Need for Forecasting

1. Ship Quick

Change Capacity Financial Planning

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Few Definition Volume Forecast : A forecast by product grouping. Mix Forecast : A forecast by individual product.

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Principle #1 Sales forecasting is being done in vartually every company that produces and sell products, either formally or by default. The challenge is to do it well, better than the competition.

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Principle #2 Better forecasts enable companies to give higher customer service (order fill), to lower the inventories, to run the plants better, to work more cooperatively with suppliers, and last but certainly not least to sell more products.

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ACCOUNTABILITY
Forecasting numbers belong to the people in the line jobs in sales and marketing. The forecasting is the companys expression of anticipated demand from customers. It is not a statement of supply (operations responsibility) or the revenue (finances responsibility) , although bth of these functions are impacted by the forecast. Thus: Principle #3 : Sales and Marketing peoples own the sales forecast; they are accountable for its development, authorization, and execution.
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FORECASTING AS A PROCESS
Processes have inputs, a conversion phase, and outputs. Well, forecasting happens the same way. There are : 1. Inputs , Usually from a variety of the sources. 2. The forecasting process itself, which is a conversion step similar to physical production, and 3. The output , which are forecasts containing four Rs : reasoned, reasonable, reviewed frequently , and represent the total demand.

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THE FORECASTING PROCESS

INPUTS Extrinsic Factors: 1.Current Customers 2.New Customers 3.Competition 4.Economic Outlook Intrinsic Factors: 5.New Products 6.Pricing 7.promotions 8.Bids 9.Management Directives 10.Inta-Company Demand 11.History 12.Other
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OUTPUTS

CONVERTING INPUTS INTO FORECASTS

Forecasts that are : Reasoned Reasonable Reviewed Frequently Represent the Total Demand

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THE FORECASTING PROCESS INPUTS CONVERSION 1. People

2. 3. Forecasting Software Structured Steps

FORECASTS

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THE FORECASTING PROCESS

1. People : Wed like to look at some of the decisions that face the people who will be involved in forecasting process

Forecasting Frequency : For the formal review and updates, the most commonly used frequency is one month. Forecast Interval: This refer to how wide a time period is used : weekly, monthly, quarterly, or whatever. When forecasting for the next year , for example, is the result 52 individual forecasts, each representing one week? Or 12 , each covering a month? Or four, one per quarter? Forecast Horizon: How far into the future should the forecast go?

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Tracking the Forecast Why track the forecast? To plan around the error in the future To measure actual demand versus forecasts To improve our forecasting methods To improve business results

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Customer Service Inventory Investment Purchasing Decisions Supplier Schedules

Production Capacity Planning Human Resource Planning Financial Planning Resource Utilization
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Tracking the Forecast Measuring the actual sales received versus the forecast Establishing a forecast tolerance level Monitoring forecast performance Holding people accountable

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Sources of Demand Demand can come from many sources:

Consumers Customers Dealers Distributors Intercompany Service Parts

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Demand Patterns Stable versus dynamic Stable demand retains same general shape over time Dynamic demand tends to be erratic
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Demand Patterns Trend Seasonal Cyclical

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Demand Type Dependent versus independent Only independent demand needs to be forecast Dependent demand should never be forecast

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Seasonality
1000

500

0 JAN FEB MAR APR MAYJUN JUL AUG SEP OCT NOV DEC

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Seasonality Index Measures seasonal variation of demand Relates the average demand in a particular period to the average demand for all periods
The Seasonality Index = Period Average Demand . Average Demand for All Periods

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Calculation of Seasonal Index

A company sells snowmobiles, the annual sales are 2400 units, the sales are recorded as follows: January 400 February 150 March 50 April 10 May 10 June 10 July August September October November December 10 10 100 350 600 700

Average Sales/Month are 200 November Sales have a seasonal index of 3.0

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Economic Cycle

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Trend Growth Increasing Positive Decline Decreasing Negative

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Random Variation A fluctuation in data that is caused by uncertain or random occurrences.

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Forecasting Techniques Qualitative Causal Research groups Customer focus groups Groups of experts Quantitative Same as last year Moving averages Exponential smoothing Seasonality

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Leading Indicators

Housing Starts Number of babies

Sales of bricks Sales of diapers

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Quantitative Techniques Based on historical data usually available in the company Assume future will repeat past Uses mathematical formulas and statistics

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Moving Averages Forecast future sales as an average of previous months sales An average of the past 3 months:
Forecast for February = 26 + 32 +20 = 26 3

If February sales are 29,

The forecast for March is 32 + 20 + 29 = 27 3
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Moving Average Forecasting Advantages A simple technique which is easy to calculate It can be used to filter out random variation Longer periods provide more smoothing Limitations Does not recognize trends Does not recognize seasonality
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Exponential Smoothing Provides a routine method of updating item forecasts Works well for stable items Is satisfactory for short-range forecasts Detects trends, but lags them

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Choice of Smoothing Factors

0.1 Low weighting -most smoothing 0.9 High weighting - close to actual

Actual sales

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Dealing with Outliers An outlier is a data point that does not fit a predefined model of how the data should behave Outliers may be caused by exceptional conditions or events These exceptional conditions may recur Outliers should not be removed unless there is a data error
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Importance of Time Periods Most companies forecast by month Weeks and days are standard units of time We need to record the history in the same time intervals as the forecast will be developed

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Data Preparation and Collection Record data in terms needed for the forecast, i.e. if forecasts are required in weekly intervals, collect data in weekly intervals Record sales demand not shipments Record circumstances relating to the data (such as exceptional conditions, ice storms etc.) Record demand separately for unique customer groupings
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Case 4 Sales Information

YEAR -3 -2 -1 F'CAST JUL -3 -2 -1 F'CAST 103 167 245 AUG 58 71 125 SEP 45 52 100 OCT 31 45 80 NOV 21 32 50 DEC 6 12 15 JAN 8 12 20 FEB 14 28 40 MAR 32 57 75 APR 40 71 100 MAY 65 89 115 JUN 91 155 235

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Focus Forecasting Invented by Bernard Smith when working for American Hardware His job was to forecast 20,000 independent demand items on a monthly basis His boss demanded 98% forecast accuracy He achieved it by using Focus Forecasting

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Focus Forecasting The most recent past is the best indicator of the future All forecasting techniques will be compared for all items forecasted The closest fit wins This technique will be used to forecast this item

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Qualitative Methods Expert opinion Market research Customer surveys Focus groups Polling Taste tests

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Qualitative Techniques Are based on intuition and informed opinion, such as groups of experts Tend to be subjective Are used for business planning and forecasting for new products Are used for medium-term to long-term forecasting
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Extrinsic Techniques Based on external indicators, such as causal factors, leading indicators, and correlation analysis Useful in forecasting total company demand or demand for families of products

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New Product Introduction Every new product/service is a calculated risk Every new product/service has the potential to be the:
Killer app Blockbuster movie Hot product Money loser Disaster Life saver Product liability nightmare
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Advanced Forecasting Techniques Artificial intelligence Neural networks Causal models

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Principles of Forecasting Forecasts Are nearly always wrong Should always include an estimate of error Are more accurate for groups of products Are more accurate for nearer periods of time Are vital for planning the business

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Principles of Forecasting Trend and seasonality should be monitored closely Wherever possible use actual demand instead of forecasted demand Assign responsibility for forecasting Monitor and report the accuracy of the forecast Plot forecast accuracy and reward improvement
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