 2 2 2 2 3 Day of Week Tuesday Wednesday Thursday Friday Saturday Sunday Monday Tuesday Wednesday Thursday Friday Saturday Sunday Monday Tuesday Rep. 1 Sales 6399 6470 6385 6090 2453 1360 7288 6515 6580 6487 6180 2486 1377 7370 6581 Rep. 2 Sales 6856 6932 6841 6525 2628 1457 7808 6981 7050 6950 6622 2663 1475 7896 7051 Total Sales 13255 13402 13226 12615 5081 2817 15096 13496 13630 13437 12802 5149 2852 15266 13632

%increase in sales = ((sales wk. 2 sales wk. 1)/sales wk. 1)*100 = 1.51009% % sales increase/day = 0.2157% Now, that you have the % sales increase/day you can develop a multiplier to handle day of week effects. The rationale is that you can use a multiplier to remove the day of week effect from sales, so you can use a double exponential smoothing technique to forecast baseline sales. The multiplier calculations that you show your boss are as follows: Day of Week Tues. Wed. Thurs. Fri. Sat. Sun. Mon. Total Week 1 & 2 Sales 26751 27032 26663 25417 10230 5669 30362 Growth Multiplier 1.012944 1.010786 1.008629 1.006472 1.004315 1.002157 1.000000 Average Adjusted Sales 27097.26 27323.58 26893.08 25581.49 10274.14 5681.23 30362.00 21887.54 Average/Adjusted 0.807740 0.801050 0.813873 0.855600 2.130353 3.852606 0.720886 Adjusted/Average 1.238022 1.248362 1.228694 1.168770 0.469406 0.259565 1.387182

The historical sales with the Day of Week effects removed that you show your boss are as follows: Obs. 1 2 3 4 5 6 Week 1 1 1 1 1 1 Day of Week (DOW) Tuesday Wednesday Thursday Friday Saturday Sunday Average/ Adjusted 0.807740 0.801050 0.813873 0.855600 2.130353 3.852606 Rep. 1 w/o DOW Effect 5168.73 5182.79 5196.58 5210.61 5225.76 5239.54 Rep. 2 w/o DOW Effect 5537.87 5552.88 5567.70 5582.79 5598.57 5613.25

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7 8 9 10 11 12 13 14 15

1 2 2 2 2 2 2 2 3

Monday Tuesday Wednesday Thursday Friday Saturday Sunday Monday Tuesday

0.720886 0.807740 0.801050 0.813873 0.855600 2.130353 3.852606 0.720886 0.807740

5253.82 5262.43 5270.91 5279.59 5287.61 5296.06 5305.04 5312.93 5315.74

5628.68 5638.83 5647.40 5656.41 5665.79 5673.13 5682.59 5692.12 5695.38

Next, you show your boss the first and second smoothed values for the two sales representatives, as well as the best alpha: Alpha used is: 0.136 Rep. 1 w/o DOW Effect 5168.73 5182.79 5196.58 5210.61 5225.76 5239.54 5253.82 5262.43 5270.91 5279.59 5287.61 5296.06 5305.04 5312.93 5315.74 First Smooth Rep. 1 5168.73 5168.73 5170.64 5174.17 5179.12 5185.47 5192.82 5201.12 5209.45 5217.81 5226.21 5234.56 5242.93 5251.37 5259.75 Second Smooth Rep. 1 5168.73 5168.73 5168.73 5168.99 5169.69 5170.98 5172.95 5175.65 5179.11 5183.24 5187.94 5193.15 5198.78 5204.78 5211.12 Rep. 2 5686.98 8.17 5695.15 -0.23 0.06 Rep. 2 w/o DOW Effect 5537.87 5552.88 5567.70 5582.79 5598.57 5613.25 5628.68 5638.83 5647.40 5656.41 5665.79 5673.13 5682.59 5692.12 5695.38 First Smooth Rep. 2 5537.87 5537.87 5539.91 5543.69 5549.01 5555.75 5563.57 5572.42 5581.45 5590.42 5599.40 5608.43 5617.23 5626.12 5635.09 Second Smooth Rep. 2 5537.87 5537.87 5537.87 5538.14 5538.90 5540.27 5542.38 5545.26 5548.95 5553.37 5558.41 5563.99 5570.03 5576.45 5583.20

Obs. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Rep. 1 What is a? 5308.37 What is b? 7.65 What are forecasts? 5316.03 Frcsts minus Actual: 0.29 Sum of Differences is:

As a final step, you predict the sales for each representative for the next seven days. You do this by forecasting the sales with the day of week effects removed, and then applying the appropriate day of week multiplier to each of these values. Rep. 1 w/o DOW Effect 5182.79 5196.58 5210.61 5225.76 5239.54 5253.82 5262.43 5270.91 5279.59 5287.61 5296.06 First Smooth Rep. 1 5182.79 5182.79 5184.67 5188.19 5193.30 5199.59 5206.97 5214.51 5222.18 5229.99 5237.82 Second Smooth Rep. 1 5182.79 5182.79 5182.79 5183.05 5183.75 5185.05 5187.02 5189.74 5193.10 5197.06 5201.54 Rep. 2 w/o DOW Effect 5552.88 5567.70 5582.79 5598.57 5613.25 5628.68 5638.83 5647.40 5656.41 5665.79 5673.13 First Smooth Rep. 2 5552.88 5552.88 5554.89 5558.69 5564.11 5570.79 5578.67 5586.85 5595.08 5603.42 5611.91 Second Smooth Rep. 2 5552.88 5552.88 5552.88 5553.15 5553.90 5555.29 5557.40 5560.29 5563.90 5568.14 5572.94

Obs. 2 3 4 5 6 7 8 9 10 11 12

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13 14 15 16

5305.04 5312.93 5315.74 NA Rep. 1 What is a? 5314.80 What is b? 7.18

5245.74 5253.81 5261.85 5269.18

5206.47 5211.81 5217.52 5223.55

5682.59 5692.12 5695.38 NA Rep. 2 5693.99 7.67

5620.23 5628.71 5637.34 5645.23

5578.24 5583.95 5590.04 5596.47

The predicted sales, for the next seven days, are: Period 16 17 18 19 20 21 22 DOW Wed. Thurs. Fri. Sat. Sun. Mon. Tues. Baseline Rep. 1 5321.98 5329.17 5336.35 5343.53 5350.71 5357.89 5365.07 Baseline Rep. 2 5701.66 5709.34 5717.01 5724.69 5732.36 5740.04 5747.71 Adj./Avg. Multiplier 1.248362 1.228694 1.168770 0.469406 0.259565 1.387182 1.238022 Predicted Sales Rep. 1 6644 6548 6237 2508 1389 7432 6642 Predicted Sales Rep. 2 7118 7015 6682 2687 1488 7962 7116

Checking the sales seven days out (against what your colleague found) reveals sales of 13,758 (i.e., 6642+7116). You then give these projections to your boss, who gives you a raise.

REFERENCES
Guerts, Michael D., and J. Patrick Kelly. 1986. "Forecasting Retail Sales Using Alternative Models." International Journal of Forecasting, 2(3): 261-272. Kotler, Philip. 1997. Marketing Management: Analysis, Planning, Implementation, and Control, Prentice-Hall: Upper Saddle River, NJ. Kress, George, and John Snyder. 1994. Forecasting and Market Analysis Techniques: A Practical Approach, Quorum Books: Westport, CT. Lilien, Gary L., and Philip Kotler. 1983. Marketing Decision Making: A Model-Building Approach, Harper and Row: New York, NY. Makridakis, S. G. 1990. Forecasting: Planning and Strategy for the 21st Century, Free Press: New York, NY. Winer, Russell S. 2000. Marketing Management, Prentice-Hall: Upper Saddle River, NJ. Zick, Cathleen D., and Richard Widdows. 1995. "Forecasting the Future of Consumer Programs in Higher Education." Journal of Consumer Affairs, 29: 460-469.

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