FORECASTING

Submitted by: Bindu Thushara. N IGTC Date: October 02, 2013

AGENDA
Introduction Periods of prediction Classification of forecasting techniques Qualitative forecasting techniques Quantitative forecasting techniques Forecasting methods References

INTRODUCTION
The forecasting process refers to a series of procedures used to forecast. It begins when an objective is determined.
Next step is determination of dependent refer to what is being forecasting: sales or the number of sales people to hire next year) and independent variables After this step one should determine forecast procedure and methods for analyzing data.

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Data are then gathered and analyzed often assumptions must be made about the forecast. The forecast is made, finalized, and, estimate passes, evaluated.

PERIODS OF PREDICTION
Short term forecasts there are usually for periods up to three months ahead and are really of use for tactical matters such as production planning. The general trends of sales is less important here then short term fluctuations Medium term forecasts these have direct implication for planners. They are of most importance in the area of business budgeting, the starting point for which is sales forecast. Thus if the sales is incorrect then the entire budget is incorrect.

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Long term forecasts these are usually for periods of three years and upwards depending upon the type of industry being considered. For computer industry, it is a long period but for some other industry such as steel manufacture ten years is a typical long term horizon. Such forecasts are needed mainly by finance accountants for long time resource implications and generally the concern of boards of directors

CLASSIFICATION OF FORECASTING TECHNIQUES

Managers apply Quantitative forecasting techniques when environment is predictable and if they have data from past period about sales. These techniques are good when existing products and technologies need to be predicted. They often used mathematics techniques for forecasting. Qualitative forecasting techniques are used in the not predictable environment and when not enough data is available. These techniques are usually used when managers forecast launching the new product line or new technologies.

 Jury of executive opinion: combining top executives views concerning future sales. Customer expectations: customers expectations of their needs and requirements as the basis for the forecast. Sales force composite combines the individual forecasts of salespeople. Delphi method is a similar to jury of executive opinion technique. The main difference the members do not meet in committee. Bayesian decision theory: Subjective + Objective Techniques.

QUALITATIVE FORECASTING TECHNIQUES

QUANTITATIVE FORECASTING TECHNIQUES

Regression analysis: statistically relates sales to one or more explanatory (independent) variables. Exponential smoothing: exponentially smoothed weighted average of past sales, trend and seasonality to derive the forecast. Moving average: an average of a specified number of past observations to make a forecast.

Box-Jenkins: auto correlative structure of sales data to develop autoregressive moving average forecast from past sales and forecast errors

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Trend line Analysis fits a line to sales data by minimizing the squared error between the line and actual past sales values. Decomposition breaks the sales data into seasonal, cyclical, trend and noise components and projects each into the forecast Straight-line projection is a visual extrapolation of the past data which is projected into the future as the forecast The simulation model is mathematical replicaton of the actual corporation.

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Life cycle analysis bases the forecast upon whether the product is judged to be in the Introduction, growth, maturity or decline stage of its life cycle Simulation uses computer to model the forces which affect sales: customers, marketing plans, competitors, flow-of-goods, etc. Experts systems use the knowledge of one or more forecasting experts to develop decision rules to arrive at a forecast Neutral networks look for patterns in previous history of sales and explanatory data to uncover relationships.

FORECASTING METHODS
1. Trend Line Projected Method Forecasting: o The trend-line method puts a heavier weighting on the latest years, as does the weighted average method. This method projects the trend into the future by estimating a trend line. o This projection approach is a linear or straight-line approach where it is expected that growth will continue to occur but at a declining rate. o The trend line projected method is also based on the least squares formula, utilizing the historical data to estimate the future.

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o This method is most appropriately used when the past trend in the measured data can reasonably be expected to continue.

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2. Single Exponential Smoothing Forecasting o This method of forecasting calculates the smoothed series as a damping coefficient times the actual series plus 1 minus the damping coefficient times the lagged value of the smoothed series. o The extrapolated smoothed series is a constant, equal to the last value of the smoothed series during the period when actual data on the underlying series are available. o Ft+1 = a Dt + (1 - a) Ft, where: Dt is the actual value, Ft is the forecasted value, a is the weighting factor, which ranges from 0 to 1, t is the current time period.

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3. Projected Growth Forecasting o This method is used when the data is increasing at a constant rate; it is not linear. This "curve" is also referred to as an exponential curve. o This method, which assumes growth in the data, is the projected growth rate method, sometimes referred to as the "projection method". o This method first computes the compounded or average growth rate in the data based on the last five periods of data. it applies this growth rate to the latest period's data, and continues this process for every period to be forecasted.

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4. Double Exponential Smoothing Forecasting o This method method is based on the Holt-Winters Smoothing method. This math and screen shot are shown below. o The variables are alpha: weight to place on previously predicted values (0 < alpha < 1). ( 1alpha). The weight to place on the most recent actual value. o ft = forecast at time t for the period t+1, Xt = actual value at time t.

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o The Exponential Smoothing Algorithm is computed as follows: Step 1: Initialize f1 using oldest historical data f1 = X1 Step 2: Iteratively calculate ft from historical data f2 = (alpha*f1) + (1-alpha) * X1

ft = (alpha*ft-1) + (1-alpha) * Xt

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5. Moving Average Forecasting o The best-known forecasting methods is the moving averages that simply takes a certain number of past periods and add them together; then divide by the number of periods. o Simple Moving Averages (MA) is effective and efficient approach provided the time series is stationary in both mean and variance. The following formula is used in finding the moving average of order n, MA(n) for a period t+1, o MA(t+1) = [Dt + Dt-1 + ... +Dt-n+1] / n

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o where n is the number of observations used in the calculation.

o The forecast for time period t + 1 is the forecast for all future time periods. However, this forecast is revised only when new data becomes available.
o This method is typically used when the past earn data are representative of the expected future and no existing pattern or trend would suggest that any one data results are any more indicative than the rest of the historical data.

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6. Weighted Moving Average Forecasting o This method is widely used where repeated forecasts required-uses methods like sum-of-the-digits and trend adjustment methods. As an example, a Weighted Moving Averages is: o Weighted MA(3) = w1.Dt + w2.Dt-1 + w3.Dt-2

o where the weights are any positive numbers such that: w1 + w2 + w3 = 1. A typical weights for this example is, w1 = 3/(1 + 2 + 3) = 3/6, w2 = 2/6, and w3 = 1/6.

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o Used when certain past earnings are more representative of the expected future or the historical data demonstrate a trend that is expected to continue in the future.

REFERENCES
http://blogs.salesforce.com/company/2013/05/how-

to-improve-your-sales-forecast-accuracy-.html
http://www.thebusinessindex.com/guides/sales-

forecasting.aspx
Wikipedia & Google