Meaning of Sales Forecasting

Why Study forecasting ?

Types of Forecasts
Categorization of Sales Forecasting
Facts in Forecasting
Limitations of Demand Forecasting
Steps in Forecasting
Sales forecasting Technique
Forecast Accuracy

Contrive

Before
[the fact]

Meaning of Demand
Forecasting

Meaning of Demand
Forecasting

Demand forecasting is the

scientific and analytical
estimation of demand for a
product (service) for a particular
period of time.

Why Study
forecasting ?

Setting Sales Targets, Pricing

policies, establishing controls
and incentives.
Allows managers to plan
personnel, operations of
purchasing & finance for better
control over wastes inefficiency

Why Study
forecasting ?
Reduce the cost for purchasing raw material, Increased revenue
Improved customer service (efficiency)

Effective forecasting builds stability in operations.

Measure as a barometer of the future health of a

company.

The ability to plan for production avoid the problem of overproduction & problem of short supply. Sales
Maximization.
The ability to identify the pattern or trend of sales knowing when
and how much to buy--- better marketing positioning.

Types of Forecasts
Economic forecasts
Address the future business
conditions
(e.g., inflation
rate, money supply, etc.)

Technological forecasts
Predict the rate of technological
progress
Predict acceptance of new products

Demand forecasts
Predict sales of existing products

Facts in Forecasting
Main assumption: Past pattern repeats itself into the
future.
Forecasts are rarely perfect: Don't expect forecasts to
be exactly equal to the actual data.
The science and art of forecasting try to minimize, but
not to eliminate, forecast errors.
Forecasts for a group of products are usually more accurate
than these for individual products.
A good forecast is usually more than a single number.
The longer the forecasting horizon, the less accurate the
forecasts will be .

Limitations of Demand
Forecasting

Limitations of Demand
Forecasting

Qualities of Good
Forecasting
1) Simple
2) Economy of time
3) Economy of money
4) Accuracy
5) Reliability

Steps in
Forecasting
Determine
the purpose of the forecast.
Select the items to be forecasted.
Gather the data.
Determine the time horizon of the forecast.
Select the forecasting model(s).
Make the forecast.
Validate and implement results.

Sales
forecasting
Process
Setting
Goals
Forecastin
g
Evaluating
of
forecastin
g
outcomes

Gatheri
ng data

Analysis
of data

Forecast
ing

Choosing
The Best
Model For
Forecastin
g

METHODS OF FORECASTING
Forecasting methods are classified into
two groups:

Forecasting Technique
Quantitative Analysis

Qualitative Analysis
Customer
Survey

Executive
Opinion

Sales Force
Composite

Delphi
Method

Test
Marketing

Time Series
Analysis

Causal
Analysis

Nave
approach
Moving
Average
Least
squares

Regres
sion
Analysis
Exponential
Smoothing

Weighted
Moving

Sales forecasting
Technique

It is generally
recommended to use a
combination of quantitative

Forecasting
Techniques

Qualitative (Subjective)
Methods

1- Consumers Opinion
Survey
(Buyers expectation Method )

1- Consumers Opinion
Survey
(Buyers: expectation Method )
Advantages
Simple to administer and comprehend.
Forecasting Reveals general attitude and feeling about
products from potential users.
Technique is very effective to determine demand for a new
product when no past data available.
Suitable for short term decisions regarding product and
promotion.

1- Consumers Opinion
Survey :
(Buyers expectation Method)

2- Sales Force Composite

Salespersons are in direct contact with the customers.
Method

Each salespersons are asked about estimated sales

targets in their respective sales territories in a given period
of time.

These forecasts are then reviewed to ensure they are

realistic, then combined at the district and national levels
to reach an overall forecast.

In this method sales people put their future sales estimate

either alone or in consultation with sales manager.

2- Sales Force Composite

Method

2- Sales Force Composite

Method

2- Sales Force Composite

Method

2- Sales Force Composite

Method

3- Jury of Executive
Opinion:

3- Jury of Executive
Opinion:

3- Jury of Executive
Opinion:

3- Jury of Executive
Opinion:

4- Experts Opinion Method

Delphi Technique:
TO make the judgemental forecasts more realistic by minimising
bias method is used.
In this method a panel of experts are asked sequential
questions in which the response to one questionare is used to
produce next questionare.
The information available to one experts are made available to
other experts.

4- Experts Opinion Method

Delphi Technique:
Conclusions, insights, and expectations of the experts are
evaluated by the entire group resulting in shared more structured
and less biased estimate of the future.
There are three different types of participants in the Delphi
process:
decision makers,
staff personnel,
and respondents.

4- Delphi
Technique:
assist the decision makers by
preparing, distributing, collecting,
and summarizing a series
of questionnaires and survey
are a group of people whose
results.
judgments are
valued.
This group provides inputs to the
decision makers before the forecast
is made.

4- Experts Opinion Method

Delphi Technique:

What will sales be?)

(Administering survey

?(Sales)
Evaluate responses
and make Decision
!(Sales will be 50)

)People who can make

valuable judgments
(Sales will be 45, 50, 55

4- Experts Opinion Method

Delphi Technique:

4- Experts Opinion
Method
Delphi Technique:

5- Test Marketing

5- Test Marketing

Forecasting Technique
Quantitative Analysis

Qualitative Analysis
Customer
Survey

Executive
Opinion

Sales Force
Composite

Delphi
Method

Test
Marketing

Time Series
Analysis

Causal
Analysis

Nave
approach
Moving
Average
Least
squares

Weighted Regress
ion
Moving
Analysis
Exponential
Smoothing

Forecasting
Techniques
Quantitative forecasting

Uses mathematical models and historical data to make

forecasts.
Used when situation is stable & historical data exist
Existing products
Time series models are the most frequently used among all
the forecasting models.

Quantitative
forecasting
Time
Series
Models
Only
independent
variable is the
time
based on the
assumption
that the future
is an extension

Casual
Models

assumes that
one or more
factors
other
than time
predict
future

Sale
s

46

Decline

Maturity

Growth

Introduction

Product Life Cycle

Time

What is a Time Series?

A collection of data recorded over a period of time (weekly,
monthly, quarterly).
an analysis of its history can be used by management to make
current decisions and plans based on long-term forecasting.
Forecast based only on past values Assumes that factors
influencing past and present will continue influence in future
Example
Year:
2007
2008 2009 2010 2011
Sales:
78.7
63.5 89.7 93.2 92.1

Demand for product or

service

Time Series

2007

2008

2009

201
2010 1

Tim
e

Time Series
Components

Seasonal

Random

Time Series Pattern:

Secular
Trend
change occurring
consistently
over a long time and is
relatively smooth in its path.
either increasing or
decreasing.

Forecasting methods: linear

trend projection, exponential
smoothing

Time Series Pattern:

Seasonal
Patterns of change in a time
series within a year which tend
to repeat each year.
Due to weather, customs, etc.
Occurs within 1 year
Forecasting methods:
exponential smoothing with
trend

 have a tendency to recur in a

few years usually repeat every
two-five years.
Repeating up & down
movements
Due to interactions of factors
influencing economy.

Stationary
or Irregular Variation or
have no trend Random
of
events
occurrence hence they
create random variation in
the series.
(due to unexpected or
unpredictable events).

Short duration & nonrepeating.

Forecasting methods:
naive, moving average,
exponential smoothing

Demand for product or

service

Product Demand Charted

over 4 Years with Trend and
Seasonality
Seasonal peaks
Trend component
Actual
demand line
Average
demand over
four years

Random
variation
Year

Year

Year

Year

Forecasting Technique
Quantitative Analysis

Qualitative Analysis
Customer
Survey

Executive
Opinion

Sales Force
Composite

Delphi
Method

Test
Marketing

Time Series
Analysis

Causal
Analysis

Nave
approach
Moving
Average
Least
squares

Weighted Regress
ion
Moving
Analysis
Exponential
Smoothing

1- Moving Average
Method
Can be defined as the summation of demands of total periods
divided by the total number of periods.
Useful if we can assume that market demands will stay fairly
steady over time.
It is convenient for short term periods

Demand in Previous n Periods

MA

2- Moving Average
Example

2- Moving Average
Solution

3- Moving Average
Solution

3- Moving Average
Solution

3- Weighted Moving
Weights are usedAverage
to give more values to recent value
This makes the techniques more responsive to changes
because latter periods may be more heavily waited
Most recent observation receives the most weight, and the
weight decreases for older data values.

3- Weighted Moving
Average

Last month
Two month
ago
Three
month
ago
ago
Mont Actual
h
Jan
Feb
Marc
h

sales

10
12
13

3
2
1

Sum of the
weights
6

Three month moving

average

)13
3(

+ )12
1( +)10
2(
=

12.1
7

3- Weighted Moving
ActuAverage
Mont
Three months moving
h

Jan
Feb
Marc
h
April

al
sale
s

average

10
12
13
16

(3 13)+) 2 12)+) 1 10)/6

= 12.17

4- Trend Projection
Method

Linear Equations
dependent variable
value

Y = bX + a
b = S lo p e

Change
in Y

C h a n g e in X
a = =Y - value
i n t e r c e p of
t (Y) when (X)
a
equals zero
independent

6- Exponential Smoothing
Method
Smoothing

constant

(0 to 1)

Ft = Ft-1
- Ft-1)

Ft= forecast for

this period

Dt-1= Actual
demand for
the previous
period
+ (D
t-1

Ft-1 = forecast for

the
previous period

- Exponential Smoothing
Method
Smoothing

constant

(0 to 1)

Dt-1= Actual sales

2012

Ft = Ft-1 + (Dt-1
- Ft-1)

Ft= forecast
for 2013

Ft-1 = forecast
2012

6- Exponential
SmoothingExample

1995 Corel Corp.

6- Exponential Smoothing
Solution
Ft = Ft-1 + (At-1 Ft-1)

Time Actual
2008
2009
2010
2011
2012
2013

180
168 175.00 +
159
175
190
NA

Forecast,
Forecast F t
( = .10(

175.00 (Given)

6- Exponential Smoothing
Solution
Ft = Ft-1 + (At-1 Ft-1)

Time Actual
2008
2009
2010
2011
2012
2013

Forecast,
Forecast F t
( = .10(

180
168 175.00 + .10)
159
175
190
NA

175.00 )Given(

6- Exponential
Smoothing Solution
Ft = Ft-1 + (At-1 Ft-1)
Forecast, F

Time Actual
2008
2009
2010
2011
2012
2013
MGMT 6020
Forecast

180
168
159
175
190
NA

) = .10(

175.00 )Given(

175.00 + .10)180 -

6- Exponential Smoothing
Solution
F = F + (A t

Time Actual
2008
2009
2010
2011
2012
2013
MGMT 6020
Forecast

t-1

t-1

Ft-1)

Forecast, Ft
) = .10(

175.00 )Given(
180
168 175.00 + .10)180 - 175.00(
159
175
190
NA

6- Exponential Smoothing
Solution
F = F + (A t

t-1

t-1

Ft-1)
Time Actual
2008
2009
2010
2011
2012
2013
MGMT 6020
Forecast

180
168
159
175
190
NA

Forecast, Ft
) = .10(

175.00 )Given(
175.00 + .10)180 - 175.00( = 175.50

6- Exponential Smoothing
Solution
F = F + (A t

t-1

t-1

Ft-1)
Time Actual
2008
2009
2010
2011
2012
2013

Forecast, F t
( = .10)

175.00 )Given(
180
168 175.00 + .10)180 - 175.00( = 175.50
159 175.50 + .10)168 - 175.50( = 174.75
175
190

NA

6- Exponential Smoothing
Solution
Ft = Ft-1 + (At-1 Ft-1)

Time

Actual

2008
2009
2010
2011
2012
2013

180
168
159
175
190
NA

Forecast,
Forecast F t
( = .10)

175.00 )Given(
175.00 + .10)180 - 175.00( = 175.50
175.50 + .10)168 - 175.50( = 174.75

174.75 + .10)159 - 174.75( = 173.18

6- Exponential Smoothing
Solution
F = F + (A t

t-1

t-1

Ft-1)
Time

Actual

2008
2009
2010
2011
2012
2013

180
168
159
175
190
NA

Forecast, F t
( = .10)
175.00 )Given(

175.00 + .10)180 - 175.00( = 175.50

175.50 + .10)168 - 175.50( = 174.75
174.75 + .10)159 - 174.75( = 173.18
173.18 + .10)175 - 173.18( = 173.36

6- Exponential Smoothing
Solution
Ft = Ft-1 + (At-1 Ft-1)

Time

Actual

2008
2009
2010
2011
2012
2013

180
168
159
175
190

Forecast,
Forecast F t
( = .10)

175.00 )Given(

175.00 + .10)180 - 175.00( = 175.50

175.50 + .10)168 - 175.50( = 174.75
174.75 + .10)159 - 174.75( = 173.18
173.18 + .10)175 - 173.18( = 173.36

NA 173.36 + .10)190 - 173.36( = 175.02

6- Exponential Smoothing
Method

Forecasting Technique
Quantitative Analysis

Qualitative Analysis
Customer
Survey

Executive
Opinion

Sales Force
Composite

Delphi
Method

Test
Marketing

Time Series
Analysis

Causal
Analysis

Nave
approach
Moving
Average
Least
squares

Weighted Regress
ion
Moving
Analysis
Exponential
Smoothing

Causal Method
Usually consider several variable that are related to the
quantity being predicted.
once the related variable are found, statistical models are
then built and used to forecast
Example: PC sales forecasts (dependent variable) could be
correlated to advertising budget, promotions, prices,
competitors prices (independent variables)

Regression Analysis
Method

Regression Analysis
Method

forecast error
defined as the difference between
actual quantity and the forecast

et =

et = D t Ft=
D
t

Ft =

actual
forecast
forecast
demand
error for
for
for
Period t
Period t
t error, the
The smaller thePeriod
forecast
more accurate the forecast.

s of Dependent Variable

forecast error
Deviation7

Actual
observation

Deviation5

Deviation6

Deviation3

Deviation4
Deviation1
(error)

Deviation2

Time period

Trend line

Forecast Accuracy
Several measures of forecasting
accuracy
larger the value the larger the
forecast error
Mean absolute deviation (MAD)
Sum of absolute values of
individual forecast errors /
number of periods of data
The larger the MAD, the less the
accurate the resulting model
MAD of 0 indicates the forecast
exactly predicted demand.

Forecast Accuracy
Mean squared error (MSE)
Average of the squared differences
between the forecasted and
observed values

Mean absolute percentage error

(MAPE)
How many Percent the forecast is
off from the actual data

Forecast Accuracy

Perio Sales( Forec

d
A)
ast

[E]

E2

A[/E]

1600

1650

-50

50

2500

0.0313

2200

2010

190

190

36100

0.0864

2000

2200

-200

200

40000

0.1000

1600

1580

20

20

400

0.0125

2500

2480

20

20

400

0.0080

3500

3520

-20

20

400

0.0057

3300

3310

-10

10

100

0.0030

3200

3200

0.0000

3900

3850

50

50

2500

0.0128

10

4700

4720

-20

20

400

0.0043

10
MAD=58

&

-20 580 828 0.263

MSE=8280
&
00

Forecast Accuracy

Perio Sales( Forec

d
A)
ast

[E]

E2

A[/E]

1600

1650

-50

50

2500

0.0313

2200

2010

190

190

36100

0.0864

2000

2200

-200

200

40000

0.1000

1600

1580

20

20

400

0.0125

2500

2480

20

20

400

0.0080

3520

-20

20

400

0.0057

3310

-10

10

100

0.0030

3
4
5
6

E]

MAD=
[
3500

3300

3200

3200

0.0000

3900

3850

50

50

2500

0.0128

10

4700

4720

-20

20

400

0.0043

10

- 580 828 0.26

MAD=58
20
00
39

Forecast Accuracy

Perio Sales( Forec

d
A)
ast

[E]

E2

A[/E]

1600

1650

-50

50

2500

0.0313

2200

2010

190

190

36100

0.0864

2000

2200

-200

200

40000

0.1000

1600

1580

20

20

400

0.0125

2480

20

20

400

0.0080

3520

-20

20

400

0.0057

3310

-10

10

100

0.0030

5
6

2500
MSE
=
3500

[E2]

3300

3200

3200

0.0000

3900

3850

50

50

2500

0.0128

10

4700

4720

-20

20

400

0.0043

10

-20 580

MSE=8280

828 0.263
00
9

Forecast Accuracy

Perio Sales( Forec

d
A)
ast

[E]

E2

A[/E]

1600

1650

-50

50

2500

0.0313

2200

2010

190

190

36100

0.0864

2000

2200

-200

200

40000

0.1000

1600

1580

20

20

400

0.0125

2480

20

20

400

0.0080

3520

-20

20

400

0.0057

5
6

2500
MAPE
=
3500

[/E]

nA

100
%

3300

3310

-10

10

100

0.0030

3200

3200

0.0000

3900

3850

50

50

2500

0.0128

10

4700

4720

-20

20

400

0.0043

10

-20 580

MAPE=2.64%

828 0.263
00
9

Excel Chart
Methods

Linear regression

Y
b
X 2 X X
XY X

Identify dependent (y)

and independent (x)
variables
Solve for XY
theslope
n XY of the
line
b

nX

Solve for the y intercept

Develop your equation

for the trend line

a Y bX

Y=a + bX

Linear Regression Problem: A maker of golf shirts has

been tracking the relationship between sales and
advertising. Use linear regression to find out what sales
might be if the company invested 53,000 in advertising
next year.

Sales
(Y)

Adv.
(X)

XY

130

32

4160

XY n XY

b
X nX

X^
2

Y^2

230
4

16,90
0

28202 4 47.25 147.25

9253 4 47.25

1.15

151

52

7852

270
4

22,80
1

a Y b X 147.25 1.15 47.25

150

50

7500

250
0

22,50
0

Y a bX 92.9 1.15X

158

55

8690

302 24964
5

153.8
5

53

Tot

589

189

2820

925 87165

a 92.9
Y 92.9 1.15 53 153.85

Correlation coefficient (r) measures the direction and strength of the

linear relationship between two variables. The closer the r value is to
1.0 the better the regression line fits the data points.

n XY X Y

r
n
r

X X
2

* n

Y Y
2

4 28,202 189 589

4(9253) - (189) * 4 87,165 589

2

.982

r 2 .982 .964
2

Coefficient of determination ( ) measures the amount of variation in

the dependent variable about its mean that is explained by the
regression line. Values of ( ) close to 1.0 are desirable.

Multiple Regression
An extension of linear regression
but:
Multiple regression develops a
relationship between a dependent
variable and multiple independent
variables. The general formula is:

Measuring Forecasting Accuracy

Mean Absolute Deviation
(MAD)
measures the total error in a
forecast without regard to sign

Cumulative Forecast Error

(CFE)
Measures any bias in the
forecast

Mean Square Error (MSE)

Penalizes larger errors

Tracking Signal
Measures if your model is

actual forecast

MAD
n

CFE actual forecast

MSE

actual
forecast

TS

CFE
MAD

108