What is forecasting? • Forecasting is the process of using past events to make systematic predictions about future outcomes or trends.
Forecasting • It is the prediction of future events on the basis of • Historical data • Opinions • Trend events • Or known future variables
Questions: • What is the significance of forecasting? • What is the most important use of forecasting?
What is business forecasting? • Business forecasting is an estimate or prediction of future developments in business such as sales, expenditures, and profits .(usually are made by past events)
Why do we need Business forecasting • Reduces the cost • Reduces the investment risk • know about the market (have a general idea of market ) • reduce the problem of decision • change the strategies of company in time
The manager’s role in managing forecasts • Who will take the responsibilty of forecasting? • In small organization • One with comprehensive knowledge • In larger organizations • User department • Management services • Data processing unit
Data processing unit Most popular • Advantages: technical expertise • Disadvantages: little knowledge of the overall issues, unable to serve for decision making; Probably the worst
Management service • Advantages • Link between specialists and decisions. • Feasible at board level. • Disadvantage • Remote from decision making.
The user department • Advantage • The best to link specialists and decisions • Disadvantage • Insufficient technical expertise
Forecasting as • A team activity • Who will be included in the team? • What are the roles of each team member? • What role is the most important in the forecasting system? • View forecasting as a system
The Main Forecasting Techniques • Qualitative • Causal modeling • Time series methods
Qualitative • Based on judgment; • the use of subjective opinions to predict; • used when data is scarce and/or environment is complex and dynamic
Qualitative techniques • Expert opinions • Group discussion
Causal modeling • It means that the variable to be forecast is related statistically to another variable which are thought to “cause” changes in it .
Time series methods • It predicts future values of a variable solely from historical values of itself. • Time series methods are also usually the cheapest and easiest to apply.
Sales Forecasting- Research about the future
Sales forecasting • Definition: • the process of predicting sales totals over some specific future period of time.
The importance • For operational planning: • Finance Dept. in… • Manufacturing Dept. in… • Purchasing Dept. in… • Human Resources Dept. in… • For the control function • Establishing an evaluation standard.
The benefits • Increased revenue • Increased customer retention • Decreased costs • Increased efficiency
Forecasting methodologies • Break-down forecasting GDP industry forecast a company forecast a product forecast
Forecasting methodologies • Build-up forecasting • E.g. sales force composites industry survey potential customers sales forecast
The Three levels of Forecasting • Market potential • the upper limit of industry demand, or the expected sales volume for all brands of a particular product type during a given period. • The market’s ability to absorb a type of product.
The Three Levels of Forecasting • Sales potential • An estimate of an individual company’s maximum share of the market, during a given period. • A company’s maximum market share;
The Three levels of Forecasting • Sales forecast • The expected actual sales volume; • What are the relations between the three levels?
The relation of three levels (in the same given period) • Market Potential>=Sales Potential>=The Sales Forecast • Market Potential =industry demand • Sales Potential =company’s demand • The Sales Forecast=actual sales volume
Conditional forecasting • The forecast will be accurate only if the assumptions are accurate. • Three variants • Optimistic assumptions; • Pessimistic assumptions; • The most likely assumptions;
Forecast by Time periods • To project the behavior of a variable into future; • Short-term forecast: a year or less; • Long-term forecast: five to ten years; • Intermediate term: • Which is more accurate? • The farther into the future you project, the greater your uncertainty.
Forecasting options • Executive opinion • convenient, inexpensive • Not scientific, subjective; • Sales force composite • More expertise; • subjective, unaware of larger economic development, lower the demand deliberately;
Forecasting options • Survey of customers • Small costs, good for established products; • Not applicable with new products; • Projection of trends • Working in mature markets; data available; • Not for dynamically changing market;
Forecasting options • Analysis of market factors • Based on factors and market index; • Correlation methods; regression methods; • No easy access to data;
Words of the End • The best advice for using forecasts might include the following: 1 Use multiple forecasts and perhaps average their predictions. 2 Remember that accuracy decreases the farther into the future you are trying to predict. 3 Use simple forecast (rather than complicated ones) where possible. 4 Important events often are surprises and represent a departure from predictions.
Questions • If a forecast is too optimistic , cash is often tied up in slow-moving inventory, and profit margins are reduced due to wasted overhead. • What can we do to increase the accuracy of forecasting?
A chemical company wants to estimate the demand for sulfur next year. One use of sulfur is in manufacturing sulfuric acid. Another use of sulfur is in polishing new cars. GM is a customer of this chemical company. How could the chemical company determine how GM’s new-car production next year might affect its sulfur sales?
Two types • Macro Forecast • Micro Forecast
Macro Forecast • World forecast • Regional forecast • National economic forecast • Industry forecast
Macro Forecast • World forecast • Importance • Providing a valuable tool for long-range strategic planning by identifying long-term growth situations • Examples of the thing forecast: population, energy food production
Macro Forecast • Regional forecast • Disadvantage: lack of reliable data for the less developed areas • Examples of the thing forecast: the population of one Latin American country
Macro Forecast • National Economic Forecast • Examples of the thing forecast: gross national product, national income • Business cycle
Macro Forecast • Industry forecast • Examples of the thing forecast: company sales
Micro Forecast • Company Sales Forecasts • Product Sales Forecast • Market Sales Forecast • Territorial Sales Forecast
Micro Forecast • Company Sales Forecast • It is the composite of all the firm’s product sales forecast.
Micro Forecast • Product Sales Forecast • It represents the level of planned sales activity for a particular product during the planning horizon.
Micro Forecast • Market Sales Forecasts • They are used where the same product is marketed to different types of users or situations.
Micro Forecast • Territorial Sales Forecasts • They are used in the setting of territory sales quotas. • What are quotas? • Quotas are the levels of expected sales performance in a given sales person’s territory.
The sales forecast must be qualified by asking the following questions: • What are the items to be forecasted (individual product lines or business units)? • How far in the future should the forecast extend? • How frequently should the forecast be made? • How frequently should the forecast be reviewed? • What would constitute an acceptable tolerance of forecast error?
What are the external factors that can affect sales? • Seasonality of the business • Relative state of the economy • Direct and indirect competition • Political events • Styles or fashions • Consumer earnings • Population changes • Weather • Productivity changes
What are the internal factors that can affect sales? • Labor problems • Credit policy changes • Sales motivation plans • Inventory shortages • Working capital shortage • Price changes • Change in distribution method • Production capability shortage • New product lines