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Case: FORECASTING SALES

Vintage Restaurant
STATEMENT OF THE PROBLEM
Vintage Restaurant, a restaurant which is owned and
operated by Karen Payne, has just completed its third year
of operation and has sought to establish a reputation for
the high-quality dining restaurant. Karen wants to plan
better for the growth of the restaurant in the future.
Hence she needs to develop a system that will enable her
to forecast food and beverage sales by month for up to 1
year in advance. In order to do this, an analysis of the sales
data for the Vintage Restaurant must be done.

Given the Food and Beverage Sales
for the Vintage Restaurant ($000s)

Month First Year Second Year Third Year
January 242 263 282
February 235 238 255
March 232 247 265
April 178 193 205
May 184 193 210
June 140 149 160
July 145 157 166
August 152 161 174
September 110 122 126
October 130 130 148
November 152 167 173
December 206 230 235
REQUIREMENTS
1. Graph of the time series


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The Vintage Restaurant
Sales
2. Seasonality of the data
Month First Year
Second
Year
Third Year Total Mean Grand Mean Index
Seasonal
sales
January 242 263 282 787 262.33 187.64 1.40 High
February 235 238 255 728 242.67 187.64 1.29 High
March 232 247 265 744 248.00 187.64 1.32 High
April 178 193 205 576 192.00 187.64 1.02 High
May 184 193 210 587 195.67 187.64 1.04 High
June 140 149 160 449 149.67 187.64 0.80 Low
July 145 157 166 468 156.00 187.64 0.83 Low
August 152 161 174 487 162.33 187.64 0.87 Low
September 110 122 126 358 119.33 187.64 0.64 Low
October 130 130 148 408 136.00 187.64 0.72 Low
November 152 167 173 492 164.00 187.64 0.87 Low
December 206 230 235 671 223.67 187.64 1.19 High
Total Mean 2,251.67
Grand Mean 187.64
3. Forecast sales for January through December of the fourth
year.



Linear Regression
y = 146.5x + 1958.7
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This regression is extremely good with an value of 0.999. The
regression equation is given as: y = 146.5x + 1958.7

For the fourth year, the total sales are obtained by plugging in x = 4
in the above equation: y(x=4) = 146.5*4 + 1958.7 = 2544.7

The average monthly sales during the fourth year, therefore, is
2544.7/12 = 212.058

The forecast for a particular month (say July) is calculated by
multiplying the average monthly sales forecast by that months
(Julys) seasonal index. For the month of July, it will be
0.831*212.058 = 176.22

Thus, the monthly forecasts for the 12 months of the fourth year
will be:

Month
(yr.4)
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
S. Index 1.40 1.29 1.32 1.02 1.04 0.80 0.83 0.87 0.64 0.73 0.87 1.19
Forecast 296.46 274.19 280.34 216.94 221.18 169.22 176.22 183.43 134.87 153.74 185.34 252.77
4. Suppose the actual January sales for the fourth year turn out to
be $295,000.

The forecasted January sales are $296,458.

Error between actual and forecasted sales
= $296,458 - $295,000 = $1458

Percentage Error =

This is an extremely small percentage error. Karen does not have
to worry about this error and she can be assured that her forecast
model is extremely good.

0.49% 100 *
295000
1458
100 *
s ActualSale
Error
5. Recommendations as to when the system that you have
developed should be updated to account for new sales data that
will occur.

Forecasting by its nature are merely projections of the future
amounts of a certain base. The drawback of this is setting a wrong
projection whenever a wrong data is employed as a basis and
whenever uncertainties in the environment arise. Thus, in order
for a company to set a more realistic projection especially for
companies with very volatile trend in sales, it is recommended
that forecasts are evaluated monthly for its variance and develop
an updated system at least semi-annually to account for new sales
data that will occur. By having this, the frequency is just enough to
account for new data while keeping your projection reliable and
less burdensome.