# FORECASTING by tempvaltemp

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```									FORECASTING
WHAT IS FORECASTING?
FUTURE, SPECIFYING THE SALES VOLUMES
TO BE ACHIEVED AND
EQUIPMENT/MATERIAL AND OTHER
INPUTS REQUIRED TO ACHIEVE THE
ESTIMATED SALES.
IT IS ALSO A SYSTEMATIC EFFORT TO
ANTICIPATE FUTURE EVENTS OR
CONDITIONS.
PRINCIPLES OF FORECASTING
FORECASTS HAVE FOUR MAJOR
CHARACTERISTICS :

1. FORECASTS ARE USUALLY WRONG –
THEY ATTEMPT TO LOOK INTO THE
UNKNOWN FUTURE AND, EXCEPT BY
SHEER LUCK,WILL BE WRONG TO SOME
DEGREE. ERRORS ARE INEVITABLE AND
MUST BE EXPECTED.
2. EVERY ERROR SHOULD INCLUDE AN
ESTIMATE OF ERROR – SINCE FORECASTS
ARE EXPECTED TO BE WRONG, THE REAL
QUEST5ION IS “BY HOW MUCH?” EVERY
FORECAST SHOULD INCLUDE AN ESTIMATE
OF ERROR OFTEN EXPRESSED AS A
PERCENTAGE (+/-) OF THE FORECAST OR
AS A RANGE BETWEEN THE MINIMUM
AND MAXIMUM VALUES.
ESTIMATES OF THIS ERROR CAN BE MADE
STATISTICALLY BY STUDYING THE
AVERAGE DEMAND.
3. FORECASTS ARE MORE ACCURATE FOR
FAMILIES OR GROUPS - THE BEHAVIOR OF
INDIVIDUAL ITEMS IN A GROUP IS
RANDOM EVEN WHEN THE GROUP HAS
VERY SUBTLE CHARACTERISTICS. E.G., THE
MARKS FOR INDIVIDUAL STUDENTS IN A
CLASS ARE MORE DIFFICULT TO FORECAST
ACCURATELY THAN THE CLASS AVERAGE.
HIGH MARKS AVERAGE OUT WITH LOW
MARKS.
THIS MEANS THAT FORECASTS ARE MORE
ACCURATE FOR LARGE GROUPS OF ITEMS
THAN FOR INDIVIDUAL ITEMS IN A GROUP.
4. FORECASTS ARE MORE ACCURATE FOR
NEARER TIME PERIODS – THE NEAR
FUTURE HOLDS LESS UNCERTAINTY THAN
THE FAR FUTURE. MOST PEOPLE ARE
MORE CONFIDENT IN FORECASTING WHAT
THEY WILL BE DOING OVER THE NEXT
WEEK THAN A YEAR FROM NOW. AS THE
SAYING GOES ‘TOMORROW IS EXPECTED
TO BE PRETTY MUCH LIKE TODAY’.
ANYTHING THAT CAN BE DONE TO REDUCE
ACCURACY.
COLLECTION AND PREPARATION
OF DATA
FORECASTS ARE USUALLY BASED ON
HISTORICAL DATA USING JUDGEMENT OR
STATISTICAL TECHNIQUE. TO GET GOOD
DATA, THREE PRINCIPLES OF DATA
COLLECTION ARE IMPORTANT.
1. RECORD DATA IN THE SAME TERMS AS
NEEDED FOR THE FORECAST – APPLES
WITH APPLES ETC.
2. RECORD THE CIRCUMSTANCES RELATING
TO THE DATA - DEMAND IS INFLUENCED
BY PARTIUCULAR EVENTS, AND THESE
SHOULD BE RECORDED ALONG WITH THE
DEMAND DATA.
3. RECORD THE DEMAND SEPARATELY FOR
DIFFERENT CUSTOMER GROUPS – EACH
HAS ITS OWN CHARACTERISTICS ,
NUANCES AND REQUIREMENTS.
FORECASTING TECHNIQUES
THERE ARE MANY FORECASTING
METHODS, BUT THEY CAN BE USUSALLY
CLASSIFIED INTO THREE CATEGORIES :

QUALITATIVE TECHNIQUES
EXTRINSIC TECHNIQUES
INTRINSIC TECHNIQUES
QUALITATIVE TECHNIQUES – ARE
PROJECTIONS BASED ON JUDGEMENT,
INTUITION, AND INFORMED OPINIONS. BY
NATURE THEY ARE SUBJECTIVE. SUCH
TECHNIQUE IS USUALLY USED BY SENIOR
MANAGEMENT.
WHEN FORECASTING FOR A NEW
PRODUCT, THERE IS NO HISTORICAL DATA.
IT IS BASED ON MARKET RESEARCH AND
TEST MARKETING. THERE ARE SEVERAL
OTHER METHODS OF QUALITATIVE
FORECASTING – ONE OF THEM IS DELPHI
METHOD WHICH USES A PANEL OF
EXPERTS WHO GIVE THEIR OPINIONS ON
WHAT IS LIKELY TO HAPPEN.
EXTRINSIC TECHNIQUE – ARE PROJECTIONS
BASED ON EXTERNAL INDICATORS WHICH
RELATE TO THE DEMAND FOR A
COMPANY’S PRODUCT. EXAMPLES OF
SUCH DATA ARE HOUSING OPERATIONS,
BIRTH RATES AND DISPOSABLE INCOME.
THEY CAN ALSO BE TERMED AS ECONOMIC
INDICATORS.
EXTRINSIC FORECASTING IS MOSTLY USED
RATHER THAN FORECASTING OF
INDIVIDUAL END ITEMS.
INTRINSIC TECHNIQUES – USE
HISTORICAL DATA TO FORECAST. THESE
DATA ARE USUALLY RECORDED IN THE
AVAILABLE. INTRINSIC FORECASTING
TECHNIQUES ARE BASED ON THE
ASSUMPTION THAT WHAT HAPPENED
IN THE PAST WILL HAPPEN IN THE
FUTURE.
SINCE THERE IS NO CRYSTAL BALL TO
PREDICT THE FUTURE, THE BEST GUIDE TO
THE FUTURE IS WHAT HAPPENED IN THE
PAST.
SOME OTHER TECHNIQUES OF
FORECASTING ARE :

AVERAGE DEMAND.

MOVING AVERAGES.

CUSTOMER TRENDS

MARKET/COMPETITVE TRENDS
DEMOGRAPHICAL CHANGES.

CONSUMER BEHAVIOR CHANGES.

GUT FEELING.
OTHER TECHNIQUES USED BY
PROFESSIONAL FORECASTERS ARE :

EXPONENTIAL SMOOTHING – IS A
TECHNIQUE WHERE A NEW DATA IS GIVEN
ANY WEIGHT AND IS REPRESENTED BY THE
GREEK LETTER ALPHA. IT IS ALWAYS
EXPRESSED AS A DECIMAL FROM 0 – 1.0.
THE FORMULA FOR CALCULATING THE
NEW FORECAST IS :
NEW FORECAST = (a)(LATEST DEMAND) +
(1-a)(PREVIOUS FORECAST)
MEAN ABSOLUTE DIVISION – WHERE
MEAN IMPLIES AN AVERAGE; ABSOLUTE
MEANS WITHOUT REFERENCE TO PLUS
AND MINUS; AND DEVIATION REFERS TO
ERROR. THIS MEASURES THE FORECAST
ERROR PRIOR TO REVISING FORECAST OR
HELPING IN PLANNING.
THE FORMULA IS :
MAD = SUM OF ABSOLUTE DEVIATIONS
NUMBER OF OBSERVATIONS
P/D RATIO – WHERE “P” IS PRODUCTION
AGAINST INHERENT ERROR IN
FORECASTING IS TO INCLUDE SAFETY
STOCK IN INVENTORY. THIS WILL INCREASE
COSTS ON EXTRA INVENTORY. THE OTHER
WAY IS TO MAKE MORE ACCURATE
PREDICTIONS.
THIS IS DONE BY :

1. REDUCE “P” TIME. THE LONGER THE
“P” TIME, THE MORE CHANCES OF
ERROR. IDEALLY “P” SHOULD BE LESS
THAN “D”.
2. FORCE A MATCH BETWEEN P AND D –
MOVING IN THIS DIRECTION CAN BE DONE
IN TWO WAYS :
A. MAKE THE CUSTOMER’S “D” TIME
EQUAL TO YOUR “P” TIME. THIS IS
COMMON WITH CUSTOM PRODUCTS
WHEN THE MANUFACTURER MAKES THE
PRODUCT ACCORDING TO THE
CUSTOMER’S SPECIFICATIONS.

B. SELL WHAT YOU FORECAST – THIS WILL
HAPPEN WHEN YOU KNOW YOUR MARKET.
3. SIMPLIFY THE PRODUCT LINE – THE
MORE VARIETY I8N THE PRODUCT
LINE, THE MORE ROOM FOR ERROR.
4. STANDARDIZE PRODUCTS AND
PROCESSES - THIS MEANS THAT
:CUSTOMIZATION” OCCURS CLOSE
TO FINAL ASSEMBLY. THE BASIC
COMPONENTS ARE IDENTICAL, OR
SIMILAR FOR ALL COMPONENTS.
5. FORECAST MORE ACCURATELY – MAKE
FORECASTS USING A WELL THOUGHT OUT
AND WELL CONTROLLED PROCESS.
FORECASTING IS AN INEXACT SCIENCE
THAT IS, NONETHELESS, AN INVALUABLE
TOOL IF THE FOLLOWING ARE KEPT IN
MIND :
● FORECASTS SHOULD BE TRACKED.

● THERE SHOULD BE A MEASURE OF
REASONABLENESS OF ERROR.
● WHEN ACTUAL DEMAND EXCEEDS OR
DECREASES THE REASONABLENESS OF
ERROR, AN INVESTIGATION SHOULD BE
MADE TO DISCOVER THE CAUSE OF ERROR.
● IF THERE IS NO APPARENT CAUSE OF
ERROR, THE METHOD OF FORECASTING
SHOULD BE REVIEWED TO SEE IF THERE IS
A BETTER WAY TO FORECAST
THANK YOU.

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