Prepared by Dr Shubhendra Singh Parihar for class room teaching

Sales forecasting Notes

Sales forecasting is a routine exercise of any sales manager. He has to forecast sales after every
month, quarter and a year. There are certain methods by which prediction can be more accurate.
The selection of forecasting method also depend upon the nature of data. If data is simple and
showing a linear trend then a certain methods are effective in prediction whereas if seasonality
trend appears in data set then another type of methods to be used to normalize the seasonality
impact.
Let us assume a time series – Yi ---------------Yn
Where
I<= n, then the forecasted error of the Ith term would be

Our goal is minimize this forecasted error

A number of measures are commonly used to determine the accuracy of a forecast, including
the mean absolute error (MAE), mean squared error (MSE) and root mean squared
error (RMSE).

Some other measurements are mean absolute percentage error (MAPE), mean

absolute scaled error (MASE) and symmetric mean absolute percentage
error (SMAPE).

For data with seasonality (Holt winter forecasting) where the periodicity is c, the
formula for MASE becomes

Finally, there is Theil’s U statistic, which is computed by the formula

If U < 1, the forecasting technique is better than guessing, if U = 1 then the forecasting
technique is as good as guessing and if U > 1 then the forecasting technique is worse
than guessing.
Actually, U is also called Theil’s U2 statistic. There is also a, less-often used, U1 statistic
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U1 takes values between 0 and 1, with values nearer to 0

representing greater forecast accuracy.

Simple Moving Average

Using a simple moving average model, we forecast the next value(s) in
a time series based on the average of a fixed finite number m of the
previous values. Thus, for all i > m

Example
The given table is the sales of product “X” in a year. The sales figures are in number of units/
month is given. Predict the month wise sales in next year. Plot a graph

Month Sales (in Units)

1 24
2 34
3 56
4 32 38
5 45 40.666667
6 31 44.333333 11.54059
7 57 36 5.789518
8 68 44.333333 7.871656
9 67 52 12.13046
10 33 64 11.9086
11 23 56 16.26858
12 34 41 16.95091
30 17.0196

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Moving Average
80
70
60
50 Actual
40
Value

Forecast
30 Linear (Forecast)
20
10
0
1 2 3 4 5 6 7 8 9 10 11 12
Data Point

Exponential smoothing
In Weighted Moving Average, you can give more weight to recent events, but you are
limited to the last m observations. Exponential Smoothing improves on Weighted
Moving Average by taking all previous observations into account, while still favoring the
most recent observations.
In Simple (aka Single) Exponential Smoothing, the forecasted value at time i+1 is
based on the value at time i, and the forecasted value at time i (and so indirectly on all
the previous time values). In particular, for some α where 0 ≤ α ≤ 1, for all i > 1, we
define

Note that we don’t include time i = 1 in the calculations of MAE and MSE.
By simple algebra, this iteration can also be expressed as

Now using exponential smoothing function from excel and get the following results.

The value of alfa is taken by the system is 0.7 by default if not mentioned by you.
This method gives weightage to recent data as compared to previous one.
#N/A #N/A
34 #N/A
49.4 #N/A
37.22 #N/A
16.8056
42.666 4
12.9019
34.4998 9
15.3066
50.24994 8

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62.67498 17.8644
2 8
65.70249 16.7334
5 9
42.81074 21.6273
8 3
28.94322
5 22.2158

Exponential Smoothing
80
60 Actual
40
Value

Forecast
20 Linear (Forecast)
0
1 2 3 4 5 6 7 8 9 10 11
Data Point

Holt’s Linear Trend Method

The above two method shows a distinct upward trend. The Moving Average and Simple
Exponential Smoothing methods don’t adequately model this, but Holt’s Linear Trend Method
( Double Exponential Smoothing) does. This is accomplished by adding a second single
exponential smoothing model to capture the trend (either upwards or downwards). The model
takes the following form for all i > 1

Where 0 < α ≤ 1 and 0 ≤ β ≤ 1.

Note that if β = 0, then the Holt model is equivalent to the Single Exponential Smoothing model.

Holt's Linear Trend    

       
24 u v forecast
34 34 0  
37.4355
56 8 0 34

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36.5867 37.4355
32 5 0 8
37.9005 36.5867
45 8 0 5
36.8229 37.9005
31 7 0 8
39.9738 36.8229
57 7 0 7
44.3505 39.9738
68 1 0 7
47.8875 44.3505
67 2 0 1
45.5626 47.8875
33 4 0 2
45.5626
23 42.0392 0 4
40.7837
34 7 0
42.0392
40.7837
>     7
       
alpha beta MAE MSE
0.156162 15.9091 313.286
8 0 4 2

When to use Holt’s Linear trend Method?

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When the data set is showing a linear upward or down ward trend then this method
predicts better.
Holt’s winter Method
Holt-
Winter
Method        
         
24 u v forecast  
0.81437
34     1  
1.34131
56     7  
0.76646
32     7  
1.07784
45 41.75 0 4  
31 41.75 0 0.81206 34
1.34208
57 41.75 0 8 56
0.79419
68 41.75 0 7 32
1.09479
67 41.75 0 1 45
0.81136 33.9035
33 41.75 0 4 2
1.31664 56.0321
23 41.75 0 4 6
0.79484 33.1577
34 41.75 0 6 3
1.09479
>     1 45.7075
         
alpha beta gamma MAE MSE
0.03215 13.8254
0 0 9 2 411.807
0.03215
  α+γ 9    

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Forecast
80
70
60
50 v
40 forecast
value

actual
30
forecast
20
10
0
34 56 32 45 31 57 68 67 33 23 34 >
time

When to use Holt’s winter method?

When data is showing seasonal impact, better use Holt’s winter model.

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