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1
Forecasting
1.0 Introduction
Forecasting is a basic tool to help managerial decision making. Managerial decis
ions are
seldom made in the absence of some form of forecasting. Every day, managers have
to take
decisions in the face of uncertainty, without knowing what would happen in
the future.
Managers strive to reduce this uncertainty and make better estimates of what i
s likely to
happen in the future. This is what forecasting aims to accomplish.
1.1 Forecasting:
The success of a business greatly depends upon the efficient forecasting and pre
paring for
future events.
1.2 Definition:
It is defined as the estimation of future activities i.e., the estimation of type,
quality and
quantity of future work.
A systematic attempt to probe the future by inference from known facts. The
purpose is to
provide management with information on which it can base planning decisions.
It refers to the statistical analysis of the past and current movements in the given
time series
so as to obtain clues about the future pattern of these movements.
things to
come.
It tries to evaluate the magnitude and significance of forces that will affect future
operating
conditions in an enterprise.
2.0 Sales Forecasting:
Sales forecast is the task of projecting the future sales of the firm. It indicates h
ow much
of a product is likely to be sold during a specified period in a specified market, at specifie
d prices.
Sales forecast is an estimate based on some past information, the prevailing situat
ion and
prospects of future. It is based on an effective system and is valid only for some specifi
c period.
Due to dynamic nature of market phenomenon sales forecasting has become a continuous
process
and requires regular monitoring of situation.
Sales forecasting has been defined by the American Marketing Association
as Sales
forecast is an estimate of sales in dollars or physical units for a specified future period
under a
2
proposed marketing plan or programme and under an assured set of economic and ot
her forces
outside the unit for which the forecast is made.
In the words of Philip Kotler, the company sales forecast is the expecte
d level of
company sales based on chosen marketing plan and assumed marketing environment.
3.0 Types of Forecasting:
There are two types of forecasting.
1. Short-term forecasting
2. Long-term forecasting
Short-term Forecasting:
The forecasting which covers a period of three months, six months or o
ne year is
generally called as short-term forecasting. The period for which forecasting is done
depends upon
the nature of business. Forecasting is done only for a short period when the demand f
luctuates
from one month to another.
Long-term Forecasting:
This type of forecasting usually covers a period of 5-10 years, and in some cases
even 20
years. However, beyond 10 years, the future is assumed to be uncertain. But in many
industries
like ship building, petroleum refinery, generation of electricity etc. along term fore
casting is
needed as the total initial investment cost of equipment is quite high.
4.0 Objectives of Forecasting:
4.1 Objectives of Short-term Forecasting:
(i) Formulation of suitable production policy: Forecast helps to formulate a suitable pr
oduction
policy so that problems of under production or over production may not arise.
(ii) Regulate supply of Raw Material: It is possible to evaluate the requirements of raw
materials
in future so as to ensure regular and continuous supply of materials on the basis of esti
mated
sales and also to control the sizes of inventory at economic level.
(iii) Best utilization of Machines: The operations can be so planned that the machines are
utilized
to its maximum capacity.
(iv) Regular availability of labour: One of the objectives of sales forecasting is also to arr
ange for
trained personnel and non-technical workers so that they might not experience any
shortage of
personnel and at the same time they dont remain idle when the production is curtailed
.
(v) Price policy formulation: Sales forecast enable the management to formula
te some
appropriate pricing mechanism, so that the level of prices does not fluctuate too muc
h in the
periods of depression or inflation.
3
(vi) Forecasting of short-term financial requirements: On the basis of sales forecast it is
possible
to determine the financial requirements of the enterprise for the production of desired
output,
and arrange it accordingly much in advance.
(vii) Setting the Sales target:
nt market
segments and then the sales targets for various territories are fixed accordingly. This
later on
becomes the basis to evaluate and control sales performance.
4.2 Objectives Long-term of forecasting:
(i) Deciding Plant Capacity: The long run objectives of sales forecasting is to plan plant
capacity
in accordance with the demand. The size of the plant can be determined such that th
e output
confirms with sales requirements. Too small or too large size of the plant may not
be in the
economic interest of the enterprise. By studying the demand pattern for the product
and the
forecast for future; the enterprise can plan for a plant with output of desired capacity.
(ii) Manpower Planning: Reliable and accurate forecast can help the management to
assess the
appropriate manpower requirements. This can ensure best manpower facility to carry
out the
production in the long run without any hindrances.
(iii) Estimating Cash inflows: Cash inflows from sales can well be estimated throu
gh sales
forecasting to determining the cash and credit sale ratio.
for credit
policy of the firm.
(iv) Determining Dividend Policy:
ross profit
ratio on sale and dividend policy can be determined.
(v) Planning of Long-run production:
pon sales
forecasting.
and other
conditions.
(vi) Long-run Financial Requirements:
long-run
financial requirements of the organization for working capital as well as
for capital
expenditure.
(vii) Budgetary Control over Expenditure:
are to be
forecast and for this purpose budget is to be prepared for the income and expenditur
e of the
organization. The budgeting figures for income and expenditure may then be compar
ed with
the actual performance and any variation is removed.
ntrol over,
expenditure becomes possible.
Thus budgetary co
4
5.0 Importance of Forecasting:
According to Henry Fayol,
nt tool of
Business
importa
management. The success of the business depends upon the skill of the man
agement in
forecasting.
Importance in planning: Provides a basis to plan the future requirements for men,
machines,
time, money, etc.
decisions
relating to the various aspects of the business.
the areas
where control is lacking.
personnel.
It helps in anticipating the areas where there is a great need to be attentive to control
the costs.
Formulating future policies: From the analysis of the past and estimation future it
assists in
formulating business policies.
concern, it
may facilitate in creating team spirit, unity and co-ordination in the efforts of
subordinated.
- the act of forecasting is a great benefit to all who take part in the process.
- it is the best means of ensuring adaptability to changing circumstances.
Helps in preparing budgets: Business activities are governed and regulated by budget
such as
sales budget, production budget, cash budget, material budget, man power budget, etc.
Sales forecasts:
-
Accurate forcast of probable demand for companys products helps the company in
production planning & control, fixing prices etc.
steps are
generally followed by most of the industries in ordinary circumstances.
The following are the main steps in demand forecasting:
5
1. Determining the objective of forecast:
Certain points in this respect should be very clear before taking up the forec
asting test
such as period of forecasting (short term, long term) areas of sales forecasting, unit
of sales
forecasting (i.e., in quantities or values); the time, labour and money to be e
mployed on
forecasting.
All these points are determined taking into account the objectives
of sales
forecasting.
2. Sub-divide the task of forecasting:
Sub-divide the forecasting the programme into homogeneous groups acc
ording to
product, area, activities or customers. The total sales forecast of the company will be
the sum
total of all the groups.
3. Determine the relative importance of factors:
So that due weightage may be given to different factors affecting forecast.
4. Select the method to be used for forecasting:
The method is to be selected by the appropriate authority taking into accou
nt all the
relevant situations, purpose of forecasting and the degree of accuracy required.
5. Collect and analyze the data:
By applying the appropriate method, the necessary data for forecast are
collected,
tabulated and cross-checked. The data are interpreted by using statistical techniques.
It may
be called as the preliminary sales forecast which forms the basis for final sales forecast.
6. Study the correlation b/w sales forecast & sales promoting plans:
Making the forecast reliable, sales promotion plans such as advertising policy, pe
rsonnel
selling and other policies should be reviewed with reference to the preliminary sales for
ecast.
7. Study of competitors activities:
Volume of sales of a company is largely affected by the activities of compet
itors and,
therefore, it is essential to study the competitors activities, policies, progra
mmes and
strategies and also their effects on the market and adjust the forecasting accordingly.
8. Prepare final sales forecasts:
The preliminary sales forecast results and converted into final sales forecast re
lating to
the products and territories involved. The aggregate of sales forecasts of different prod
ucts, or
territories or customers or activities may from the sales forecasts of the enterprise.
9. Evaluation and adjustments:
The actual sales performance in the coming period should be reviewed and
evaluated
from time to time. The evaluation may be made monthly, quarterly, half yearly or year
ly. The
forecast figures may be revised in the light of difficulties experienced during the
course of
actual operations. On the expiry of forecasts period the actual sales and forecast sale
s should
be compared and causes of variation found out which may help to improve the n
ext period
sales forecasts.
6
7.0 Advantages of Sales Forecasting:
Helps in effective planning: Forecasting helps in effective planning by providing a s
cientific
and reliable basis for anticipating future operations such as sales, production, inventory,
supply
of capital etc.
alization
of various procedures for the achievement of organizational objectives.
resources
and reduction in waste and inefficiencies.
participate in
the process of forecasting. This creates a sense of belongingness among them.
Provides a basis for effective control: Forecasting provides a basis for effective
control by
providing information where higher degree of control is to be exercised. The manag
ers can
predict the weaknesses of their departments through forecasting.
Importance at the national level: Economic forecasts of various factors at the nati
onal level
help in planning for economic development.
8.0 Limitations of Forecasting:
Forecasts are only estimates of future condition. They can never be actual positio
n. They
can only give a best estimate of future course of events, but they can never be hundred
percent
accurate and reliable the following are some of the limitations of sales forecast.
ome guess
work and possibility of error.
Forecasting is usually based on past data but future may not be a copy of the past.
Changes in consumers need, taste fashion, style, etc. may cause inaccuracy in forecast.
Forecasts are not full proof and condition proof and if there are chances in
the general
economy of the country; they may not materialize.
Development of new products, materials methods may introduce error in the sales fore
cast of a
particular product.
Lack of sales history in case of a new product makes the forecast difficult.
Short term forecasting is more accurate than long term forecasting and hence its usef
ulness is
limited to short-term purposes.
7
9.0 Forecasting Techniques:
Forecasts can be obtained using a variety of techniques / models. The forecasting
models
fall into one of the two categories: qualitative models and quantitative models.
The qualitative models use personal judgment and involve qualities like intu
ition and
experience as the bases of forecasts, and are subjective by their very nature. On the oth
er hand,
quantitative models are objective in nature and they employ numerical information as the
basis of
making forecasts. The quantitative models include time series models and casual models.
9.1 Qualitative Models of forecasting:
Some of the Qualitative methods of forecasting are discussed below.
Delphi Method: Perhaps the most important method of forecasting involving judgments i
s called
the Delphi method. The method is an iterative group process and it employees
a group of
experts, not an oracle, to obtain forecasts. The experts are usually not known to each o
ther and
their interaction takes place through a coordinator. The other participants in the Delhi pro
cess are
the staff and respondents. The staff personnel assist the experts by preparing,
distributing,
collecting and summarizing and tabulating the data, while the respondents are the subjects
whose
judgments are valued and are being sought. In this method, the coordinator obtains the f
orecasts
from the experts and then assimilates each of their forecasts. Based on this additional infor
mation,
each of the experts may revise his / her original forecast. After repeating
this process
appropriately, the experts tend to reach a consensus forecast.
Sales Force Composite: In this method of demand forecasting, each of the members com
prising
sales force of a company are asked to estimate the likely sales in their respective a
reas.
The
s are then
reviewed to ensure that they are realistic. After this, the estimates are combined at the
district,
regional and national level to obtain the overall forecast.
Consumer Panel Survey:
nels for
making forecasts. Here, a consumer needs panel to be maintained and consumers on such
a panel
are questioned about their purchase plans. The goal here is to forecast demand for prod
ucts and
services on the basis of the subjective judgments of the subjects involved, abo
ut possible
purchases. This method works on a strong assumption that the consumers on the panel
are truly
representative of the ultimate purchasers.
9.2 Quantitative Models of Forecasting:
9.2.1 Time Series Models of Forecasting:
These are the demand characteristics over time. In this, time series analysis is
done by
analysts who plot demand data on a time scale, study the plots and look for consistent s
hapes or
patterns.
These time series data are analyzed for forecasting future activity levels. Ti
me series
8
data refer to set of values of some variables measured at the equally spaced time intervals
such as
monthly inventory levels, quarterly sales or monthly production levels.
emand has
The d
following patterns:
1.
Constant Pattern: In this pattern demand remains constant throughout the period.
2. Trend Pattern: It refers to the long-term growth or decline in the average level of
demand.
3. Seasonal Pattern: It refers to the annually repetitive demand fluctuation that may b
e caused
by weather, tradition or other factors.
4.
Cycle Pattern: Business cycle refers to the large deviation to actual demand value
s due to
complex environmental influences.
s except
that seasonality occurs at regular intervals and is of constant durations whereas it
varies in
both time and duration of occurrence.
5.
seasonal
factors are ignored and focus is given on trend component with a minor emphasis on
business
cycle.
comes less
important and the seasonal and random factors are given more importance for short
duration
(one week to 3 months) main concern is random fluctuations.
a business
Generally when
concern is in operation, combination of trend and seasonal variations are given imp
ortance.
Such a pattern is shown in below figure. Some data plotted in the figure, do not fa
ll on the
combined pattern of trend with seasonal variations, but they are all cluster around it.
Some
SA 1
points fall very close to the pattern, while some lie relatively far away from the patter
n.
9
9.3 Average Methods
9.3.1 Simple Average Method:
Forecast is obtained by considering the average of all the past data available.
D D D D
n
9.3.2 Moving Average Method:
A moving average forecast is obtained by summing the data point over a desired
number
of past periods in years, months, weeks. This number usually encompasses 3 years, 5 ye
ars or 8
years. Extending the moving average to include more periods increases the smoothenin
g effect
but decreases the sensitivity of forecasts to more recent data.
A simple moving average is a method of a specified number of the most r
ecent data
values in a series.
SMA M t 1 D t n1 D t n2 .... D t 2 D t 1 D t
n
Mt = Simple moving average at the end of period (t); it is to be used as a forecast for per
iod (t+1).
Dt = actual demand in periodt.
The moving average gives a very good picture of the general long term movement in
the data,
if the data contains uniform cycles and if the trend in the data, if any,
is linear or
approximately so.
years are
added the entire calculations are not changed.
This method is not affected by the personal prejudice and bias of the computer.
If the period of moving average method has the value equal to the period of the
cycle, the
cyclical fluctuations are completely eliminated.
The moving average method has the merit of flexibility to adaptation of new
conditions and is
often a more effective measure of scalar trend than the curves fitted with great labo
ur. The
fitting of mathematical curves frequently involves the breaking up of a period into 2
or more
(three) subdivisions and the fitting of a separate curve to each of them.
The
use of this
method removes this difficulty.
W
10
Disadvantages:
It does not result in a mathematical equation which may be used for forecasting.
There is a tendency to cut corners which results in the loss of data at the ends.
In case of the sharp turns in the original graph, the moving average trends to
reduce the
curvature.
The trend values cannot be computed for all items of the series.
period of
moving average, the greater the number of years for which trend value cannot be com
puted.
The selection of the period of moving average requires a great deal of care for, i
f a wrong
period is selected a correct picture of trend cannot be obtained.
This method can represent trend accurately only if the cyclic and irregular fluctu
ations are
uniform both in duration and amplitude.
9.3.3 Weighted moving average method:
Equal weights were assigned to all periods in the computation of the simpl
e moving
average.
The weighted moving average assigns more weight to some demand valu
es than to
others.
n
i
i 1
n
i
i 1
D1 D2 ....
(n)
Dn
M1 2n 1
11
Subsequent double moving average = M2(t )
M 2(t
1)
M 1(t
n)
M 1(t )
n
t F Z
M2(t )
1)
Example 1:
Demands of an item in a firm has been 180, 160, 170, 190 items in each of the
last four
quarters. Forecast the demand for this item for the current quarter based on SA method.
t
Forecast
for current quarter based on SA would be
300
February
350
March
400
April
400
May
450
June
500
6 months MA
(i)
6 months MA
4 months and MA
(iii)
3 months MA
400
500450
450400
400400
350 440
300
4 months M500
437.5
400
A=
4
(ii)
(iii)
(ii)
Example 4:
A XYZ refrigerator supplier has experienced the following demand for refrigerator during p
ast five
months.Find out demand forecast for the month of July using 5 period MA and 3 period M
A using
SMA method.
12
(i)
Month
Demand
February
20
March
30
April
40
May
60
June
45
July
(ii)
45 60 40 30 29 units
20
5
45 60
48.33 49 units
40
.... Dt2 3Dt1 Dt
July
Dt(n1) Dt(n2)
Forecast Ft
95
100
87
94.00
123
103.33
94.00
90
100.00
103.33
96
103.00
75
87.00
78
83.00
106
86.33
10
104
96.00
11
89
99.67
12
83
92.00
99.67
92.00
Example 6:
The Manager of a restaurant wants to make a decision on inventory and overall c
ost. He
wants to forecast demand for some of the items based on weighted MA method.
r the past
three months he experienced a demand for Pizzas as follows:
Month
Demand
October
400
November
480
Fo
December
550
Find the demand for the month of January by assuming suitable weights to demand data.
WMA CiDi
13
n
i 1
MA3
120
118
MA M(t)
Forecast Ft
130
110
118
140
129
118
110
119
129
130
126
119
126
(ii)
Assign weights of 0.55, 0.33 and 0.12 to the months in sequence stacking with
most recent
month.
Month
Demand
MA
WMA
F(t)
12
8.77
9.33
8.7
8.77
15
10.33
12.06
8.7
11
11.67
12.08
12.06
10
12
10.93
12.08
12
11
11.22
10.93
11.22
14
Example 10:
M1(t )
60
70
85
71.66
60
71.66
88
77.66
73.66
85.66
68
72.00
73.77
68.44
71.66
106
87.33
79.00
104.00
75
83.00
80.77
87.44
86
89.00
86.44
94.11
95.00
89.00
94.11
110.66
98.22
107.00
111.00
105.55
135.55
M 1(3) 7
10
71.66
11
124
71.66
122
12
87
Assume n = 3
D1 D2 D3 60 70 85
3
3
M1(4) M1(t 1)
73.66
Dt Dtn
n
60 60
3
DMA
M1(2)
M 1(3)
M1(4)
M 1(5)
M1(1)
M 2(2n 1) M 2(5)
3
M2(t ) M 2(t 1)
M2(t )
M 1(t
n)
M 1(t )
n
M1(3)
M1(6)
M2(6) M2(5)
3
F(t)
73.66
73.77
F t 1 t 1 t 1 1 t 2
.....
15
1
2
1 2 .....
1
2
1 1
Making forecasts while the calculation of the forecast seems a difficult proposition in term
s of the
t
F 1 t 1 1 t 2 ...........................................
Eq.(2)
1 F
F 1 1 F t
F 1 t 1 F
F 1 F t F .
t actual value of period (t).
16
Ft forecast value for the same period.
Current Forecast = Last period's Forecast + Last period's actual value - Last Period's
forecasted value
proach to
forecasting is easy to use but choosing an appropriate value of the smoothing constan
t t1 is an
t
important matter. This is because the choice of this value can make the difference
between an
1
t 1
t 2forecast.
.................................
Eq.
accurate
forecast
and an
In selecting an appropriate
value of the
1inaccurate
t
(3)
smoothing
constant the objective is to obtain the most accurate forecast. The overall ac
t
curacy of a
forecasting
model is determined
by comparing the actual values with the forecasted v
t
t
alues. The
t
difference between an actual value and a forecasted value is called forecast error.
9.5 Trend Adjusted Exponential Smoothing:
The simple exponential smoothing and moving averages methods fail to res
pond to the
week assuming the subsequent demands as 465, 434, 420, 488 and 462 units.
periods, data also provides the best current forecast for time periods t + 1 + m, for
m = 1, 2, 3,
.. The method of forecasting, when linear trend is assumed, is given below.
Yt observed actual value of time series at time (t), then first obtain the smoothed leve
l St at time
(t) as follows.
S t Y 1 S t 1 B t 1
Bt St St 1 1 Bt 1.
In the above equations,
St : smoothened level at time (t)
: smoothing constant as defined earlier
Bt : Smoothed value of the slope at time (t)
: Smoothing constant, like , , for obtaining smoothed value of the slope, with va
lues ranging
between
0 & 1.
t
Forecasted values for m periods as :
F m S t M B t
17
t
Example 11:
A firm uses simple exponential smoothening with 0.02 to forecast dem
and.
The
forecast for the first week of January was 400 units whereas actual demand turned out to
be 450
nd
emand
during the 2
February
rd
0.02
nd
D t
January 1
st
450
400
50
10
410
nd
460
410
50
10
420
rd
465
420
45
429
th
434
429
05
430
February 1
st
420
430
-10
-2
428
nd
498
428
70
14
442
rd
462
442
20
446
Demand smoothing technique, compute the forecast from the following dat
Using the Exponential
Week
t
t
t
t
a under
th
Correction
Month
st
Demand
27
27
27
27
30
27
0.9
27.9
2.1
29.1
32
27.9
4.1
1.23
29.13
2.87
31.13
=0.7
4 when 31
29.13
1.87 the forecast
0.56
the situations
=0.3 and
=0.7. Compute
for 29.69
the 11
ast
5
28
29.69
-1.69
-0.507
29.18
1.309
period.
-1.183
31.039forec
Which
28.912
27
29.18
-2.18
-0.654
28.53
-1.526
27.57
30
28.53
1.47
0.441
28.97
1.029
29.271
33
28.97
4.03
1.209
30.179
2.821
31.88
33
30.179
2.821
0.846
31.02
1.979
32.664
10
31
31.02
0.02
0.006
31.499
31.014
Example 12:
One of
ut
usually
the
two
irregular
increasing demand for three products. The demand was found to be 420 bikes for June
and 440
Ft1
t
bikes for July. They use a forecasting method which takes average of past year to foreca
st future
demand. Using SA method demand forecast for June is found as 320 bikes. (Use a s
moothing
coefficient 0.7 to weight the recent demand most heavily) and find the demand f
orecast for
average.
18
Actual
Demand Dt
Smoothed
Average Ft
Smoothed
Trend Tt
Next period
projection
Ft1
st
600
650
605
1.00
606.00
nd
605
600
605.4
0.88
606.38
rd
605.4
550
600.65
-0.246
600.40
th
600.65
650
605.36
0.742
606.10
605.36
625
607.99
1.120
609.11
nd
607.99
675
615.70
2.440
618.14
rd
615.70
700
626.33
4.080
630.41
th
626.33
710
638.37
5.670
644.04
January 1
2
February
st
1
2
st
March 1
Month
Dt
D t
F 1
Dt
F 1
Ft
June
420
320
100
70
390
July
440
390
50
35
425
425
Example 13:
Compute adjusted exponential forecast for the 1
m with the
following data.
st
F0
as
January
February
Week
Demand
650
600
550
650
625
675
700
710
st
=605
0.8 0 1.0
Tt1 0
nd
F 0.1 600 0
.9 605 1
= 605.4
19
9.6 Trend Projections:
We now consider the last of time-series forecasting techniques, in the for
m of trend
projections. For this method, a trend line is fitted to the given time series data and then pr
ojections
2 Week
are made into future using this line. The trend line may be linear (straight line0 or curvilinear in
nature. There is a wide variety of curvi-linear trend lines possible to draw, but our
= 0.88
focus in this
chapter is on linear trend only. For obtaining the trend line, the given historical dat
a are first
plotted on the graph, representing time scale on the x-axis then a line is drawn thr
ough these
points in such a way that (i) the sum of deviations above the line is equal to the sum of d
eviations
below the line so that the sum of deviations is equal to zero (ii) sum of squares of these
(vertical)
deviations is the minimum. In essence, the trend line is drawn on the basis of the pri
nciple of
least squares. Such a line, like any other straight line, is represented by the equation.
Yt a bX
Yt : trend value
na b X.
XY
b X
a X
XY nXY ; a Y bX.
Alternatively b
Here,
XY
1988
1989
1990
1991
1992
1993
1994
1995
1996
11
23
29
34
40
45
56
nX
20
Example 14:
A firm believes that its annual profit depends on its expenditures for resea
rch.
The
information for the preceding six years is given below. Estimate the profit when the expen
diture is
6 units.
Year
1989
20
1990
25
1991
34
1992
30
1993
11
40
1994
31
1995
Solution:
X
XY
1989
20
40
1990
25
75
1991
34
170
25
1992
30
120
16
1993
11
40
440
121
1994
31
155
25
Total
X
Y
n
30
180
30
6
5
180
6
30
1000 6 5 30
X Y n X
b
X n X
2
200 6 5
Y
2
2
Year
1000
200
b
Solution:
Year (X)
Solution: 1988
0
1989
l
+
0
w
n
x = X - 1992
xY
-4
-24
16
-3
-24
1990
11
-2
-22
1991
23
-1
-23
1992
29
1993
34
34
1994
40
80
1995
45
135
56
224
16
380
60
1996
6 y y
2
y y1 Total
1
252
aY
X 30
2 5 2
The mode
is y = a
bX=2
+ 2X
The profit
hen expe
diture is
units.
Y = 20 +
2 x 6 = 32 units of rupees.
x
Example15:
0
Alpha company has the following sales pattern during 1988 to 1996. Compute th
e sales
y
28
n x
6.33
21
n
x
252
9
b
xy n x y
2
380 0
60 9 0 0
mean is computed for each group and position at the centre of each sub period.
Year
Sales (Rs. in Lak
Semi Average
1991
When the
400
1992
number of periods
is odd, the middle 420
one is not considered while430
dividing data into
1993
two equal
470
1994
Notthe
considered
parts. A line drawn
through the two semi480
averages then constitutes
trend.
1995
Example16 : Sales
turnover of a firm in520
the last seven years is as follows.
Year
1996
Year
550
1997
1991
610
1990
x 1
Sales x 39
1991
48
Year
1992
1993
1994
1995
1991
65
78
95
Sales (Rs. in Lakhs)
1992
420
39
1993
470
48
1994
480
1992
1995
65
520
1993
1996
78
550 -
1994
1997
95
610
1990
1996
91
112
Semi Total
Semi Average
152
50.67
Not considered
Not considered
}
}
112
99.33
22
x2 x 1
4
Y = 625
Example 17:
96 are
The details of sales turnover of a fertilizer company for the period 1990
Year
1988
1989
1990
45
56
1991
78
1992
46
75
1995 1991
2
y 50.67 (X)
Salessquares,
(Y) in find theX trend values
xY the five years.
x
By adoptingYear
the method of least
for each of
so
khs 45
1988
1
1
45
Al
y 123.66
1989 124 crores 56
2
4
112
Solution:
1990
78
3
9
234
9.7 Least Square Method:
1991
46
4
16
184
In this method, a line y = a + bx is identified which fits the data best, by examining the su
1992
75
5
25
375
m of their
300with the smallest sum
15 of squared55errors is950
and the line
squared Total
deviations,
determined.
A least
square line is determined using data from N periods and known parameters a and b. This
is done
Year
1990
1991
1992
1993
by solving a set of two linear equations.
110
130
150
160
b x
y na Sales
2
y
na
b
x
-----(1)
xy
a
x
--------140
(ii)
Demand Index
100
110
150
b xthe estimate sales for the year 1997.
given in the following table. Compute
2
Year
Index X in 0
Sales Y in 0
X
Solution:
1990
10
1991
11
23
20
x 70
estimate the annual sales for 1993.
99.33 50.67
x 1991;
xy
b x
a x
x 1997
a = 45, b = 5
180
200
xy
11
100
110
13
121
143
196
210
225
240
400
360
1992
14
15
Example 18: The annual sales of an enterprise are as follows:
1993
15
16
1994
1994
18
73
1042
xy
1063
lakhs
y 1990 = 45 + 5(3) = Rs.60 lakhs; y 1991 = 45 + 5(4) = Rs.65 lak
hs
y 1992 = 45 + 5(5) = Rs.70 lakhs; y 1993 = 45 + 5(6) = Rs.75 lak
b 0.66
hs
Example 19:
w sale of
0.66demand
5.36
automobile
and
Index
for cars. The sales for the last five years are
year 1995. Supposing the demand index nse to 210. Use least square method.
24
na b
73 5a 70b
xy
b x
a x
(1)
a 5.3
Find the relation b/w the demand index and sale of automobile. Further make a forecast for the
6
Trend equation will be y = 5.36 + 0.66 x
Solution:
The y and x in the equation are 1/10 f actual y and x
y
x
10
10
a statistical
relationship between it and the independent variable(s).
regression
analysis. Here, we consider simple regression analysis and then have some idea about
multiple
regression analysis.
9.8.1 Simple Regression Analysis:
The simple regression analysis is employed where there is one inde
pendent or
explanatory variable.
ding to a
given value of the independent variable, by placing the relationship between the two vari
ables in
the form of a regression line The regression line is obtained on the basis of the
given data,
involving paired observations of the X and Y variables. The given paired data are plot
ted on a
graph by means of points.
ast squares,
discussed earlier in this chapter.
equation,
which is obviously called the regression equation.
YC a bX.
25
XY
nX
and a Y bX
X
Y nX
2
2
b: Regression coefficient
9.8.2 Correlation Analysis:
Correlation analysis is an additional technique which may be employed to sales f
orecast.
Since all forecast methods are subject to error, a firm is wise to employ more than one me
thod. A
forecast based on time series analysis trends to be substantiated if a similar forecast is obt
ained by
correlation analysis.
icate the
need for further analysis. It is recognized fact that certain lines of business or economic
activity
generate business in other fields. For example, sales of building material supplies fluctu
ate with
change in the number and value of building permits issued. Furniture sales follow the p
attern of
new home purchases. Population, employment, income, climate, and distribution
of age,
education, sex and nationality are among other factors which may be used to forecast sales
.
Correlation Defined:
A statistical tool used for expressing the relationship between two or more var
iables in
one single figure is known as correlation. Correlation is simply as averaging process by
which an
average relationships between two or more variables is established.
Measurement of Correlation:
Correlation can be known by
(i)
(ii)
concurrent
or concomitant deviation method, (c) Ranking method, (d) Regression equation or least
squares
method, (e) Difference method.
Pearsonian method:
To render comparison possible a coefficient of correlation is calculated.
Karl
Pearson,
the great biologist, has devised a coefficient of correlation which varies with is 1.1 re
presents
perfect correlation. Positive correlation is given by (+) sign and negative correlation by
xy
(-) sign.
x y
N
Zero indicates
of any
or independence of variables. Limited degrees
correlation
xabsence
y
.N y
of are
given
by intermediate
values lying within
+1.
N
xy or r xy y
r
N x x2 N y
3
4
Sales (Rs.1
2
Consumption of goods
9 8
10
12
11
2
2
2x x x
X
Y
x
300 5a 15b
N x y
1
9
-4
16
16
2
y
15
xy
-3
12
-3
-4
16
12
10
-2
-2
12
-1
11
-1
13
26 1
14
16
12
8
Y = standard
deviation 16
of y series
13
14
y y y
N = Number of observations
xy
9
3
The
sum of the 15
product x and 4y columns, 16
x and y denotes
deviation9of x and y. 12
y
y
x0 x
108
60
60
xy
22
2
However, we may compute r, if sufficient data are available by the following formula
N xy xx
yy
2
2
57
0.95
y
x 20:
Example
Given below are the sales pattern of ABC company, manufacturing consumer goods
Required equation : x X l y Y
trends of
pute the
Demand (Y)
XY
105
105
108
216
112
336
116
464
16
(ii)
130
x 21
691
780
xy
2501
27
xy
Period (X)
25
36
2
91
57
60 60
estimates of sales where consumption in the market will rise to 20 lakhs.
2
X 5
Solution:
Y 12
l 0.95
x 5 0.9
5
x
y
2x2
N
2.58
(y 12)
2.58
X = 0.95 y 6.4
Y = 20, then x = 0.95 x 20 6.4 = 12.6
Example 21: The demand for six consecutive period for a product is as follows:
105, 108, 112, 116, 120, 130
(i)
(iii)
Calculate the coefficient of determination and standard deviation for the line of the
best fit.
Solution:
N 6 21
N 6 691
Y
xy N. X.
b
4.714
Y
(i)
N=6
3.5
115.167
N X
(iii)
a Y bX 98.668
x X X
Y
Y = 98.668 + 4.714 X
th
1
105
-2.5
6.25
XY
103.37
25.42
2 Y 98.668
108
-1.5 11 150.522
2.25
4.714
11
3
112
-0.5
0.25
-7.167
51.365
10.75
-3.167
10.03
1.58
116
0.5
0.25
0.833
0.694
0.42
120
1.5
2.25
4.833
23.36
7.25
130
2.5
6.25
14.833
220.02
37.08
x0 x
Correlation Coefficient r
Standardized Cost
28
17.5
xy
x y
3.05
91
xy
408.84
3
3.25
2.98
0.97
5
2.93
6
3.91
7
2.58
2.44
2.37
2
Year (X)
XY
3.25
3.25
3.05
6.1
2.98
8.94
2.93
11.72
16
3.91
19.55
25
2.58
15.48
36
2.44
17.08
49
2.37
18.96
64
(ii)
y Y Y
-10.167
Year
36
23.51
period:
XY
101.08
204
82.5
82.5
82.5
17.5 408.84
17.5
6
4.5
x.
N2
of4.5
Standard deviation
y series
y .
84.6
408.84
6
y
N
Required equation X X
r.
x
Y Y
y
X 3.5 0.9
7
1.7 Y 115.17
1
8.2
5
0.2 Y = 19.53 + X
Example 22:
The cost per standardized long distance phone call has been decreasing over time
using the
(ii)
1.71
8.25
Using above equation, predict the standardized cost for year 10.
(i)
Use linear regression to compute an expression for cost as a linear function of time.
Solution:
29
(i)
X 36
X
8
N
X
X
N
36
8
a Y b X 3.4452
Y = 3.4452 0.1125 X
(iii)
Forecast error, Ft = Dt - Ft
MAD n
1
Dt
tF
30
MSE
t 1
Percentage
error
Absolute
Percentage
Error
Dt
Forecast,
Ft
Deviation
(Dt - Ft)
Absolute
Deviation
Dt Ft
Squared
error
2
(Dt Ft)
150
165
-15
15
225
-10.000
10.000
160
165
-5
25
-3.125
3.125
165
165
175
165
10
10
100
5.71
5.71
180
165
15
15
225
8.33
8.33
Time
period
Demand,
Dt Ft
X 100 Dt Ft
X 100
Dt
Dt
MFE
t1
t
t
Mean of the forecast deviations of theforecast
demands
from the actual demands.
Year
Sales
1
96
2
116
3
119
n
Dt
1
M
X 100
Ft
An
t1 t
4
P
127
E
5
146
6
145
7
153
8
158
9
160
10
165
11
177
12
190
Wins
6
6
8
For the
data given in4table, calculate
the forecast
errors.
Attendance
Problem:
36,300
40100
41200
53000
6
44000
7
45600
5
39000
7
47500
MAD = 45/5 = 9
MSE = 575/5 = 115
MAPE = 27.165/5 = 5.433%
MFE = 5/5 = 1
31
Alpha company has the following sales pattern during 1988 to 1996
.Compute the
sales forecast for 1997:
13
205
(a) Show that in exponential smoothing method, weightage to the past dat
a declines
exponentially.
(b) Compare exponential smoothing forecast for different values of smooth
ing
constant.
2.
A computer software firm has experienced the following demand for its P
ersonal
Finance software package:
low
(a) List out various qualitative methods of forecasting. Explain any one.
(b) The State university athletic department wants to develop its budget for
the
Coming year using a forecast for football attendance. Foot ball attendan
ce
accounts for the largest portion of its revenues and athletic director beli
eves
attendance is directly related to the number of wins by the team. Busine
ss
Month 1
Sales 96
3
106
92
4
5
6
114 108 98
7
99
8
115
9
106
10
91
11
102
12
99
(a) Develop a linear regression model for these data and determine the
strength of the linear relationship using correlation
b) Estimate the profit when the expenditure is 6 units
6.
(a) Classify forecasting based on its use and explain them briefly.
(b) The following table represents the sales data for liters of milk sold by a
milk booth
th
Use single exponential smoothing and forecast demand for 10 month with
=0.2 and an initial forecast of 100.0
manager has accumulated total annual attendance figures for the past 8 years.
33