APO DP Forecasting

Selecting the Right
Forecasting Method
Copyright 2000 SAP AG. All rights reserved
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Agenda

Traditional Sales Forecasting Methods

Current Sales Forecasting Methods and Techniques Being Used Underlying Theory of Forecasting Methods
Sales Forecasting Methodologies

Quantitative vs Qualitative Tool Kit Approach
Build a Model

Components of Applied Market Response Modeling Analyze an Actual Model Using Live Data Introduction to Multi-Tiered Causal Analysis
Composite Forecasting Application
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Traditional Sales Forecasting Methods...

Most companies seem to use simple techniques that are easy to comprehend and mostly those that involve judgment by company employees. A method widely used results in forecast goal-setting, this is not really forecasting.

Here companies begin their planning process with a corporate goal to increase sales by some percentage. This target often comes directly from the chief executive officer. Then everyone backs into their target based on what each business unit manager thinks they can deliver. Finally, if they dont meet the target when totaled the CEO either assigns targets to particular business units or puts a financial plug in place hoping someone will over deliver.
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Current Sales Forecasting Methods and Techniques Being Used

More focus on utilizing time series methods to predict baseline sales demand

Primarily using Winters Exponential Smoothing Also, some Decomposition/Census X-11 Very little ARIMA/Box-Jenkins
Judgmental techniques still seem to be the dominant method of choice

Sales Force Composites Jury of Executive Opinion Delphi Approach
Multiple Regression is beginning to be utilized

More Universities are teaching Regression Applications Accessing causal data is becoming easier Regression is required to evaluate and predict sales promotions
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Underlying Theory of Forecasting Methods...
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Forecast = Pattern + Randomness
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This simple equation is really saying that when the average pattern of the underlying data has been identified some deviation will occur between the forecasting method applied and the actual occurrence.
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Sales Forecasting Methods...
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Two Types Of Sales Forecasting Methodologies
Qualitative
Also Known as Judgmental or Subjective
Quantitative
Also known as Mathematical or Objective
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Qualitative Methods

Are also known as Judgmental Rely on subjective assessments of a person or group of people Using intuitive or gut feelings based on their experience and savvy Who understand the current marketplace and whats likely to occur
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Qualitative Methods
Subjective or judgmental derived forecasts using intuitive or gut feelings
Independent Judgment Committees Sales Force Estimates
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Qualitative Methods

Also known as Sales Force Composites
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Qualitative Methods

Also known as Sales Force Composites
Juries of Executive Opinion
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Qualitative Methods
Advantages

Low cost to develop Executives usually have a solid understanding of the broad-based factors and how they affect sales demand Provides input from the firms key functional areas Can provide sales forecasts fairly quickly

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Qualitative Methods
Disadvantages

They are always biased toward the user group They are not consistently accurate over time Some executives may not really understand the firms sales situation since they are too far removed from the actual marketplace Not well suited for firms with a large number of products
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Quantitative Methods
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One Dimensional or Reactive Methods

Time Series Techniques, using only past sales history alone
Time Series
F o r e c a s t
Shipments
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One Dimensional or Reactive Methods

Time Series Techniques, using only past sales history alone
Multidimensional or Proactive Methods

Causal Techniques, built on a relationship(s) between past sales and
some other variable(s)
Time Series
F o r e c a s t
Causal Price Shipments Promo

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F o r e c a s t
Shipments
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Objective mathematically derived forecasts.
Times Series Techniques

Naive
Simple Moving Averaging Exponential Smoothing

Browns Double Exponential Smoothing Holt's Two Parameter Exponential Smoothing Winters Three Parameter Exponential Smoothing
Decomposition

Multiplicative Additive

Census X-11 Box-Jenkins
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(One Dimensional or Reactive Methods)
Time Series Methods

Advantages

They are well suited to situations where sales forecasts are needed for a large number of products They work very well for products with fairly stable sales They can smooth out small random fluctuations They are simple to understand and use They can be easily systematized and require little data storage Software packages are usually accessible, and They are generally good at short-term forecasting

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Time Series Methods

Disadvantages

(One Dimensional or Reactive Methods)
They require a large amount of historical data They adjust slowly to changes in sales A great deal of searching may be needed to find the weighted (Alpha) value They usually fall apart when the forecast horizon in long, and Forecasts can be thrown into great error because of large fluctuations in current data

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Objective mathematically derived forecasts.
Causal Techniques

Simple Regression Multiple Regression Econometric Modeling Robust Regression
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Things to Remember about Regression...

When and who invented regression? The term regression was introduced by Francis Galton in 1886. He called it the Law of Universal Regression. His friend Karl Pearson confirmed the theory by collecting a thousand records of heights for children of tall and short parents. Sir Henry Moore in 1918 developed the first Econometric Model.
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Why Havent Causal Methods been Used?

They are more time-intensive to develop and require a strong understanding of statistics They require larger data storage and are less easily systematized, and They tend to be more expensive to build and maintain
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Why Are Causal Methods the wave of the Future?

Enabled by the advent of the PC and Client Server Technology Available in most software packages Provide accurate short-, medium-, and long-term forecasts Are capable of supporting What-if analysis
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Causal Methods
(Multidimensional or Proactive Methods)
Advantages

They are available in most software packages They are inexpensive to run on computers These techniques are covered in most statistics courses so they have become increasingly familiar with managers They provide accurate short-, medium-, and long-term forecasts, and They are capable of supporting What-if analysis
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Causal Methods
(Multidimensional or Proactive Methods)
Disadvantages

Their forecasting accuracy depends on a consistent relationship between independent and dependent variables An accurate estimate of the independent variable is crucial A lack of understanding by many managers who view it as a black box technique They are more time-intensive to develop and require a strong understanding of statistics They require larger data storage and are less easily systematized, and They tend to be more expensive to build and maintain

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Tool Kit Approach
Selecting the Appropriate Method Based On Portfolio Management

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Data
Product Portfolio
Stable
Incomplete
Complete
Unstable
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Data
Product Portfolio
Stable
Incomplete
Simple Moving Average Committees Independent Sales Force Judgment Composites
Complete
Unstable
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Data
Product Portfolio
Stable
Census X-11 Box-Jenkins Winters
Incomplete
Complete
Unstable
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Data
Product Portfolio
Stable
Census X-11 Box-Jenkins Winters Multiple Regression Simple Regression
Incomplete
Complete
Unstable
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Data
Product Portfolio
Stable
Incomplete
Complete
Robust Regression
Unstable
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Data
Product Portfolio
Stable
Census X-11 Box-Jenkins Winters
Demand Pull
Multiple Regression Simple Regression
Incomplete
Business Simple MovingStrategy

Average Committees Robust Regression
Complete
Factory Push
Independent Sales Force Judgment Composites
Unstable
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Data
Product Portfolio
Stable
Incomplete
Simple Moving Average
Complete
Robust Regression
10%
Committees Independent Sales Force Judgment Composites
Unstable
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Data
Product Portfolio
Stable
50%
Winters
Incomplete
Complete
Robust Regression
Unstable
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Data
Product Portfolio
Stable
Census X-11 Box-Jenkins Winters Multiple Regression 35% Simple Regression
Incomplete
Complete
Robust Regression
Unstable
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Data
Product Portfolio
Stable
Incomplete
Complete
Robust Regression
5%
Unstable
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Data
Product Portfolio
Stable
50%
Winters
35%
Incomplete
Simple Moving Average
Complete
Robust Regression
10%
Committees Independent Sales Force Judgment Composites
5%
Unstable
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Benefits of the Forecast Tool Kit Approach

Better understand what method(s) to apply to each product group
in your product portfolio

Determine where additional data is required How to staff your forecasting resources Justifies the requirements for a system support tool that
encompasses the complete tool kit of forecasting methods
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Building A Model...
Yi = B0 + B1X1...BnXn + ei
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Components of Applied Market Response Modeling
Four Phases

Specification: The model building activity.

Involves the client (i.e., Product Management)
Estimation: Fitting the model to the data.

Includes collecting the data.

Verification: Testing the model. Prediction: Forecasting
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Three Major By-Products of Market Response Models

Structural Analysis

Estimation of the impact of such things as price and advertising on demand as measured by elasticity's.
Policy Evaluation

The impact of policies that may affect consumer demand, such as pricing changes.
Forecasting

Forecasting demand of particular items in either the short-range or long-range.
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Model Building Process

First, we will identify and assess the factors that make up the marketing mix (consumption) for a particular product. This is known as Structural Analysis. Next, via simulation, begin to determine possible alternative policies. Then, we will produce sales forecasts for consumer demand. Finally, tie the outcome to factory shipments via a second model to forecast customer demand (shipments). This process of linking causal models together is known as Multi-Tiered Causal Analysis

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In other Words... Economics 101
Retail Market (Demand)
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Factory Shipments (Supply)
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The Multiple Regression Model

Yi = Fo + F1X1 + F2X2... + FnXn + ei
Dependent Variable
Constant Coefficients
Explanatory Stochastic Disturbance Variables Term
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The Multiple Regression Model

Yi = Fo + F1X1 + F2X2... + FnXn
Dependent Variable
Constant Coefficients
Explanatory Variables
The regression method we will use is called Ordinary Least Squares.
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What to Remember???

Carl Friedrich Gauss, a German mathematician developed the method of Ordinary Least Squares Regression. This method has some very attractive statistical properties that have made it one of the most popular methods of regression analysis. Ordinary Least Squares regression may be a linear modeling approach, but many times it works in situations that you would think it normally would not... Regression models are really called condition models because they model current conditions. In this case current conditions occurring in the marketplace around a specific product line.

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Phase I.
Specification: The model building activity.

Involves the client (i.e., Product Management)
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Product X
Retail Versus Shipments
units
1800000 1600000
600000
500000 1400000 1200000 1000000 300000 800000 600000 400000 100000 200000 0 0 200000 400000
Ja n93 M ar -9 3 M ay -9 3 Ju l -9 3 Se p93 N ov -9 3 Ja n94 M ar -9 4 M ay -9 4 Ju l -9 4 Se p94 N ov -9 4 Ja n95 M ar -9 5 M ay -9 5 Ju l -9 5 Se p95 N ov -9 5 Ja n96

Month/Yr. Shipments Retail
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Phase II.

Estimation: Fitting the model to the data.

Includes collecting the data
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Original Variables
MONTH
J a n-9 3 Fe b -9 3 Ma r-9 3 Ap r-9 3 Ma y -9 3 J un-9 3 J ul-9 3 Aug -9 3 S e p -9 3 Oc t-9 3 N o v -9 3 D e c -9 3 J a n-9 4 Fe b -9 4 Ma r-9 4 Ap r-9 4 Ma y -9 4 J un-9 4 J ul-9 4 Aug -9 4 S e p -9 4 Oc t-9 4 N o v -9 4 D e c -9 4 J a n-9 5 Fe b -9 5 Ma r-9 5 Ap r-9 5 Ma y -9 5 J un-9 5 J ul-9 5 Aug -9 5 S e p -9 5 Oc t-9 5 N o v -9 5 D e c -9 5 J a n-9 6 Fe b -9 6
Retail
360946 337538 339249 459376 348480 375431 388201 305836 288724 411043 339806 530741 317279 260120 311943 381634 296083 307453 363155 300288 286932 379779 313691 492106 280779 264012 286491 395456 349945 329236 356813 297439 298422 368086 321278 501781 306368 270453
STORE
84.60 80.00 82.51 82.49 82.43 82.46 83.63 79.79 80.43 79.01 83.02 85.81 81.02 81.23 82.87 83.46 81.16 81.85 81.98 79.87 80.80 81.62 80.91 83.42 77.61 77.13 80.18 83.48 80.67 81.93 84.09 81.61 81.87 83.30 82.46 84.81 80.80 79.52
ACVF
22.51 13.00 34.68 33.21 14.47 29.77 19.54 29.22 6.82 29.84 35.75 38.93 23.84 11.32 32.13 10.48 29.33 14.69 25.16 27.55 8.63 31.29 8.89 15.76 6.61 12.40 22.98 19.11 28.86 15.21 26.11 26.37 11.36 31.70 10.64 15.01 6.43 9.02
ACVD
0.77 0.00 0.50 0.11 0.31 0.39 0.24 0.17 0.33 0.80 0.53 1.52 0.75 1.18 0.88 0.16 0.10 0.42 0.92 0.15 0.24 0.81 0.31 0.16 0.16 0.14 0.16 0.15 0.27 0.00 0.01 0.30 0.00 0.00 0.03 0.82 0.15 0.66
ACVDF
0.61 0.00 0.09 0.13 0.00 0.00 0.00 0.04 0.00 0.06 0.06 0.01 0.00 0.00 0.00 0.00 0.03 0.01 0.00 0.03 0.00 0.00 0.11 0.17 0.00 0.00 0.00 0.04 0.00 0.00 0.02 0.02 0.00 0.00 0.00 0.13 0.00 0.00
DPRICE
FSI
CABLE
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 87 112 106 0 0 0 108 11 0 0 0 0 0 0 0 0 0
GRP
8 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 303 231 112 0 0 0 275 34 0 0 0 0 0 0 0 0 0
BARTER
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 67 64 64 0 0 0 24 0 0 0 0 0 0 0 0 0 0
SPOT
1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4 8 4 0 0 0 28 7 0 0 0 0 0 0 0 0 0
PRICE
10.11 10.10 10.10 10.14 10.08 10.05 10.13 10.11 10.16 10.28 10.10 10.13 10.43 10.51 10.48 10.57 10.59 10.53 10.61 10.63 10.58 10.55 10.51 10.50 10.67 10.66 10.53 10.60 10.61 10.49 10.61 10.65 10.71 10.67 10.54 10.56 10.73 10.92
NPRICE
10.22 10.10 10.47 10.43 10.19 10.28 10.26 10.26 10.22 10.52 10.36 10.34 10.58 10.62 10.62 10.68 10.75 10.66 10.78 10.77 10.71 10.72 10.59 10.59 10.74 10.76 10.66 10.70 10.73 10.66 10.73 10.78 10.76 10.82 10.65 10.63 10.80 10.96
CAM
6547 7174 7391 7741 6908 8392 8476 7174 5811 8686 8213 18367 6982 5338 5074 7354 4752 5245 7069 4365 3260 5600 4310 10433 4478 3230 4134 7697 7175 6944 5212 6687 4658 7841 6907 15543 6076 5666
CPI
4.5 4.5 4.3 4.5 4.5 4.2 3.9 3.9 3.8 3.9 3.8 3.9 3.6 3.6 3.6 3.4 3.3 3.6 4 4.2 4.3 3.8 3.9 3.9 4.1 4.2 4.2 4.5 4.7 4.5 4.1 3.9 3.8 4.2 3.9 3.8 4.1 4
MEDIA
584000 1099000 2468000 1395000 1824000 4670000 1077000 2122000 4603000 2967000 3122000 3185000 854000 1453000 2404000 1408000 1516000 3556000 1341000 1788000 2341000 2291000 2808000 2063000 617000 802000 980000 1678000 1746000 2017000 1410000 2008000 2466000 2291000 2054000 1458000 617000 802000
9.70 0 7.00 0 7.33 0 11.05 0 9.34 0 12.62 0 8.76 0 6.36 0 6.91 33166 6.31 0 6.49 0 10.29 0 11.03 0 6.51 0 6.30 0 7.31 0 7.01 0 6.50 0 8.12 0 6.90 0 10.36 0 8.97 0 11.60 0 10.88 0 8.34 0 7.48 0 9.55 0 9.41 64054 6.19 67992 9.46 0 10.93 0 6.69 0 7.13 0 9.65 0 10.79 0 13.23 0 7.72 0 5.86 0
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Estimation Phase: The model building activities.

Product X
Demand Model
R2 = .9152 Adj. R2 = .8880
DW = 1.509 F-Stat = 33.598
n = 38
Prod X = Nprice+Cam +Media [-1] +Adv +Store + ACV F + Easter + Xmas + FSI + Constant Coeff t-Stat M Elasticity Pt Elasticity -36246 4.93 .012839 135.55 4819.1 1104.7 67439.0 105380.0 .37309 235550 -1.85 1.44 3.24 1.70 1.84 2.55 4.42 3.39 1.50 .78 -1.11 .099 .072 .007 1.14 .066 .015 .024 .005 .68 - .77 .150 .040 n/a .81 .030 n/a .210 n/a n/a
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Summary of Findings

Marketing Mix Models
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Summary of Findings


Gaining store distribution is the second most effective driver of volume.
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Summary of Findings


Gaining store distribution is the second most effective driver of volume. Merchandising payback with in store features is above average compared to other brands modeled.
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Summary of Findings


Gaining store distribution is the second most effective driver of volume. Merchandising payback with in store features is above average compared to other brands modeled. Advertising combined with FSI coupons show potential, but it is hard to determine whether the spending is sufficient.
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Summary of Findings


Pricing
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Summary of Findings


Pricing

Price is the most significant or effective driver of volume.
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Summary of Findings


Pricing

Price is the most significant or effective driver of volume. Across nearly all measured channels, the brand shows price elasticitys are above the optimal price point.
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Pricing Analysis
380000
Price Units % Chg From Revenue $10.49 U 1.8% 0% -1.7% -2.0% -2.2%
2600000
370000 Margin 360000 350000 340000

$6.80 $6.99
2550000 R 2500000 2450000 2400000 2350000 2300000 10.49 10.67 10.7 10.72
$10.30 373781 $10.49 344905 $10.67 337478 $10.70 336823 $10.72 334205
$2,541,711 n
i $2,425,126
t $2,410,886 $7.17 s 330000

$2,419,717320000 $7.20 $2,412,960310000 $7.22
e v e n u e
10.3
Price
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Simulation Phase: The model building activities.

Product X
Demand Model
R2 = .9152 Adj. R2 = .8880
DW = 1.509 DH = 1.2912 F-Stat = 33.598 n = 38
4049738 = $10.72 + 70506 + $19527M + 178 + 82% + 15%-32% + 55M + 235550
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Product X Retail
Demand Model
R2 = .9152 Adj. R2 = .8880
DW = 1.509 DH = 1.2912 F-Stat = 33.598 n = 38
4049738 = $10.72 + 70506 + $19527M + 178 + 82% + 15%-32% + 55M + 235550 What If: 4651328 = $10.52 + 80506 + $40000M + 178 + 90% + 15%-32% + 110M + 235550
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Product X Retail
Demand Model
R2 = .9152 Adj. R2 = .8880
DW = 1.509 DH = 1.2912 F-Stat = 33.598 n = 38
4049738 = $10.72 + 70506 + $19527M + 178 + 82% + 15%-32% + 55M + 235550 What If: 4651328 = $10.52 + 80506 + $40000M + 178 + 90% + 15%-32% + 110M + 235550
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Net Results

A unit increase of 601,590 units... An additional $6,328,727 to the topline for this particular product... Total cost $21,000,000 across entire Product X family line... Net return from Product X portfolio of $26,000,000...

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Phase III.
Verification: Testing the model
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Now we need to project explanatory variables (or drivers)

Two Ways to Project Explanatory Drivers
Buy outside information that includes forecasts for
out months
Use a time series method to forecast them out into
the future
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Product CAM Retail

Data: Complete and Stable (Highly Seasonal)
units 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0
93
92
pr -9 3
-9 3
-9 2
ug -9
ug -9
pr -9 4
pr -9 2
Fe b9
Fe b9
Fe b9
ug -9
-9 4
94 D ec -
Month/Yr. Camera
Fe b9
Ju n9
Ju n9
Ju n9
ec -
O ct
O ct
ec -
O ct
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Project Explanatory Variables
In this case only Cam retail demand needs to be projected...
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R2 = .9862 DW = 1.851 Adj. R2 = .9867 F-Stat = 32.84 MAPE = 2.8%
n = 60
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Evaluation Phase: The forecasting and tracking activities Using An Ex-Post Forecast
(Forecasting) Backcasting Ex-Post Simulation or Historical Simulation Ex-Post Forecast Ex-Ante Forecast
Time, t Estimation Period
T1
T2
T3
(Today)
Source: Robert S. Pindyck & Daniel L. Rubinfeld, Econometric Models & Economic Forecasts
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Product X Retail Demand Model Ex-post Sales Forecast

Month/Year December 1995 January 1996 February 1996 Actual 501781 306368 270453 Forecast 464743 283799 265476 Error 7.3% 7.4% 1.8%
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Product X
Retail Versus Fit (Ex-Post)
units
600000
600000
500000
500000
400000
400000
300000
300000
200000
200000
100000
100000

Month/Yr. Fit Retail
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Phase IV.
Prediction: Forecasting
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Sources of Forecast Error

The estimation of the parameters in the model are
wrong.
The right hand side variables (explanatory variables)
have been projected incorrectly.

Something changes during the ex-ante forecast
periods.
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Product X
Retail Versus Shipments
units
1800000 1600000
600000
500000 1400000 1200000 1000000 300000 800000 600000 400000 100000 200000 0 0 200000 400000

Month/Yr. Shipments Retail
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Product X Shipment Customer Demand Model
R2 = .9296 Adj. R2 = .9210

Coeff .57071 43861.0 398.79 t-Stat 2.13 3.163 10.31 M Elasticity .3022 .0621 .6371 P Elasticity .8914 .1638 1.6993
DW = 2.066 F-Stat = 108.87

Constant .31445 2.59 .3355 .3232
n = 38
Prod X = Retail + Coop + Cashd + Season ality +
-219700.0 -1.47 -.3369 n/a
Runs Test: 22 Runs, 22 Positive, 16 Negative Normal Statistic: .8350
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Product X Shipment Customer Demand Model
R2 = .9296 Adj. R2 = .9210

Coeff .57071 43861.0 398.79 t-Stat 2.13 3.163 10.31 M Elasticity .3022 .0621 .6371 P Elasticity .8914 .1638 1.6993
DW = 2.066 F-Stat = 108.87

Constant .31445 2.59 .3355 .3232
n = 38
Prod X = Retail + Coop + Cashd + Season ality +
-219700.0 -1.47 -.3369 n/a
Runs Test: 22 Runs, 22 Positive, 16 Negative Normal Statistic: .8350 What If: Retail increased to 4,651,328 units from 4,049,738 units, which, in turn, increased shipments from 7,473,481 units to 8,042,984 units. This adds $3,417,000 to the bottom line.
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Product X Shipment Customer Demand Model Ex-post Sales Forecast
Month/Year December 1995 January 1996 February 1996
Actual 687958 283797 431132
Forecast 767100 326795 387863
Error 11.5% 15.2% -10.0 %
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Product X
Shipments Versus Fit (Ex-Post)
units
1600000 1400000 1200000 1000000
1800000 1600000 1400000 1200000 1000000
800000 800000 600000 600000 400000 200000 0 400000 200000 0
Ja n9 M 3 ar -9 M 3 ay -9 Ju 3 l -9 Se 3 p9 N 3 ov -9 Ja 3 n9 M 4 ar -9 M 4 ay -9 Ju 4 l -9 Se 4 p9 N 4 ov -9 Ja 4 n9 M 5 ar -9 M 5 ay -9 5 Ju l -9 Se 5 p9 N 5 ov -9 Ja 5 n96
Month/Yr. Fit Shipments
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Product Y Retail (Supermarket Channel) Demand Model
Prod Y
R-SQUARE = VARIABLE NAME DS PRICE STORE ACVA CONSTANT
price + Store + ACVA + DSeason[-12] + Constant

R-SQUARE ADJUSTED = 0.9458
0.9553
ESTIMATED STANDARD COEFFICIENT ERROR 1.0153 0.4024E-01 -96001. 0.1968E+05 3655.1 278.8 3118.5 645.4 0.10322E+06 0.3649E+05
T-RATIO PARTIAL STANDARDIZED ELASTICITY 19 DF P-VALUE CORR. COEFFICIENT AT MEANS 25.23 0.000 0.985 0.5713 0.6917 -4.878 0.000-0.746 -0.0916 -0.8333 13.11 0.000 0.949 0.2610 0.5430 4.832 0.000 0.743 0.1310 0.0995 2.829 0.011 0.544 0.0000 0.5235
DURBIN-WATSON = 1.9233 VON NEUMANN RATIO = 2.0069 RHO = -0.01099 RUNS TEST: 8 RUNS, 16 POS, 0 ZERO, 8 NEG NORMAL STATISTIC = -1.7317 DURBIN H STATISTIC (ASYMPTOTIC NORMAL) = -0.11333
Note: Product Y is a Coca-Cola Product in the USA

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Product Y Retail Demand Model Ex-post Sales Forecast

Month/Year October 1997 November 1997 December 1997 Actual 464810 296730 184750 Forecast 412480 296730 206360 Error 11.3% 0.0% - 11.7%
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Product Y Bottler Shipment Customer Demand Model
Prod Y = Retail + Constant
R-SQUARE = 0.9410 R-SQUARE ADJUSTED = STANDARD ERROR 0.4308E-01 0.1212E+05 0.9383
VARIABLE ESTIMATED NAME COEFFICIENT RSALES 0.39926 CONSTANT 15148.
T-RATIO PARTIAL STANDARDIZED ELASTICITY 22 DF P-VALUE CORR. COEFFICIENT AT MEANS 9.267 0.000 0.892 0.8205 0.8186 1.250 0.224 0.258 0.0000 0.1575
DURBIN-WATSON = 1.4837 RUNS TEST: 14 RUNS, 12 POS, 0 ZERO, 12 NEG DURBIN H STATISTIC (ASYMPTOTIC NORMAL) = 1.5549 MODIFIED FOR AUTO ORDER=1
NORMAL STATISTIC =
0.4174
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Product Y Bottler Shipment Customer Demand Model Ex-post Sales Forecast
Month/Year October 1997 November 1997 December 1997
Actual 188520 114960 89209
Forecast 200730 133620 88911
Error - 6.5% - 16.2% 0.3%
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Product Y TCCC Shipment Bottler Demand Model
Prod Y = BShipments + Constant
R-SQUARE =
0.9513
R-SQUARE ADJUSTED = STANDARD ERROR 0.5864E-01 0.6460E-01 5866.
0.9480
VARIABLE ESTIMATED NAME COEFFICIENT -0.21269 SEASON3 BSALES 1.1570 CONSTANT 6307.6
T-RATIO PARTIAL STANDARDIZED ELASTICITY 30 DF P-VALUE CORR. COEFFICIENT AT MEANS -3.627 0.000-0.552 -0.2167 -0.1933 17.91 0.000 0.956 1.0809 1.1221 1.075 0.282 0.193 0.0000 0.0713
DURBIN-WATSON = 1.9460 RUNS TEST: 16 RUNS, 14 POS, 0 ZERO, 19 NEG NORMAL STATISTIC = -0.4062 DURBIN H STATISTIC (ASYMPTOTIC NORMAL) = 0.89408E-01 MODIFIED FOR AUTO ORDER=1 WITH LAGGED DEPVAR
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Product Y TCCC Shipment Bottler Demand Model Ex-post Sales Forecast
Month/Year October 1997 November 1997 December 1997
Actual 174690 91301 60253
Forecast 180390 101550 61325
Error - 3.3% - 11.2% - 1.8%
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Concerns/Caveats

Regression analysis is a technique that uses changes in data sets to establish statistical relationships. For example, an independent variable shown not to be significant in the regression equation may still influence the dependent variable, but the relationship may not be identified due to a lack of data interaction. Also, this analysis was done on aggregated retail market level which may not necessarily represent behaviors at the store level. This is a problem that is always encountered when using syndicated market data in regression analysis. To precisely evaluate promotional effectiveness, store level regression models or household level logit models must be used.
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Forecasting Experience With Market Response Models

Forecasts using market response models are generally superior to those based on simple extrapolation techniques. Market response models provide a useful starting place for formulating the forecast; identifying factors for which judgmental decisions can be made; and provide a framework to insure internal consistency of the forecast process (role of identities). Forecasts with subjective adjustments generally are more accurate than those obtained from the purely mechanical application of the regression model (a combination of model building and subjective expertise).
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Composite Forecasting
Judgmental
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What is Composite Forecasting?

Combines forecasts from alternative methods (i.e., Time Series, Causal, and/or Judgment) for a particular brand, product family, product. Either by simply averaging the forecasts giving each equal weight, or by weighting each forecast and summing them based on the residual error associated with each method. The underlying objective is to take advantage of the strengths of each method to create a single forecast. By combining the forecasts the business analysts objective is to develop the best forecast possible. The composite forecasts of several mathematical and/or judgmental methods have been proven to out perform the individual forecasts of any of those methods used to generate the composite.
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Simple Averaging

Example: Simple averaging of several forecasting methods
CF = FM1 + FM2 + FM3 3
Actual W inter's Causal ARIM A Simple Average Sales History M odel M odel M odel Composite Forecast 0 189325 157566 205091 183994 0 145453 143910 151363 146909 0 152675 158359 152666 154567 0 238260 215284 258450 237331 0 224234 229538 232486 228753 0 314142 272172 316594 300969
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Weighted Averaging
Example: Minimum variance weighting minimizes the variance of the forecast errors over the forecast period. CF = w1 FM1 + w2 FM2 + w3 FM3 Step 1) Create Ex-Post Forecasts for each method
Month/Week Period(s)
Actual Sales History
25 26 27 28 29 30 31 32 33 34 35 36
Winter's Causal ARIMA Model Model Model Ex-Post Ex-Post Ex-Post Forecast Forecast Forecast 123449 103781 112058 124268 95435 84243 83997 79842 94028 161075 144031 196730 385962 373273 417806 464806 296731 184748 97426 144852 149053 215001 375566 38404 402782 437483 267229 208968 93908 136698 130834 194093 331835 353199 344688 364587 221864 168609 99472 183625 195275 248136 348688 350157 360525 314270 244690 164711
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Weighted Averaging
Step 2) Run an Ordinary Least Squares (OLS) regression model. Using the Actual history for the last 12 periods as the dependent variable and the ex-post forecasts of the three models as the independent variables we restrict the three independent variables to equal 1. This causes the coefficients of the independent variables to equal one becoming our weights. Where:
OLS Actual F1Winter + F2Causal + F%6-1% + FCSnstant /Restrict
Restrict Winter + Causal + ARIMA = 1
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Weighted Averaging
R-SQUARE = 0.9177 R-SQUARE ADJUSTED = 0.8994
VARIANCE OF THE ESTIMATE-SIGMA**2 = 0.18323E+10 STANDARD ERROR OF THE ESTIMATE-SIGMA = 42805. SUM OF SQUARED ERRORS-SSE= 0.16490E+11 MEAN OF DEPENDENT VARIABLE = 0.24484E+06 LOG OF THE LIKELIHOOD FUNCTION = -143.574
VARIABLE ESTIMATED NAME WINTER CAUSAL ARIMA
STAND
T-RATIO 9 DF 1.772 0.6269 1.257 1.021 P-VALUE 0.110 0.546 0.240 0.334
PART STAND ELASTICITY CORR. COEFF AT MEANS 0.509 0.205 0.386 0.322 0.1743 0.2125 0.3081 0.0000 0.1511 0.2632 0.4030 0.1493
COEFFICIENT ERROR 0.17581 0.28493 0.53926 0.09923 0.4545 0.4290 35810
CONSTANT 36548.
DURBIN-WATSON = 1.5182 VON NEUMANN RATIO = 1.6563 RHO = 0.17868 RESIDUAL SUM = 19379. RESIDUAL VARIANCE = 0.18740E+10 SUM OF ABSOLUTE ERRORS= 0.36853E+06 R-SQUARE BETWEEN OBSERVED AND PREDICTED = 0.9431 RUNS TEST: 5 RUNS, 5 POS, 0 ZERO, 7 NEG NORMAL STATISTIC = -1.1451 DURBIN H STATISTIC (ASYMPTOTIC NORMAL) = 0.92103 MODIFIED FOR AUTO ORDER=1
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Weighted Averaging
Step 2) The sum of the coefficients of the three models should equal one (e.g., .18+. 28+. 54 = 1), and proportioned based on their residual errors accordingly. The final steps are to multiple the coefficients (weights) by their corresponding original models forecasts and sum the three forecasts.
Actual Winter's Causal ARIMA Variance Weighted Sales History Model Model Model Composite Forecast wt=.18 wt=.28 wt=.54 0 189325 157566 205091 188946 0 145453 143910 151363 148212 0 152675 158359 152666 154262 0 238260 215284 258450 242729 0 224234 229538 232486 230175 0 314142 272172 316594 303714
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Closing Thoughts...
Your market, products, goals, and constraints should
be considered when selecting the forecasting tools best for you...
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APO DP Forecasting

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Selecting the Right

Copyright 2000 SAP AG. All rights reserved

Traditional Sales Forecasting Methods

Sales Forecasting Methodologies

Quantitative vs Qualitative Tool Kit Approach

Composite Forecasting Application

Traditional Sales Forecasting Methods...

Current Sales Forecasting Methods and Techniques Being Used

Judgmental techniques still seem to be the dominant method of choice

Sales Force Composites Jury of Executive Opinion Delphi Approach

Multiple Regression is beginning to be utilized

Underlying Theory of Forecasting Methods...

Underlying Theory of Forecasting Methods...

Forecast = Pattern + Randomness

Underlying Theory of Forecasting Methods...

Forecast = Pattern + Randomness

Underlying Theory of Forecasting Methods...

Forecast = Pattern + Randomness

Sales Forecasting Methods...

Two Types Of Sales Forecasting Methodologies

 Independent Judgment  Committees  Sales Force Estimates

 Independent Judgment  Committees  Sales Force Estimates

 Independent Judgment  Committees  Sales Force Estimates

 Juries of Executive Opinion

One Dimensional or Reactive Methods

One Dimensional or Reactive Methods

Multidimensional or Proactive Methods

some other variable(s)

Causal Price Shipments Promo

Times Series Techniques

Simple Moving Averaging Exponential Smoothing

Census X-11 Box-Jenkins

(One Dimensional or Reactive Methods)

Time Series Methods

Time Series Methods

(One Dimensional or Reactive Methods)

Simple Regression Multiple Regression Econometric Modeling Robust Regression

Things to Remember about Regression...

Why Havent Causal Methods been Used?

Why Are Causal Methods the wave of the Future?

Tool Kit Approach

Selecting the Appropriate Method Based On Portfolio Management

Multiple Regression Simple Regression

Business Simple MovingStrategy

Independent Sales Force Judgment Composites

Copyright 2000 SAP AG. All rights reserved

Committees Independent Sales Force Judgment Composites

Multiple Regression Simple Regression

Multiple Regression Simple Regression

Committees Independent Sales Force Judgment Composites

Benefits of the Forecast Tool Kit Approach

in your product portfolio

encompasses the complete tool kit of forecasting methods

Components of Applied Market Response Modeling

Specification: The model building activity.

Involves the client (i.e., Product Management)

Estimation: Fitting the model to the data.

Verification: Testing the model. Prediction: Forecasting

Three Major By-Products of Market Response Models

Forecasting demand of particular items in either the short-range or long-range.

Model Building Process

In other Words... Economics 101

Retail Market (Demand)

Independent Judgment Committees Sales Force Estimates

Independent Judgment Committees Sales Force Estimates

Independent Judgment Committees Sales Force Estimates

Juries of Executive Opinion

Specification: The model building activity.