that tracks the life of each pint of ice cream, from ingredients to sale. Each pint is
stamped with a tracking number that is stored in an Oracle database. Then the com
pany uses the information to track trends, problems, and new business opportunities.
They can track such things as seeing if the ice cream flavor Chocolate Chip Cookie
Dough is gaining on Cherry Garcia for the top sales spot, producl sales by location,
and rales of change. This information is then used to more accurately forecast prod, Marketing
uct sales. Numerous other companies, such as Procter & Gamhle, General Electric,
Lands' End, Scars, and Red Rohin Gourmet Burgers, arc investing in the same type of
software in order to improve forecast accuracy.
In this chapter you will learn about forecasting, the different types of forecasting
.net hods available, and how to select and usc the proper techniques. You will also
:earn about the lalest available software that can help managers analyze and process
data to generate forecasts.
PRINCIPLES OF FORE(ASTING~
There are many types of forecasting models. They differ in their degree of complexity,
the amount of data they use, and t~e way they generate the forecast. However, some
features arc common to all forecasting models. They include the following:
I. Foremsrs are rarely perfect. Forecasting the future involves uncenainty. Therefore,
it is almost impossible to make a perfect prediction. Forecasters know that they
4 • CHAPTER 8 fORECASTING
have to live with a certain amount of error, which is the difference between what
is forecast and what actually happens. The goal of forecasting is to generate good
forecasts 011 the average over time and to keep forecast errors as low as possible.
2. Forecasts are more ace,urate for groups or families of items mther chem for individ
ual items. When items are grouped together, their individual high and low val
ues can cancel each other out. The data for a group of items can be stable even
when individual items in the group are very unstable. Consequently, one can
obtain a higher degree of accuracy when forecasting for a group of items rather
than for individual items. For example, you cannot expect the same degree of
accuracy if you arc forecasting sales of longsleeved hunter green polo shirts
that you can expect when forecasting sales of all polo shirts_
3. Forecasts are more accurate for shorter chari lorrgeT time horizolls. The shorter the
time horizon of the forecast, the lower the degree of uncertainty. Data do not
change very much in the short run. As the time horizon increases, however,
there is a much greater likelihood that changes in established patterns and rela
tionships will occur. Because of that, forecasters cannot expect the same degree
of forecast accuracy for a longrange forecast as for a shortrange forecast. For
example, it is much harder to predict sales of a product two years from now
than to predict sales two weeks from now.
4. Gellerate tile forecast. Once we have selected a model we use it to generate the
forecast. But we are not finished, as you will see in the next step.
5. Monitor forecast occllracy. Forecasting is an ongoing process. After we have made
a forecast, we should record what actually happened. We can then use that in
formation to monitor our forecast accuracy. This process should be carried out
cont.inuously. because environments and conditions often change. ""hat was 3
good forecasting model in the past might not provide good results for the fu
ture. \Ve have to constantly be prepared to revise our forecasting model as our
data changes.
Qualitative Methods
.:...
There ar< many types of qualitative forecasting methods, some informal and some
structured. R<gardless of how structur<d the process is, however, remember that these
m2dcl,Dllebased on subjective opinion and 3re not mathematical in nature. Some com
mon qualitative methods are shown io Table 82 and are described in this section.
TYPES OF FORECASTING METHOOS • 257
•
method consensus among a forecasting longterm to develop.
group of experts. product demand,
technological changes,
and scientific advances. Marketing
Market Resea.KbMa~eIt'eSeaJ'ch is an approach that uses surveys and interviews ••. Market research
Approach 10 forecasting that
10 determine customer likes, dislikes. anaprCfcrences analOiaCiitiTy new product
relit'S on survcrs and
iilCas. Usually the compan)' hires an outside marketIng "rm to conduct a market re intcryiews to determine
~:irch stud)'. There is a good chance that you were a participant in such a study if customer preferences.
someone called you and asked about your product preferences.
Market research can be a good determinant of customer references. Howcver,jL.
h,as a number of shortc.9llliQgs,.One_o. CJll.O$t.C9,mlllon has to do wit ili"OWthe sur
vey questions are designed. For example. a market research firm may_cal~nd aSk you
tOidentify which of theJoliowing.is.yourfavorite.hobby: gardening, working on cars,
cooking •.OI.pla)'IDg.sports. But maybe none of these is your favorite because you pre
fer playing the piano or fishing, and these options are not included. This question is
poorl)' designed because it forces you to pick a categor)' that you really don't fit in,
which can lead to misinterpretation of the survey results.
The Delpbi Method The Delphi method is a forecasting method in which the ob
•
Marketing
.~ 
'~":t'.:
.~.'I
Quantitative Methods
Quantitative methods are different from qualitative ones because they are based on
mathematics. Quantitative methodLQO also be divided into t\'lO categorics~ time se
ries models and causal models. Although bolh are mathematical, the two categories
differ in their assumptions ana in the manner in which a forecast is generated. In this
section we \'IiH study some common quantitative models, which are summarized in
•••Timeseriesmodel~
aBased on the
forecasl be gcnerah!dthat ~
can assumption
from the information
.
Time =
Table 83. _ .
.
senes models assume that all the mformattOn . 
needed to generate a forecast
IS contained in the time series of data. A time series is a series of observations taken at
cont:lincd if) a timc series of regular intervals over a specified period of time, F,or example. if you wcre forccasting
data. quarterly corporate sales and had collected fIve years of quarterly sales data, you
•••Time seric5 would hav a timc seriesJIimcser~rysls assumes tfiat we can generatc. a torecast
A serks of observationstakcn based on patterns intne data. As a forecasler, you would look for patterns such as
ov~rtime. trend. seasonality. and cycle. and use that information to generate a forecast.
~ Cousal models. rf"'\ Causal models, sometimes called associative models, use a ver~differen~ logic to
Based on the assumptton th:lt
th<variablc being forecast is
vg~nerate
\ , __
7""'
a forecast. They assume t~at Ihe vanable we wIsh, to.!orecast ~s somehow
rdated.to oth~r variables in 9
rc tated to other variables 10 the envIronment. TllCforecaster S Job lS to dIscover how

the environment. thescVifi'ables arc relatctfinm.a:theITi3tical term~ use that i'nfmmation to forecast
TYPES OF FORECASTING METHODS. 259
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