Forecasting

 An essential aspect of managing any

organization is planning for the future.

 For e.g. sales forecasting seeks to

estimate a firm’s future sales.
 Forecasting techniques are used to
determine:

1. Demand for products and services.

2. Availability/need for manpower.
3. Forecast inventory and materiel
needs daily.
Forecasting techniques used to
determine:

4. Future sales of products.

5. The way sales fluctuate at
different times of the year.
6. The effect of promotion on
sales.
Techniques for Forecasting
Sales
1. Qualitative – (use people’s
opinion/judgments)
consumer surveys, jury of experts,
delphi method, sales force composite

2. Quantitative – numerical data e.g.

moving average, least squares
regression
 Consumer Surveys
 Form of market research
I. Asking for likely future levels of demand.
II. Asking for reasons behind future demand
choices.

 Questions – quantitative/qualitative
 Sample large enough for greater accuracy
Consumer Surveys – Adv.
 Get direct responses from consumers.

 Be able to know exactly what

consumers would want.
Consumer Surveys – Disadv.
 Usually conducted by the business –
takes up management time (research
techniques, questionnaire construction)

 Can be expensive – business has to hire

a specialist market research agency.
Delphi Method
 External panel of experts
 The experts do not meet
 They are anonymous to each other.
 The facilitator collects and co-
ordinates the opinions from
experts.
Delphi Method
 Detailed questionnaires are sent asking
for their judgement about possible
future events.
 After each round of questionnaire
results are collected they are
summarized and sent to all of the
experts on panel.
 Delphi Method
 A 2nd round of questionnaire is sent out to
see if the experts have changed their minds
after reading the results of the first round of
questionnaires.
 When this is done the extreme responses
from the experts are often amended so that
a consensus is reached that reflects the
most likely ‘correct forecast.
 Delphi Method – Advs.
 More accurate forecasts can be given than
unstructured groups of experts giving their
opinions.
 Management team is not burdened to
conduct any surveys.
Delphi Method – Disadvs.
 It may take up to several rounds of
questionnaires to come to an
agreement.
 It may be costly.
Jury of Experts or Jury of
Executive Opinion
 Specialist within the business to make
forecasts (functional areas)
 Senior managers meet and develop
forecasts based on their knowledge of
the specific areas of responsibility.
Jury of Experts – Advantages
 Easy, quick and not much math
required

 Inexpensive

 Opinions from all executives are

integrated
Jury of Experts – Disadvantages.

 Lacks the external view of market

conditions and consumer trend than the
Delphi approach offers.
 Largely based on the managers opinion
and not supported by data.
 Not all the executives have knowledge
on forecasting.
 Sales Force Composite
 A technique used by production managers to
project the future demand for a good or
service based on the total amount that each
salesperson anticipates being able to sell in
their region.

 Based on feelings, ideas and personal

experiences of the company’s sales people.
Sales Force Composite
 For example, a sales force composite
analysis might be helpful to a
manufacturing business deciding how
much goods to produce within a given
time frame and what amount of raw
materials will be needed.
Sales Force Composite
 The salespersons individual reports are
often looked at and assessed to come
to a consensus.
Sales Force Composite –
Advantages.
1. Inexpensive
2. Salespeople know the sales potential
3. Salespeople are closest to the source.
Sales Force Composite –
Disadvantages.
1. Focus is only on the present.
2. Salespeople may be too optimistic.
3. Takes time away from selling.
4. Salespeople are not trained
forecasters.
5. extremely weak if there is trend
(changes) in the product or the market
demand.
 Moving Average
 This is the average of a set number of
periods.
 The average can be taken for any period the

business wants:
 Year

 Month

 A quarter
 Moving Average

 It is used to help to identify the trend of

sales and use the trend to make
predictions for future sales.
 An analysis will indicate an upward,
downward or constant trend.
 Types of Moving Average
 Simple Moving Average – adding all the
months or years looking at and then divide
the total by the number of months or
years.
 Weighted Moving Average – adjust the
moving average method by assigning
weights (%) on each figure to be
averaged.
 Simple Moving Average
Period Actual Moving Moving
Demand Total Average
(n=3)
1 4 - -
2 6 - -
3 5 - -
4 3 demand
Response Y1 – actual 4+6+5=15 15/3=5.0
5 6+5+3=14 14/3=4.667
 Weighted Moving Average
Month Demand Weight Weighted
applied Moving
Average
1 120 120*.2
2 130 130*.3
3 110 110*.5 118
4 140 129
5 110
6 130 Weights (.50, .30 and .20) :
Weights have to add up to 1.0
 Answer for previous slide
 Weights must add up to 1.
 Most recent information always gets the
highest weight.
 To calculate WMA for 3 months period (1 -3)
(120*.2) + (130*.3) +(110*.5)
24 + 39 +55 =118
 To calculate WMA for months (2-4)
(130*.2) + (110*.3) + (140*.5)
70 + 33 + 26 = 129
Calculate 3 year simple moving average
from the yearly sales of a toy
manufacturer ($000)
YEARS SALES
1995 300
1996 500
1997 600
1998 550
1999 600
2000 750
2001 850
2002 1,100
2003 800
2004 1,100
 3 year moving average for sales
of a toy manufacturer ($000)
YEARS SALES MOVING AVERAGE

1995 300
1996 500
1997 600
1998 550 466.7
1999 600 550
2000 750 583.3
2001 850 633.3
2002 1,100 733.3
2003 800 900
Moving Average – Advantages.
 It is reasonably accurate for short-term
forecasts in reasonably stable economic
conditions.
 It helps a business to plan for the
future – have an idea of what future
demands could be like
 Easy to interpret
Moving Average - Disadvantages
 It is a fairly complex calculation.
 Forecasts further into the future
become less accurate as the projections
made are entirely based on past data.
 Assumes no environmental changes.
Least Square Regression
 This method utilises the concept of
linear regression in making a forecast
for future sales or demand.
 The method fits a ‘line of best fit’
through a linear pattern of scatter
points.
 We are not required to plot the scatter
graph or show the line of best fit for
this course.
Product Design Planning
 Modularisation
 Miniaturisation
 Integration
 Value analysis
 CAD/CAM
Modularisation
 Much good product design is currently
based around ‘modular components’.
 These are parts of a product that can
easily be added or removed from a
complete product to make it look like a
new product.
 Cellular phones
Miniaturisation
 This refers to the trend towards smaller
and smaller products.
 Usually electronic products – have the
capacity to contain an increasing
number of features.
 For e.g. computers, cellular phones
Miniaturisation
 Smaller products – new and intricate
machinery has been developed that can
produce and assemble complex
products that would be too tiny for the
human hand to manipulate.
Integration
 Product designers need to integrate
their work with other departments of
the business in order to increase the
chances of the final product being
launched successfully.
 New product designs must focus on
consumer needs – market research
dept.
Integration
 Must integrate must be
‘manufacturable’ – integrate with
factory to find out if in reality it can be
made.
 It is rare for new products to be
commercially successful if this
integration has not taken place at the
design stage.
Value Analysis
 Process of analysing whether a product
or a new product design can be made
more efficiently without reducing its
consumer appeal.
 Criteria of Value Analysis
Performance Appearance Economy of
manufacture

• Does it • Does it • Can it be

have the look right? made at a
features • Is the cost level
consumers appearanc where
want? e of the profit can
• Will it be product be made?
reliable? appropriat
• e.g. e for the
washing market it is
machine aimed at?
Value Analysis
Your thoughts

on designing the most reliable washing

machine that could last for 20 years.
 Computer Aided Design (CAD)
 Before a product is manufactured it is used
in the designing process of a product.

 Designing on computer allows a business to

produce accurate drawings, which can be
viewed in 3D and altered cheaply and
quickly for a client.
Computer Aided Design (CAD)
 Designs can be accurately measured
and tested on computer for faults, such
as unsuitable components or
dimensions, which might have caused
problems during manufacture.
Computer aided manufacture
 The computers are used to design
products and the information is then fed
into CNC machines. These machines will
reproduce the shapes, guided by the
information contained in the computer.
 E.g. a manufacturer of telephones may
design a new shape using a CAD program
and inputted into CNC machines.