Professional Documents
Culture Documents
Forecasting
Dr. A. N. Sah
Introduction
What is forecasting?
Types of Forecasts
Short term
Medium Term
Long term
2.
3.
4.
5.
2.
3.
4.
5.
6.
Production Planning
Sales Forecasting
Control of Business
Inventory Control
Growth and Long Term Investment Program
Economic Planning and Policy Making
Sources of Data
Consumption
level
method
Smoothing techniques
Econometric
Methods
Regression Method
Simple
Multivariate
Contd
Expert opinion
Delphi Method
Market Experimentation
Test marketing
A test area may include several cities having similar features i.e.
population, income levels, cultural and social background, choice and
preferences of consumers
Contd
Very expensive
Being costly, carried out on a scale too small to permit
generalization with a high degree of reliability
Based on short term and controlled conditions which
may not exist in an uncontrolled market
Tinkering with price increases may cause a permanent
loss of customers to competitive brands
Moving Averages
Least Squares Method
Exponential Smoothing Technique
Econometric Method
Barometric Method
Illustration
Suppose Income elasticity of demand for
chocolates is 3. In year 1995 per capita income is
$500 and per capita annual demand for
chocolates is 10 million in a city. It is expected
that in year 2000 per capita income will increase
by 20 % . Then projected per capita demand for
chocolates in 2000 will be?
Trend Projection
Firms Actual
Market Share (A)
Three Quarter
Moving Average
Forecast (F)
A-F
(A-F)2
20
22
23
24
21.67
2.33.
5.4289
18
23.00
-5.00
25
23
21.67
1.33
1.7689
19
21.67
-2.67
7.1289
17
20.00
-3.00
22
19.67
2.33
5.4289
10
23
19.33
3.67
13.4689
11
18
20.67
-2.67
7.1289
12
23
21.00
2.00
13
21.33
Total= 78.3534
Firms Actual
Market Share (A)
Fiv3 Quarter
Moving Average
Forecast (F)
A-F
(A-F)2
20
22
23
24
18
23
21.4
1.6
2.56
19
22
-3
17
21.4
-4.4
19.36
22
20.2
1.8
3.24
10
23
19.8
3.2
10.24
11
18
20.8
-2.8
7.84
12
23
19.8
3.2
10.24
13
20.6
Total= 62.48
Exponential Smoothing
A serous criticism of using moving averages in forecasting is that they give equal
weight to all observations in computing the average even though more recent
observations are more important
It uses a weighted average of past data as basis for a forecast by giving heaviest
weight to more recent information and smaller weights to observations in more
distant past on assumption that future is more dependent on recent past than on
distant past
The value of time series at period t (A t) is assigned a weight (w) between 0 and 1
both inclusive, and forecast for period t (F t) is assigned 1-w . The basic Equation :
Ft+1 = wAt + (1-w)Ft
Where Ft+1 = forecast for next period
At = Actual value of time t (most recent actual data)
Ft = forecast for present period
w = weight ie smoothing constant
Contd..
Rules of Thumb:
When magnitude of random variations is large, w is
taken as lower value so as to even out the effects of
random variation quickly
When magnitude of random variations is moderate, a
large value is assigned to w
It has been found appropriate to have w between 0.1 and
0.2 in many systems
To identify best forecast amongst many arrived from
different values of W,RMSE is used and forecast having
least RMSE is considered as best
Actual Sales
(Rs 000)
Forecasted Sales
60
64
58
66
70
60
70
74
62
10
74
63
Contd..
Econometric Methods
Regression Method
Contd
Linear Equation
Y= a +bX Where X and Y are averages
Objective of regression analysis is to estimate
linear relationship ie a and b
a = Y-bX
b = NXY (X) (Y)
N X2 - (X)2
Year t
Advertising
Xt (millionRs)
Sales
Yt (000
units)
X2
XY
45
25
225
50
64
400
10
55
100
550
12
58
144
696
10
58
100
580
15
72
225
1080
18
70
324
1260
20
85
400
1700
21
78
441
1638
10
25
85
625
2125
b = 10(10254) (144)(656)
10(2448) (144)2
b = 2.15
a = Y bX where Y & X are averages
Y = 34.54 + 2.15X
It means that an increase of Rs 1 million in ad
expenditure will bring an increase of 2.15
thousand units in sales ie 2,15000 units
Year
1992
10
1993
12
1994
11
1995
15
1996
18
Illustration: Suppose
1997 that a local bread manufacturer company
14 wants to assess
demand for its product for years 2002,2003 and 2004. for this purpose it uses
1998
20
time series data of its sales over past 10 years.
1999
18
2000
21
2001
25
Sales
T2
ST
1992
10
10
1993
12
24
1994
11
33
1995
15
16
60
1996
18
25
90
1997
14
36
84
1998
20
49
140
1999
18
64
144
2000
21
81
189
2001
25
10
100
250
n=10
S=164
T=55
T2 = 385
ST= 1024
Contd.
Year
Sales( lacs
in Rs)
1991
45
1992
56
1993
78
1994
46
1995
75
Contd..
2. Suppose number of
refrigerators sold in past 7
years in a city is given in
table. Forecast demand
for refrigerator for year
2002 and 2003 by
calculating 3-yearly
moving average
Year
Sales
1995
11
1996
12
1997
12
1998
13
1999
13
2000
15
2001
15
Contd..
Year
Population
(millions)
Sugar consumed
(000tonnes)
95-96
10
40
96-97
12
50
97-98
15
60
98-99
20
70
99-2000
25
80
2000-01
30
90
2001-02
40
100
Thank you