Forecasting

© 2014
© 2014
Pearson
Pearson
Education,
Education,
Inc.Inc. 4-1
 Learning Objectives
When you complete this chapter you
should be able to :
1. Understand the three time horizons and
which models apply for each use
2. Explain when to use each of the four
qualitative models
3. Apply the naive, moving average,
exponential smoothing, and trend
methods

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 Learning Objectives
When you complete this chapter you
should be able to :
4. Compute three measures of forecast
accuracy
5. Develop seasonal indices

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 Forecasting Provides a
Competitive Advantage for Disney

► Global portfolio includes parks in Hong Kong,

Paris, Tokyo, Orlando, and Anaheim
► Revenues are derived from people – how
many visitors and how they spend their
money
► Daily management report contains only the
forecast and actual attendance at each park

© 2014
© 2014
Pearson
Pearson
Education,
Education,
Inc.Inc. 4-4
 Forecasting Provides a
Competitive Advantage for Disney

► Disney generates daily, weekly, monthly,

annual, and 5-year forecasts
► Forecast used by labor management,
maintenance, operations, finance, and park
scheduling
► Forecast used to adjust opening times, rides,
shows, staffing levels, and guests admitted

© 2014
© 2014
Pearson
Pearson
Education,
Education,
Inc.Inc. 4-5
 Forecasting Provides a
Competitive Advantage for Disney

► 20% of customers come from outside the

USA
► Economic model includes gross domestic
product, cross-exchange rates, arrivals into
the USA
► A staff of 35 analysts and 70 field people
survey 1 million park guests, employees, and
travel professionals each year

© 2014
© 2014
Pearson
Pearson
Education,
Education,
Inc.Inc. 4-6
 Forecasting Provides a
Competitive Advantage for Disney

► Inputs to the forecasting model include airline

specials, Federal Reserve policies, Wall
Street trends, vacation/holiday schedules for
3,000 school districts around the world
► Average forecast error for the 5-year forecast
is 5%
► Average forecast error for annual forecasts is
between 0% and 3%

© 2014
© 2014
Pearson
Pearson
Education,
Education,
Inc.Inc. 4-7
 What is Forecasting?
► Process of predicting a
future event
► Underlying basis
of all business
??
decisions
► Production
► Inventory
► Personnel
► Facilities
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 Forecasting Time Horizons
1. Short-range forecast
► Up to 1 year, generally less than 3 months
► Purchasing, job scheduling, workforce levels,
job assignments, production levels
2. Medium-range forecast
► 3 months to 3 years
► Sales and production planning, budgeting
3. Long-range forecast
► 3+ years
► New product planning, facility location,
research and development
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 Distinguishing Differences
1. Medium/long range forecasts deal with more
comprehensive issues and support
management decisions regarding planning
and products, plants and processes
2. Short-term forecasting usually employs
different methodologies than longer-term
forecasting
3. Short-term forecasts tend to be more
accurate than longer-term forecasts

© 2014 Pearson Education, Inc. 4 - 10

 Influence of Product Life
Cycle
Introduction – Growth – Maturity – Decline
► Introduction and growth require longer
forecasts than maturity and decline
► As product passes through life cycle,
forecasts are useful in projecting
► Staffing levels
► Inventory levels
► Factory capacity

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 Product Life Cycle
Introduction Growth Maturity Decline

Best period to Practical to change Poor time to Cost control

increase market price or quality change image, critical
share image price, or quality
Company Strategy/Issues

R&D engineering is Strengthen niche Competitive costs

critical become critical
Defend market
position Drive-through
Internet search engines restaurants
DVDs
Xbox 360
iPods
Boeing 787

Sales
3D printers

3-D game Analog

Electric vehicles TVs
players

Figure 2.5
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 Product Life Cycle
Introduction Growth Maturity Decline
Product design Forecasting critical Standardization Little product
and development differentiation
Product and Fewer product
critical
process reliability changes, more Cost
Frequent product minor changes minimization
Competitive
and process
OM Strategy/Issues

product Optimum capacity Overcapacity in

design changes
improvements and Increasing stability the industry
Short production options Prune line to
of process
runs Increase capacity eliminate items
Long production
High production not returning
Shift toward runs
costs product focus good margin
Product
Limited models Reduce
Enhance improvement and
capacity
Attention to quality distribution cost cutting

Figure 2.5
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 Types of Forecasts
1. Economic forecasts
► Address business cycle – inflation rate, money
supply, housing starts, etc.
2. Technological forecasts
► Predict rate of technological progress
► Impacts development of new products
3. Demand forecasts
► Predict sales of existing products and services

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 Strategic Importance of
Forecasting
► Supply-Chain Management – Good
supplier relations, advantages in product
innovation, cost and speed to market
► Human Resources – Hiring, training,
laying off workers
► Capacity – Capacity shortages can result
in undependable delivery, loss of
customers, loss of market share

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 Seven Steps in Forecasting
1. Determine the use of the forecast
2. Select the items to be forecasted
3. Determine the time horizon of the
forecast
4. Select the forecasting model(s)
5. Gather the data needed to make the
forecast
6. Make the forecast
7. Validate and implement results
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 The Realities!
► Forecasts are seldom perfect,
unpredictable outside factors may
impact the forecast
► Most techniques assume an
underlying stability in the system
► Product family and aggregated
forecasts are more accurate than
individual product forecasts

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 Forecasting Approaches
Qualitative Methods
► Used when situation is vague and
little data exist
► New products
► New technology
► Involves intuition, experience
► e.g., forecasting sales on Internet

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 Forecasting Approaches
Quantitative Methods
► Used when situation is ‘stable’ and
historical data exist
► Existing products
► Current technology
► Involves mathematical techniques
► e.g., forecasting sales of color
televisions
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 Basic Terms Used in Sales Forecasting
▶ Market demand for a product or service is the
estimated total sales volume in a market (or
industry) for a specific time period in a defined
marketing environment, under a defined
marketing program or expenditure. Market
demand is a function associated with varying
levels of industry marketing expenditure.
▶ Market (or industry) forecast (or market size) is
the expected market (or industry) demand at
one level of industry marketing expenditure

© 2014 Pearson Education, Inc. 4 - 20

 Basic Terms (Continued)
▶ Market potential is the maximum market (or industry)
demand, resulting from a very high level of industry
marketing expenditure, where further increases in
expenditure would have little effect on increase in
demand
▶ Company demand is the company’s estimated share
of market demand for a product or service at
alternative levels of the company marketing efforts
(or expenditures) in a specific time period
Fig. Market Demand Functions
Market demand

Market Potential

Market Forecast
Market Minimum

© 2014 Pearson Education, Inc. Industry marketing expenditure 4 - 21

 Basic Terms (Continued)
▶ Company sales potential is the maximum estimated
company sales of a product or service, based on
maximum share (or percentage) of market potential
expected by the company
▶ Company sales forecast is the estimated company sales
of a product or service, based on a chosen (or proposed)
marketing expenditure plan, for a specific time period, in
a assumed marketing environment
▶ Sales budget is the estimate of expected sales volume
in units or revenues from the company’s products and
services, and the selling expenses. It is set slightly lower
than the company sales forecast, to avoid excessive
risks
▶ Sales quota performance goal

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 Forecasting Approaches

▶ Two basic approaches:

• Top-down or Break-down approach

• Bottom-up or Build-up approach

▶ Some companies use both approaches to

increase their confidence in the forecast

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 Steps followed in Top-down / Break-
down Approach
▶ Forecast relevant external environmental factors
▶ Estimate industry sales or market potential
▶ Calculate company sales potential = market
potential x company share
▶ Decide company sales forecast (lower than
company sales potential because sales potential
is maximum estimated sales, without any
constraints)

© 2014 Pearson Education, Inc. 4 - 24

 Steps followed in Bottom-up / Build-up
Approach
▶ Salespersons estimate sales expected from their
customers
▶ Area / Branch managers combine sales
forecasts received from salespersons
▶ Regional / Zonal managers combine sales
forecasts received from area / branch managers
▶ Sales / marketing head combines sales
forecasts received from regional / zonal
managers into company sales forecast, which is
presented to CEO for discussion and approval

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 Sales Forecasting
Methods
Qualitative Methods Quantitative Methods

• Executive opinion • Moving averages

• Delphi method • Exponential smoothing
• Salesforce composite • Decomposition
• Survey of buyers’ • Naïve / Ratio method
intentions
• Test marketing • Regression analysis
• Econometric analysis

© 2014 Pearson Education, Inc. 4 - 26

Executive opinion method
▶ Most widely used
▶ Procedure includes discussions and / or average of all
executives’ individual opinion
▶ Advantages: quick forecast, less expensive
▶ Disadvantages: subjective, no breakdown into subunits
▶ Accuracy: fair; time required: short to medium (1 – 4 weeks)
Delphi method
▶ Process includes a coordinator getting forecasts separately
from experts, summarizing the forecasts, giving the
summary report to experts, who are asked to make another
prediction; the process is repeated till some consensus is
reached
▶ Experts are company managers, consultants,
intermediaries, and trade associations
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 Delphi Method (Continued)
▶ Advantages: objective, good accuracy
▶ Disadvantages: getting experts, no breakdown into subunits,
time required: medium (3/4 weeks) to long (2/3 months)
Salesforce composite method
▶ An example of bottom-up or grass-roots approach
▶ Procedure consists of each salesperson estimating sales.
Company sales forecast is made up of all salespersons’ sales
estimates
▶ Advantages: Salespeople are involved, breakdown into
subunits possible
▶ Disadvantages: Optimistic or pessimistic forecasts, medium
to long time required
▶ Accuracy: fair to good (if trained)

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Survey of Buyers’ Intentions Method
▶ Process includes asking customers about their intentions
to buy the company’s products and services
▶ Questionnaire may contain other relevant questions
▶ Advantages: gives more market information, can
forecast new and existing products, good accuracy
▶ Disadvantages: some buyers’ unwilling to respond, time
required is long (3-6 months), medium to high cost

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 Test Marketing Method

▶ Methods used for consumer market testing: full blown,

controlled, and simulated test marketing
▶ Methods used for business market testing: alpha and
beta testing
▶ Advantages: used for new or modified products, good
accuracy, minimizes risk of national launch
▶ Disadvantages: Competitors may disturb if some
methods are used, medium to high cost, medium to long
time required

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