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    forecasting

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    © All Rights Reserved
    Download as PDF or read online from Scribd
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    5 views4 pages

    9612100375

    Uploaded by

    pkj009
    forecasting

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    © All Rights Reserved
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    A So aN nde 2 ose hl cad te oir IMPROVING SALES FORECASTS BY IMPROVING THE INPUT DATA By _ Michael D. Geurts and David Whitlark Although oftenignored, data quality may be one of the biggest stumbling blocks to creating accurate sales forecasts ... evaluation of sales and governmental data may reveal both forecasting flaws and forecasting solution .. keeping a log of product changes, competitors’ activities, promotions, and internal politics will prove helpful in future forecasting efforts Jory yeni rcanerbats Pricistrersatienesneet th fren by improving te els sed fo make ocean, The er ‘ay toimpove te accuracy ofreestig xt tegoretngaly ots deri The November 7, 1994 Business Week ‘cover story illustrates the problems with forecasting with bad data, The article is entitled “The Real Truth About the Economy. Are Government Statisties So Much Pulp Fiction? Take A Look.” The article focuses on the errors inthe data that the government provides and how the data, do not represent what they intend to represent. At the beginning of the article it states, “The economic statistics that the government issues every week should come ‘with a warning sticker: User Beware... the government is pumping out a stream of Statistics that are nothing but myths and misinformation.” Problems also surfaced during the 1990 census, in spite ofa large effort to gather accurate data, some states ‘and organizations sued the U.S. Census Bureau over the accuracy in the reported Satisties, ‘The Manager's Journal column in the January 9, 1995 Wall Street Journal reports that, “The flaw in Intel's Pentium chip underscores an already pervasive business problem — bad data. Faulty information generates poor decisions, which in turn can cost a company its market. Most often, however, hardwareisn’ttoblame, Consider how much information we gobble up without double-checking its origin or validity.” Apparently, gathering and identifying accurate data is a problem for governments and businesses, ‘Thepurposc ofthe articleisto highlight several sources of data error and to provide ideas for helping forecasters recognize and adjust for inaccurate data. We first discuss pitfallsassociated with company-generated sales data, then tum to problems with government data that may affect sales forceasts COMPANY-GENERATED SALES DATA Ther data error that complicate are many possible sources of les forecasting. Most companies use atime series approach to forecast sales for production planning, MICAHEL GEURTS Dr. Geurtsisa Professor of Business ManagementatBrigham Young University He received his doctorate degree in ‘marketing from the University of Oregon. He has consulted for AT&T, Hewlett- Packard and other leading firms. He has Published in the Journal of Marketing Research and other marketing and forecasting journals, ‘THEJOURNAL OF BUSINESS FORECASTING, FALL 1996 DAVID B. WHITLARK Dr. Whitlark is an Assistant Professor in the Marketing Department at Brigham Young University. He holds graduate degrees from Cornell University and the University of Virgi He is a Senior Associate with Wirthlin Worldwide through which he consults with companies, industry associations,and charitable organizations. ‘The philosophical basis of time series forecasting is that the measured valves that ‘constitute the series are generated by an underlying process that remains stationary overtime, Asaresult, pastdatapattens an ‘be thrown forward to produce a forecast of the time series, All time series models, such as exponential smoothing or Box- Jenkins, use this notion, The primary difference in time series models is in the ‘manner in which thepastdataarestatisically partitioned, aggregated, and weighted prior to the projection and the method of projecting. Obviously, time series forecasting depends heavily on gathering ‘accurate past ata thatreflect theunderlying process that generates the data, DISTORTIONS INTRODUCED ‘THROUGH PERIODIC MARKETING MIX EXPENDITURES. ‘A time series can be broken down into components or patterns, Most researchers referto four components intime series, that is (2) trend, (2) seasonality, (3) cycles, and (4) noise or residuals, In many time series, particularly those which measure a product's sales,afifth componentis present which are called “outliers.” ‘The fifth component, outliers, can be the result of marketing mix expenditures such as a price promotion, consumer promotion, or extraordinary advertisement thathave an effect on only a few of the data points. One important goal of marketing ‘managers is to create positive sales outliers through manipulating the marketing mix. Wdentifying and adjusting for marketing mix outliers is a recurring and difficult process in sales data analysis that is critical tosales forecasting. Ifthe sales data arenot modified toremovethe impactoftheoutlier whenthe data areanalyzed, themodels may inappropriately attribute the outlier effect to a onc of the four previously mentioned time-series components ‘There are many ways to deal with outliers. Afteranoutlierhasbeen identified, the forecaster should determine the cause ofthe outlier. Then the outliers changed to value that makesit fit better with the more typical datapoints. Forexample, considera simple approach described by Velleman and Hoaglin. They smooth a time series describing the number of live births per 10,000 23-year-old. women in the United States between 1917 and 1975. Large scale trends, such as drops in birtrate during the Depressionand the surgein irthate during the baby-boom following World War I, are easily picked out. The values of the smoothed daa are then subtracted from the raw data to create “rough” o residual data {time series plot depicting the “ough of birthrate” shows erate periods during the 1920s and during World War Il. The smoothed data can be used for forecasting trends, whereas the rough data can identify outliers and help predict situations that could interfere with the general trend. ‘The value that replaces the outlier ean be determined by several techniques. A common approach is to use the average value of the series or the average value of the data points before and after the outlier. Sometimes the forecast value is used in place of the outlier value. DISTORTIONS INTRODUCED ‘THROUGH SALES QUOTAS Sales managers set up sales compensation programs to motivate salesmen and maximize company profits Salesmen, however, can manipulate the sales program to benefit themselves. In doing so they can distort management's view of actual sales patterns. For example, salespeople may be on a quota, and if $0, it may be that when they make their quota, they postpone some sales so they fall into the next quota period. This practice makes it easier for the salespeople to make quota nxt period, but it changes the underlying sales process andhasa measurably negative ‘effect on the ability to accurately forecast sales. Postponing sales once a quota is achieved is not the only way in which our picture ofthe salesprocess can be distorted. In another situation, ifa salesperson hasn't ‘made quota, they may buy the product for their own account to make quota and then sell the product in the next period. Another tactic is for a salesperson to get a good friend who is a customer to buy enough product from them to reach their quota for the period; then the customer cancels the ‘order orreturns the merchandise in thenext quota period, “Game players” that manipulate incentive programs are a problem in most every sales organization. Forecasters must know which product lines and time periods are most likely to experience such distortions. EFFECTS OF PRODUCT SUPPLY ‘ON SALES DATA PATTERNS ‘An additional problem in sales forecasting is that often a product's sales ‘are not made up of a single time series, but of two different time series. The time series for some months measures customer demand; for other months the time series ‘can measure product supply or production capacity. For example, consider thesales of Japanese-made cars in the United States. During portions ofthe time series, there are import quotas or tariffs, and the number of ‘cars sold measures supply, not demand During other periods, quotas do not exist, and the time series is a measurement of demand, ‘Another example of this problem is forecasting tourism. During February and ‘August, the hotel occupancy ratein Hawaii is often as high as 98 percent. As aresult, it is impossible to find available rooms some ‘months, However, in November, occupancy rates can be as low as 47 percent. Such a time series measures hotel capacity (not demand) during some months (February 1nd August), but measures demand the rest of the year, ‘Also consider new products, It is not uncommon foracompany tounder-forecast sales and allocate too little production ceapacity for a new product. It may take several years to build the capacity necessary to satisfy demand, As a result, for the first few years of a popular product's lifecyle, the timeseriesmeasures production capacity rather than demand, In the above situations, the sales time ‘THEJOURNALOF BUSINESS FORECASTING, FALL 1996, series is really two time series. One is a sales-demanded time series; the other is a production-capacity time series. The demand is what should be forecasted. To forecast demand, the forecaster must identify which periods were constrained by supply and increasethe sales ofthose periods toreflectthe quantity of product demanded. ‘A manufacturer could correct demand data by adding the number of back orders forthe Period to the mumber actually shipped. Where this eannot be done, the forecaster may have to use other methods such as multiple regression to estimate what Additional sales would have been if there had been an adequate supply of product. ACCOUNTING-INDUCED DATA. DISTORTIONS Accounting practices can have the effect of distorting the data used in forecasting. Forexample,a problemeaused by accounting methods is that some firms

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