What is Forecasting?

♦ Process of predicting a Sales will be

future event $200 Million!
♦ Underlying basis of
all business decisions
♦ Production
♦ Inventory
♦ Personnel
♦ Facilities

4-1
 Types of Forecasts by Time
Horizon
♦ Short-range forecast
♦ Up to 1 year; usually less than 3 months
♦ Job scheduling, worker assignments
♦ Medium-range forecast
♦ 3 months to 3 years
♦ Sales & production planning, budgeting
♦ Long-range forecast
♦ 5-10 years
♦ New product planning, facility location

4-2
 Product Demand Charted over 4
Years with Trend and Seasonality
Seasonal peaks Trend
component
Demand for product or service

Actual
demand line

Average demand
over four years
Rando
m
variatio
Ye Ye Ye Ye
ar n ar ar ar
1 2 3 4
4-3
 Realities of Forecasting

♦ Forecasts are seldom perfect

♦ Most forecasting methods assume that there
is some underlying stability in the system
♦ Both product family and aggregated product
forecasts are more accurate than individual
product forecasts

4-4
 Forecasting Approaches
Qualitative Methods
♦ Used when situation is
vague & little data exist
♦ New products
♦ New technology
♦ Involves intuition,
experience
♦ e.g., forecasting sales on
Internet
Quantitative Methods
♦ Used when situation is
‘stable’ & historical
data exist
♦ Existing products
♦ Current technology
♦ Involves mathematical
techniques
♦ e.g., forecasting sales of
color televisions

4-5
 Overview of Qualitative Methods
♦ Jury of executive opinion
♦ Pool opinions of high-level executives, sometimes
augment by statistical models
♦ Sales force composite
♦ Estimates from individual salespersons are
reviewed for reasonableness, then aggregated
♦ Delphi method
♦ Panel of experts, queried iteratively
♦ Consumer Market Survey
♦ Ask the customer

4-6
 Jury of Executive Opinion
♦ Involves small group of high-level managers
♦ Group estimates demand by working together
♦ Combines managerial experience with
statistical models
♦ Relatively quick
♦ ‘Group-think’
disadvantage

4-7
© 1995 Corel Corp.
 Sales Force Composite

♦ Each salesperson
Sales
projects their sales
♦ Combined at district &
national levels
♦ Sales rep’s know
customers’ wants
♦ Tends to be overly
optimistic
© 1995 Corel Corp.

4-8
 Delphi Method
♦ Iterative group
process Decision Makers
(Sales?)
♦ 3 types of people (Sales will be 50!)
♦ Decision makers
Staff
(What will
♦ Staff sales be?
♦ Respondents survey)
♦ Reduces ‘group-
think’ Respondents
(Sales will be 45, 50, 55)

4-9
 Consumer Market Survey
How many hours will
♦ Ask customers you use the Internet
about purchasing next week?
plans
♦ What consumers
say, and what they
actually do are
often different
♦ Sometimes difficult
to answer © 1995 Corel
Corp.

4-10
Quantitative Forecasting Methods
(Non-Naive)
Quantitativ
e
Forecasting

Time Series Associative

Models Models

Moving Exponential Trend Linear

Average Smoothing Projectio Regression
n

4-11