Forecasting is the process of making predictions of the future based on past and present data and

most commonly by analysis of trends. The two methods are explained below:

DELPHI Method

Delphi Method is a method that gathers, evaluates, and summarizes expert opinions as the basis
for a forecast, but the procedure is more formal than that for the jury of executive opinion
method.

The Delphi Method has the following steps:

1. STEP 1 Various Experts are asked to answer, independently and in writing, a series of
questions about the future of sales or whatever other area is being forecasted.

2. STEP 2 A summary of all the answers is then prepared. No expert knows, how any
other expert answered the questions.
3. STEP 3 Copies of summary are given to the individual experts with the request that
they modify their original answers if they think it necessary.

4. STEP 4 Another summary is made of these modifications, and copies again are
distributed to the experts. This time, however, expert opinions that deviate significantly
from the norm must be justified in writing.

5. STEP 5 A third summary is made of the opinions and justifications, and copies are once
again distributed to the experts. Justification in writing for all answers is now required.
6. STEP 6 The forecast is generated from all of the opinions and justifications that arise
from step 5 or it can be iterated till the results are not obtained.

Exponential Smoothing:

1. Most frequently used time series method because of ease of use and minimal amount of
data needed
 2. Need just three pieces of data to start:
3. Last periods forecast (Ft)
4. Last periods actual value (At)

5. Select value of smoothing coefficient, ,between 0 and 1.0
6. If no last period forecast is available, average the last few periods or use naive method
7. Higher values (e.g. .7 or .8) may place too much weight on last periods random
variation

Ft 1 A t 1 Ft
Formula =

Example: How Exponential Smoothing is used in Sales Forecasting?

In Exponential Smoothing, the system assigns weights that exponentially decay. The equation for
Exponential Smoothing forecasting is:

Forecast = (Previous Actual Sales) + (1 ) (Previous Forecast)

The forecast is a weighted average of the actual sales from the previous period and the forecast
from the previous period. Alpha is the weight that is applied to the actual sales for the previous
period. (1 ) is the weight that is applied to the forecast for the previous period. Values for
alpha range from 0 to 1 and usually fall between 0.1 and 0.4. The sum of the weights is 1.00 ( +
(1 ) = 1).

You should assign a value for the smoothing constant, alpha. If you do not assign a value for the
smoothing constant, the system calculates an assumed value that is based on the number of
periods of sales history that is specified in the processing option.

Forecast specifications:

equals the smoothing constant that is used to calculate the smoothed average for the
general level or magnitude of sales.

Values for alpha range from 0 to 1.

n equals the range of sales history data to include in the calculations.

 Generally, one year of sales history data is sufficient to estimate the general level of sales.
For this example, a small value for n (n = 4) was chosen to reduce the manual
calculations that are required to verify the results. Exponential Smoothing can generate a
forecast that is based on as little as one historical data point.

Minimum required sales history: n plus the number of time periods that are required for
evaluating the forecast performance (periods of best fit).

This table is history used in the forecast calculation:

Past Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct N
1 None None None None None None None None 131 114 1

This table is the calculation of Exponential Smoothing, given n = 4, = 0.3:

Month Calculation
October Smoothed Average* = September Actual

= (September Actual) + (1 ) September Smoothed Average

= 1 * (131) + (0) (0) = 131

November Smoothed Average = 0.3 (October Actual) + (1 0.3) October Smoothed Average

= 0.3 (114) + 0.7 (131) = 125.9 rounded to 126

December Smoothed Average = 0.3 (November Actual) + 0.7 (November Smoothed Average)

= 0.3 (119) + 0.7 (126) = 123.9 or 124

January Forecast = 0.3 (December Actual) + 0.7 (December Smoothed Average)

= 0.3 (137) + 0.7 (124) = 127.9 or 128

Month Calculation
February Forecast = January Forecast

March Forecast = January Forecast

* Exponential Smoothing is initialized by setting the first smoothed average equal to the first
specified actual sales data point. In effect, = 1.0 for the first iteration. For subsequent
calculations, alpha is set to the value that is specified in the processing option.

This table is the Exponential Smoothing forecast for next year, given = 0.3, n = 4:

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
128 128 128 128 128 128 128 128 128 128 128