The Aim of Forecasting

The aim of forecasting is to reduce the risk or

uncertainty that the firm faces in its short-term
operational decision making and in planning for its
long term growth.
Forecasting the demand and sales of the firms
product usually begins with macroeconomic forecast
of general level of economic activity for the economy
as a whole or GNP.
The firm uses the macro-forecasts of general
economic activity as inputs for their micro-forecasts of
the industrys and firms demand and sales.
The firms demand and sales are usually forecasted on
the basis of its historical market share and its planned
marketing strategy (i.e., forecasting by product line
and region).
The firm uses long-term forecasts for the economy
and the industry to forecast expenditure on plant and
equipment to meet its long-term growth plan and
strategy.

What is meant by Forecasting and

Why?

Forecasting is the process of

estimating a variable, such as the
sale of the firm at some future date.
Forecasting is important to business
firm, government, and non-profit
organization as a method of reducing
the risk and uncertainty inherent in
most managerial decisions.

Forecasting Techniques
A wide variety of forecasting methods are
available to management. These range from the
most nave methods that require little effort to
highly complex approaches that are very costly
in terms of time and effort such as econometric
systems of simultaneous equations.
Mainly these techniques can break down into two
parts:

qualitative approaches
and
quantitative approaches.

Qualitative mtd
Expert opinion mtd
Consumers survey mtd1) complete enumeration method
2)sample survey method
3) end use method

Expert opinion method

Advice is obtained from experienced experts
who have long standing experience in the
field of enquiry-panel consensus .
Delphi method-the panel consensus is
individually presented a series of questions
pertaining to the forecasting problem.
Such responses are analyzed by
independent party.
Use of simple/weighted average is used

Consumer survey method

The most direct method

Valid for short term projections
Consumers are approached directly
To find buyers intentions & views about
the particular productinterview/questionnaire.
Questionnaire has to be simple, complete,
Covering all aspects & interesting

Consumer survey
Complete enumeration
Covers all consumers like in data
collection
( past,present,& all possible consumers)
Sample survey
Covers only few representative buyers
Very useful in case of new brands &
products

Consumer survey
End use method
If the product has several end uses, it
has specific demand for each use, its
met sag
Consumers in each met segmt convey
their potential demand likely in future.
Aggregate demand from all segments
taken
for forecasts

Quantitative methods

Time series
Exponential smoothing
Regression analysis
Moving averages
Index numbers
Input-output analysis
Econometric models

Time Series Analysis

Set of evenly spaced numerical data
Obtained by observing response
variable at regular time periods
Forecast based only on past values
Assumes that factors influencing past,
present, & future will continue
Example
Year: 2004
2005
2006
2007
2008
Sales:
78.7
63.5
89.7
93.2 92.1

Time Series Components

Tren
d

Cyclica
l

Season
al

Rando
m

 Time series analysis-is based on

obtaining the historical data regarding
the demand for the product.
Moving averages-is most useful when
the market is assumed to remain
steady overtime.
Exponential smoothing- more weigtage
is given to recent observations as they
have more impact in future

Quantitative method
Index numbers- it offers a device to
measure changes in a group of related
variables over time period, usually taking
base year 100.
Regression analysis-used to measure the
relationship between two variables where
correlation exists. This method is based on
statistical data.eg-annual repairs
expenses of ACs can be predicted if we
know age of ACs

Quantitative method
Econometric models- used to form an
equation which seems best to express the
most probable interrelation between a set
of economic variables.eg- all factors
influencing demand need to be
determined.
Input-output analysis- based on a set of
tables explaining the various components
of economy, helpful to understand interindustry

Forecasting methods
Lifecycle stage
method
Development & introduction
Delphi,survey
Rapid growth
Time
series,regr
Steady growth
Econometric
model

Criteria of good forecast

Accuracy
Reliability
Economical
Data avaialibility
Flexibility
Durability

Trend Component

Demand

Persistent, overall upward or

downward pattern
Due to population, technology
etc.
Several years duration

Year 1

Year 2

Year 3 Time

Cyclical Component

Demand

Repeating up & down

movements
Due to interactions of factors
influencing economy
Usually 2-10 years duration

Year 1

Year 2

Year 3

Time

Seasonal Component

Demand

Regular pattern of up &

down fluctuations
Due to weather, customs
etc.
Occurs within 1 year

Year 1

Year 2

Year 3 Time

Random Component
Erratic, unsystematic, residual
fluctuations
Due to random variation or
unforeseen events
Union strike
Tornado
Short duration &
non-repeating

Example: Central Call Center

Use the weighted moving average method
with an AP = 3 days and weights of .1 (for
oldest datum), .3, and .6 to develop a
forecast of the call volume in Day 13.
F13 = .1(168) + .3(198) + .6(159) =
171.6 calls
Note: The WMA forecast is lower than the
MA forecast because Day 13s relatively
low call volume carries almost twice as
much weight in the WMA (.60) as it does
in the MA (.33).

Exponential Smoothing
Method
Form of weighted moving average
Weights decline exponentially
Most recent data weighted most
Requires smoothing constant ()
Ranges from 0 to 1
Subjectively chosen
Involves little record keeping of past
data

Exponential Smoothing
Forecasts

Ft = Ft-1 + (At-1 - Ft-1)

Premise--The most recent observations might have
the highest predictive value.
Therefore, we should give more weight to the more
recent time periods when forecasting

Week
1
2
3
4
5
6
7
8
9
10

Demand
820
775
680
655
750
802
798
689
775

Determine
exponential
smoothing
forecasts for
periods 2-10
using =.10 and
=.60.
Let F1=D1

Week Demand
1
820
2
775
3
680
4
655
5
750
6
802
7
798
8
689
9
775
10

0.1
820.00
820.00
815.50
801.95
787.26
783.53
785.38
786.64
776.88
776.69

0.6
820.00
820.00
793.00
725.20
683.08
723.23
770.49
787.00
728.20
756.28

F3 = 820 + .1(775-820) = 8
F3 = 820 + .6(775-820) =79

Single Equation Model of the

Demand For Cereal (Good X)
QX = a0 + a1PX + a2Y + a3N +
a4PS + a5PC + a6A + e
QX = Quantity of X

PS = Price of Muffins

PX = Price of Good X

PC = Price of Milk

Y = Consumer Income

A = Advertising

N = Size of Population

e = Random Error