CHAPTER SALES FORECASTING TECHNIQUES

LEARNING OBJECTIVES

9.1 Sales Forecasting

9.1.1 Non Statistical Methods of Sales Forecasting
9.1.2 Other Techniques
9.1.3 The Delphi Method
9.2 The Quantitative Forecasting Method
9.2.1 Examples of Simple Moving Average
9.2.2 Examples of Weighted Moving Average
9.2.3 Method of Least Squares

________________________________________________________________________
SALES FORECASTING TECHNIQUES

9.1 SALES FORECASTING :

It is the task of projecting the future sales
of the firm. The Sales forecast indicates how much of a product is
likely to be sold during a specified period in a specific market, at
specified prices.

Why Sales Forecasting ?

All business firms are keen to know the likely demands for its products
how much of a given product it could sell in a given market in a given
time; whether the sale would increase or decrease from the current
levels and by how much and what would be the share of the market it can
secure during the specified period. This knowledge is required by the
firm for its very survival and growth. Without this knowledge it cannot
plan any of its activities. Sales Forecasting provides this vital
knowledge.

Forecasting is the Starting point for all activities in the marketing

(1) Sales forecasting fulfills the primary requirement of business

planning. It helps the firm to decide which products are to dropped,
which ones are to be added to the line, and which ones need
modification. Thus Sales Forecasting influences the course of all the
business decisions / activities of the firm.

(2) It enables the firm to identifying its precise position in the

market, this in term facilitates option utilization of resources,
option penetration of markets, and option gains from the marketing
opportunities.

(3) It gives the backbone of 'Customer Oriented Marketing' as Sales

forecasting not only provides the quantitative
(Arithmetic numbers ) but also about the vital clues regarding
customer's tastes, preferences and needs.
(4) It helps in Marketing Planning and Strategy formation and develop
its marketing objectives.

(5) It helps in developing company budgets, vital for fixing sales

targets and for decisions on physical distribution, promotion, Sales
force and pricing. In short, the entire marketing miX i.e. product,
price, promotion and distribution, revolves around the Sales
Forecasting.

Period Range of Sales Forecasting

The short range forecast
The large range forecast
The Perspective planning forecast

9.1.1 NON STATISTICAL METHODS OF SALES FORECSTING :

(I) JURY METHOD / EXECUTIVE OPINION METHOD

The Jury Method is the commonly applied method of Sales Forecasting

( also known Executive Opinion Method ). JUDGEMENT is the crucial
factor in this method. This is true of both 'TOP JURY METHOD' and
'PERCOLATED JURy METHOD'.
In the Top Jury Method, the participants are limited to senior
level persons only whereas in the Percolated Jury Method a large
number of Marketing/Sales Executives participate. By a rough averaging
of these opinions the final forecast is arrived at. Evidently, the more
the participants have a versatile experience and sound knowledge of the
business, the more accurate shall be the forecasting. They must be well
informed about the overall Economic Environment and the the conditions
prevailing in the country. They should also have the knowledge about he
STRENGTHS and WEAKNESSES of their firm.

Merits
(1) This is based on judgement and is easy to operate.
(2) Gives due weightage to experience and judgement of the people
who know the market.
(3) Is more suitable for the firms who have to adopt Statistical
Techniques in their firms ( where past sales and market statistics are
not available).

Demerits

Forecasting is based on "Opinions" and not on "Facts".

(ii) SURVEY OF EXPERT OPINION METHOD

This method is based on 'Opinion' but differs from the Jury Method
in the sense that here the experts in the concerned field inside or
outside the organisation are approached for their estimates. This
method is more useful in developing the total industry forecast that
company level Sales Forecast.

(iii) SALES FORCE COMPOSITE METHOD

As per the Sales Force Composite Method, the Sales Forecasting is
done by the Sales Force. It is also a judgement based method. Each
salesman develops the forecast for his respective territory; the
territory based forecast are consolidated at branch/area/region level;
and the aggregate of all these forecasting is taken as the Corporate
Forecast.

COMPARISON WITH JURY METHOD :

It is similar but differs as in Jury Method
only a few Executives participate whereas here all salesmen
participate. It is a grass roots method as the forecast is obtained
from consumers bypeople who are closest
to the market.

9.1.2 OTHER TECHNIQUES

(1) USER EXPECTATION METHOD

More suited for industrial products.
The method is called User Expectation Method / End Use Method /Survey
of Buyers' Intention Method.

(2) MARKET SHARE METHOD

( Based on SWOT Analysis)

Merits and Demerits of Sales Composite Method

Merits

(1) As the method is a grass root method, it is a micro level and hence
more close to the values likely to be.

(2) As customers in proximity to salesmen, hence their opinions are

also figuring here and hence more reliable in prediction.

(3) As the salesmen themselves do it hence they have to commit for the
same and easy for implementation for fixing of Sales Quota.

(4) the technique takes care of Production and hence easy to do for
branch/area wise and monthwise and customerwise (Dealer/Distributor)

(5) Hence gives a very meaningful Corporate Forecasting and be

responsible for better budgets etc.

Demerits

(1) All salesmen may not be matured and experienced enough and do not
possess the knowledge of statistical techniques.
(2) As they shall have their sales quota fixed on this, may try to play
it safe.
(3) Some salesmen are more optimistic and some are more pessimistic.
(4) Knowledge of Market conditions and prevailing conditions in the
country are also essential for Forecasting.

9.1.3 THE DELPHI METHOD :

The Delhi Method is a fairly new technique where a set
of procedures is laid for obtaining and referring the opinions of a
group of people. ( When the experts are asked to about their opinions,
usually their is a divergence. To the decision maker, it posses the
problem of evaluation of the divergent points view. Also a group of
interaction has its drawbacks such as the influence exercised by
dominant individuals and so on ). In Delphi Techniques such drawbacks
are kept at a minimum.

Delphi Technique
"The Delphi Technique is an iterative process to obtain the most expert
opinion of a group of experts. It is essentially a series of intensive
interrogation of an individual considered as expert in the relevant
area of inquiry, through a number of sounds of " inquiry, response and
feedback". At the end of each round, the responses are sent to the
respondents for further inquiry. This is repeated until the convergence
of opinion takes place. However at each round the individual responses
are kept confidential.
In the entire process of study, there is no face to face communication.
The anonymity and secrecy of the individuals' behaviour is maintained
right through.

Advantages

(1) The influence of dominant members and group pressure in expressing

opinion is prevented.
(2) The respondents are not effected by the 'bandwagon effect' of a
majority opinion.
(3) The respondents are free to retreat from an expressed opinion.
This technique has been widely and successfully used to forecast the
distant future. The basis for the forecast is the
respondents'experience and sense of awareness as an expert.
(4) This technique can be used for forecasting both qualitative and
quantitative factors.
(5) This technique can be used to process both opinion, judgement and
exact numeric factors.

DELPHI PROCEDURE

Delphi Procedure can be analysed under following headings :

(1) Anonymity

Anonymity of the respondents is ensured through separate and

private answering of prepared questions. This means that a dominant
individual cannot influence the opinions. At the same time interaction
between the group members are also ensured through formal communication
channels operated by the consultants or executives who control the
Delphi experiment.

(2) Interactive Process

The opinion and estimates of the group members are statistically

analysed. For example, if the group task is to estimate the 'Numerical
Quality' such as forecast of demand after 20 years, the median value of
estimates of all individuals may be a very good indicator.Once again,
these justifications are analysed, summarised, feedback and counter
arrangements are elicited. This is an interactive process.

(3) Group Response

Each respondent is asked to rate various questions in the order of

his competence to answer them and in the order of his confidence in his
answer. This helps in arrowing at group response and to select a
subgroup of relatively more confident individuals within the group,
whose ***ª is better than the group as a whole. Delphi Technique are
used increasingly in the areas of long range activities such as
technological and social developments. In addition to applying for
Forecasts Demand, the technique can be successfully utilized for demand
of raw material, new source development, and the prices of raw material
and government policy on imports and lead timing.

9.2 THE QUANTITATIVE FORECASTING METHODS :

The Quantitative Forecasting Methods are :
1. Time Series :
(a) Simple Moving Average Method
(b) Weighted Moving Average Method
(c) Exponential Smoothing

2. Trend Projection
Correlation Regression Analysis

9.2.1 EXAMPLE OF SIMPLE MOVING AVERAGE :

_____________________
| Year | Demand |
| | Tons of |
| | Steel Sold |
|--------|------------|
| 1985 | 2.0 |
| 1986 | 3.0 |
| 1987 | 5.0 |
| 1988 | 7.0 |
| 1989 | 8.0 |
| 1990 | 9.0 |
| 1991 | 11.0 |
| 1992 | 12.0 |
| 1993 | 14.0 |
| 1994 | 15.0 |
| 1995 | 17.0 |
| 1996 | 19.0 |
| 1997 | 20.0 |
|________|____________|

Step 1
Find the three year moving average for the sales of steel sold
during the year 1985 1997.

__________________________________________________________
| Year | Steel | Three Year | Three Year | Forecasts |
| | Sold | Sales | Sales Moving | |
| | (Tons) | (total) | Average | |
|------|--------|---------------|--------------|-----------|
| 1985 | 2.0 | ------ | ------- | ---- |
| 1986 | 3.0 | 2+3+5 = 10 | 10/3 = 3.33 | ---- |
| 1987 | 5.0 | 3+5+7 = 15 | 15/3 = 5.00 | ---- |
| 1988 | 7.0 | 5+7+8 = 20 | 20/3 = 6.67 | 3.33 |
| 1989 | 8.0 | 7+8+9 = 24 | 24/3 = 8.00 | 5.00 |
| 1990 | 9.0 | 8+9+11 = 28 | 28/3 = 9.33 | 6.67 |
| 1991 | 11.0 | 9+11+12 = 32 | 32/3 = 10.67 | 8.00 |
| 1992 | 12.0 | 11+12+14 = 37 | 37/3 = 12.33 | 9.33 |
| 1993 | 14.0 | 12+14+15 = 41 | 41/3 = 13.67 | 10.67 |
| 1994 | 15.0 | 14+15+17 = 46 | 46/3 = 15.33 | 12.33 |
| 1995 | 17.0 | 15+17+19 = 51 | 51/3 = 17.00 | 13.67 |
| 1996 | 19.0 | 17+19+20 = 56 | 56/3 = 18.67 | 15.33 |
| 1997 | 20.0 | ----- | -------- | 17.00 |
| 1998 | | | -------- | 18.67 |
|______|________|_______________|______________|___________|

Forecast for the year 1998 = 18.67 Tons of Steel

Shortcomings of Simple Moving Average Method" :

(1) All past datas are given equal weightage.
(2) Method does not take care of seasonal fluctuations.
(3) All previous periods have to be carried forward for calculating
forecasts for future periods.

9.2.2 EXAMPLE ON WEIGHTED MOVING AVERAGE :

The first disadvantage i.e. "All part data periods are given the same
importance by giving equal weightage" can be improved by giving
weightage to the historical data e.g.
For the year 1997 = 50%
1996 = 30%
1995 = 20%
------------
Total = 100%
------------

Thus for the above example

forecast for the year
1998 = 20 X weightage factor (0.50)
+ 19 X weightage factor (0.30)
+ 17 X weightage factor (0.20)
= 10 + 6.33 + 8.50
= 24.83 T

Fitting Trend Line

9.2.3 METHOD OF LEAST SQUARES :

This is the most popular method of fitting a trend
line to the sales data. This method is a mathematical device which
places a line through a series of plotted points in such a way that
the sum of the squares of the deviations of the actual points above
and below the trend line is at the maximum. The method, therefore,
is called the Method of Least Squares and gives the line of the
best fit.

Advantages :

(i) The method is free from personal prejudice and bias.

(ii) Different persons working with this method will get the
same result.

(iii) Trend values can be obtained for all the years.

(iv) The method gives the very satisfactory results as the sum
of the squares of deviations is the least.

Example illustrating the Least Squares Method :

Suppose that we have the following figures of production
value( Rs. in Lacs) for the last five(5) years i.e. from the year
1993-94 to 1997-98. Using method of least squares find :

(a) The Production Value for the year 1998-99

(b) If the business conditions indicate that the production

will be 20¥ higher than the trend, what will be the production
value (Rs. in Lacs) for the year 1999-2000.

-
Year Production Value (Rs. in Lacs)
- 1993-94 1.6

1994-95 1.3

1995-96 1.5

1996-97 1.8

1997-98 2.5
-:
By applying Method of Least Squares :
- Year Production Value Deviation from
(Rs. in Lacs) Middle year
y x xy xµ2µ
-
1993-94 1.6 -2 -3.2 4

1994-95 1.3 -1 -1.3 1

1995-96 1.5 0 0 0

1996-97 1.8 +1 +1.8 1

1997-98 2.5 +2 +5.0 4

-
__ __ __ __
dy = 8.7 \ dX = 0 \ dxy = 2.3 \ dx2 = 10 \
 /_ /_ /_ /_

-
__
\ dy 87
/_
a = --- = --- = 1.74
n 5
__
\ dxy 2.3
/_
â = ------- = ----- = 0.23
dx2 10

Therefore, equation of the trend is

" y = a + bX "

y = 1.74 + 0.23x

Putting X = -2, -1, 0, +1, +2

Trend of Production during 1993-94 = 1.74 + 0.23(-2)

= 1.74 0.46 = 1.28

Trend of Production during 1994-95 = 1.74 + 0.23(-1)

= 1.74 0.23 = 1.51

Trend of Production during 1995-96 = 1.74 + 0.23(0)

= 1.74 0 = 1.74

Trend of Production during 1996-97 = 1.74 + 0.23(+1)

= 1.74 + 0.23 = 1.97

Trend of Production during 1997-98 = 1.74 + 0.23(+2)

= 1.74 + 0.46 = 2.20

Trend of Production during 1998-99 = 1.74 + 0.23(+3)

= 1.74 + 0.69 = 2.43

(b) Forecast for the year 1999-2000 :

Forecasted sales = Trend + Cyclic Variation

-
= 2.43 + 0.20(2.43)

= 2.43 + 0.49

= 2.92

Hence, production value (Rs. in Lacs) will be expected at

Rs. 2.92 Lacs.

The trend is fitted by the method of least squares.

The Forecast Y = a + bx
where Y = Calculated Trend Value.
 a = intercept of the Trend Line at y axis
â = slope of the trend Line
The values of a and â are determined by "regression analysis".

For values of i = 1 to n
Y1 = a + bX1
Y2 = a + bX2
.
.
Yi = a + bXi ............(1)
Yn = a + bXn

Adding all these equations, we have

Y1 + Y2 + Y3 + .... + Yn = na + b(X1 + X2 + .... + Xn)

Divide both sides by n,

__ __
\ Yi = a + b(\ Xi
/_-- /_--
n n
_ _
y = a + b.X ............. (ii)

Subtract (ii) from (i), we have

_ _
Yi y = b(Xi x).
or y = b (x) where y = difference of Yi from average

and X = difference of Xi from average

xy = b(x)2
__ __
\ dxy = b\x2
/_ /_
__
\ xy
/_
Therefore b = ------
__
\ X2
/_
To determine 'a', substitute the value in the equation
_ _
y = a + b (X) above.

3. Exponential Smoothening :

In the Exponential Smoothening Method, the forecast for the

Next Month(new forecast) is based on the forecast for the Previous
Month(old forecast) and the Actual Value of the Previous month.

The weightages given are dependent on the nature of

changes.

Forecast for the month(k) = 1/x ( actual price in the

 month (k -1) + (1 1/x) ( forecast for the month (k
d) ]

If X = 5 in the last example,

then, the forecast for the

- Year ActualProductionValue Production Value
-
1993-94 1.6 1.8

1994-95 1.3 1.76

1995-96 1.5 1.67

1996-97 1.8 1.64

1997-98 2.5 1.67

1998-99 3 1.84
-

For the year 1994-95 : 0.2(1.6) + 0.8(1.8)

= 0.32 + 1.44 = 1.76

For the year 1995-96 : 0.2(1.3) + 0.8(1.76)

= 0.26 + 1.41 = 1.67

For the year 1996-97 : 0.2(1.5) + 0.8(1.67)

= 0.30 + 1.34 = 1.64

For the year 1997-98 : 0.2(1.8) + 0.8(1.64)

= 0.36 + 1.31 = 1.67

For the year 1998-99 : 0.2(2.5) + 0.8(1.67)

= 0.50 + 1.34 = 1.84

Another approach to do the same is

New Forecast (for the next year)

= Old Forecast (of the previous year)
+ (Actual Oâserved of the previous year Predicted Value)

where 'a' is called the Smoothing Factor.

In the above example ,

Forecast for the year 1994-95 = (a = 1/n = 1/5 = 0.2)

= 1.8 + 0.2[1.6 1.8]

 = 1.8 .04

= 1.76

Similarly for the year 1995-96

= 1.76 + 0.2(1.3 1.76)

= 1.76 .09
= 1.67 and so on.

Advantages :

In the moving average, we have seen that the weightage

given is 1/X where X is the number of months/ years overwhich the
average is taken. The moving average requires a lot of data
presentations and this becomes tedious if the number of months
overwhich the average is taken is large. Another aspect for
consideration is the equal weightage. These two aspects
presentation of data and equal weightage to previous months is
overcome by the Exponential Smoothing Method.

QUESTIONS FOR SELF PRACTICE :

Q.1 With the help of following data, project the trend for the next
3 years :

YEAR 1995 1996 1997 1998 1999

SALES 1,00,000 1,05,000 1,15,000 1,25,000 1,50,000

Q.2 Fit a straight line trend to the following data :

YEAR 1993 1994 1995 1996 1997 1998 1999

PRODUCTION
(‘000 35 36 38 41 43 45 50
tons)

Estimate the production for the year 2000 .

Q.3 The following data refer to sales, in thousands of rupees(x), of a

certain product five years :

YEAR 1988 1989 1990 1991 1992

X 605 715 830 790 835
REVIEW QUESTIONS :-

Q.1 What is Sales Forecasting ? Why Sales Forecast is necessary?

Write briefly the various techniques of Sales Forecasting.

Q.2 Describe the quantitative Forecasting methods and illustrate

through examples of your choice.

Q.3 Discuss Delphi Technique for Forecasting. What precautions

must be taken while using Delphi Technique ?

Q.4 Explain Regression Analysis Method for forecasting.

Q.5 Explain the difference between Co-efficient of Co-relation

and Co-efficient of determination .

Q.6 Write briefly the Exponential Smoothing Method of

Forecasting