Sales Forecasting

Dr. Inderdeep Singh,

Department of Mechanical and Industrial Engineering,
Indian Institute of Technology Roorkee
 Is Forecasting a Black Art?

“Economic forecasting, like weather

forecasting in England, is only valid for
the next six hours or so. Beyond that it is
sheer guess work”
M.J. Moroney
 Definition

• Forecasting is the process of estimating

future demand in terms of the quantity,
timing, quality, and location for desired
products and services
• Forecasting is the art and science of
predicting future events
Incorrect FORECAST Correct

 
 
 Sales forecasting
Why is it important?

• A key element of business decision

making

• strongly influences an organization's

strategy regarding its future direction,
priorities and activities
 Need of forecasting

• Lead times require that decisions be made

in advance of uncertain events.
• Forecasting is important for all strategic
and planning decisions in a supply chain.
• Forecasts of product demand, materials,
labor, financing are an important inputs to
scheduling, acquiring resources, and
determining resource requirements.
 Forecasting: A Decision Making Process

• The essential problem of management is to

transform a company's strategic objectives into
decisions and actions.
• The constantly increasing volatility of business
dynamics emphasizes the critical importance of
forecasting in decision making processes.
 Forecasting Horizons

• Short Term (0 to 3 months): for inventory

management and scheduling.
• Medium Term (3 months to 2 years): for
production planning, purchasing, and
distribution.
• Long Term (2 years and more): for
capacity planning, facility location, and
strategic planning.
 Decisions
1. Selection of data
2. Selection of Method
INPUTS OUTPUTS
1. Internal data
a) Historical
Forecasting
b) Subjective Estimates of
c) Survey Methods 1. Expected demand
1. Predictive 2. Forecast error
2. Environmental 2. Causal
Data 3. Time series
a) Economic
b) Social, political
c) Technological Constraints
1. Data 3. Expertise
2. Time 4. Funds
The Forecasting System
 Forecasting Methods

• Qualitative methods are subjective in

nature since they rely on human
judgement and opinion.
• Quantitative methods use mathematical
or simulation models based on historical
demand or relationships between
variables.
 Forecasting Methods

• Qualitative
- Analogies, historical comparison
- Survey technique
- Delphi method
 Forecasting Methods

• Quantitative
- Time Series Methods (Average, moving
average, exponential smoothing)

- Causal Methods (Linear regression,

multiple regression)
 Forecasting Methods

• Qualitative or Subjective
- rely primarily on the experience and opinions of
people inside or outside the organization
- employed either when there is little time or no
past relevant data
- introducing a new product represents activity
with limited or non-existent historical data
- major application in long-range strategic
planning
 Forecasting Methods

• Subjective-Estimates Survey
- forecast draws on the experience, knowledge
and the ‘sixth sense’ of their own people
- individual salesmen asked to submit
estimates of anticipated demand
- these estimates are pooled at the regional
level and adjusted to account for regional
economic, demographic and other factors
 Subjective-Estimates Survey

- The revised regional estimates are combined

at headquarters with further adjustments
related to the economy, international trade,
competitors and other developments
- such an exercise can produce a forecast
rather quickly, at low cost and without any
need of special expertise
 Subjective-Estimates Survey

• Drawbacks of surveys
- allow recent experiences to play a more
dominant influence than they should
- dominant personalities can produce estimates
that depart from general consensus
- the lack of any measure of accuracy in the
estimate, difficult to plan how to cope with
large errors
 The Delphi Method

• A panel of experts respond to a questionnaire

about future demand
• individual estimates are summarized and
returned to the panel members
• they can revise their original guesses
• critical feedback mechanism makes it easier
to arrive at estimate that most people will
accept
 The Delphi Method

• The cost of this method is medium to high

• Originally applied to technological
forecasting, used for a variety of long-term
predictions such as developing new products,
acquiring new capacity, penetrating new
markets and making other strategic decisions
for which historical data is insufficient
 Sales Forecasting - II

Dr. Inderdeep Singh,

Department of Mechanical and Industrial Engineering,
Indian Institute of Technology Roorkee
Business Time Series
 Types of Forecasting Models
Types of Forecasts
Qualitative --- based on experience,
judgement, knowledge;
Quantitative --- based on data, statistics;

Methods of Forecasting
Naive Methods --- eye-balling the numbers;
Formal Methods --- systematically reduce
forecasting errors;
time series models (e.g. exponential
smoothing);
causal models (e.g. regression).
Simple Moving Average

1
Ft 1  ( Dt  Dt 1    Dt 1n )
n
t
1
Ft 1   Di
n i t 1n

Forecast Ft is average of n
previous observations or actuals Dt
Simple Moving Average
• Note that the n past observations are equally
weighted.
• Issues with moving average forecasts:
– All n past observations treated equally;
– Observations older than n are not included at
all;
– Requires that n past observations be
retained;
– Problem when 1000's of items are being
forecast.
 Simple Moving Average
• Include n most recent observations
• Weight equally
• Ignore older observations
weight
1/n

n ... 3 2 1
today
 Example 1: Simple Average

A XYZ television supplier found a demand

of 200 sets in July, 225 sets in August &
245 sets in September. Find the demand
forecast for the month of October using
simple average method.
The average demand for the month of October is
 Simple Moving Average :
A XYZ refrigerator supplier has experienced the
following demand for refrigerator during past five
months.

Month Demand
February 20
March 30
April 40
May 60
June 45
Find out the demand forecast for the month
of July using five-period moving average &
three-period moving average using simple
moving average method.
Weighted Moving Average Method :

The manager of a restaurant wants to make

decision on inventory and overall cost. He
wants to forecast demand for some of the
items based on weighted moving average
method. For the past three months he
experienced a demand for pizzas as follows:

Month Demand
October 400
November 480
December 550
Find the demand for the month of January by
assuming suitable weights to demand data.
 Exponential Smoothing I
• Include all past observations
• Weight recent observations much more
heavily than very old observations:

weight
Decreasing weight given
to older observations

today
 Exponential Smoothing I
• Include all past observations
• Weight recent observations much more
heavily than very old observations:

weight
0 1
Decreasing weight given 
to older observations

today
 Exponential Smoothing I
• Include all past observations
• Weight recent observations much more
heavily than very old observations:
0 1
weight
Decreasing weight given 
to older observations
 (1  )

today
 Exponential Smoothing I
• Include all past observations
• Weight recent observations much more
heavily than very old observations:
0 1
weight
Decreasing weight given 
to older observations
 (1   )
 (1   ) 2

today
 Exponential Smoothing: Concept
• Include all past observations
• Weight recent observations much more
heavily than very old observations:

weight
0 1
Decreasing weight given 
to older observations
 (1   )
 (1   ) 2
 (1   ) 3

today 
 Exponential Smoothing

Ft  Dt   (1   ) Dt 1   (1   ) Dt  2  
2

Ft  Dt  (1   )Dt 1   (1  a ) Dt  2  
 Exponential Smoothing

Ft  Dt   (1   ) Dt 1   (1   ) 2 Dt  2  
Ft  Dt  (1   )Dt 1   (1  a ) Dt  2  

Ft  aDt  (1  a ) Ft 1
 Exponential Smoothing

Ft  aDt  a (1  a ) Dt 1  a (1  a ) 2 Dt  2  
Ft  aDt  (1  a ) Ft 1
• Thus, new forecast is weighted sum of old
forecast and actual demand
• Notes:
– Only 2 values (Dt and Ft-1 ) are required,
compared with n for moving average
– Parameter a determined empirically (whatever
works best)
– Rule of thumb:  < 0.5
– Typically,  = 0.2 or  = 0.3 work well
• Forecast for k periods into future is:

Ft  k  Ft
Exponential Smoothing :
One of the two wheeler manufacturing company
experienced irregular but usually increasing
demand for three products. The demand was
found to be 420 bikes for June and 440 bikes for
July. They use a forecasting method which
takes average of past  year to forecast future
demand. Using the simple average method
demand forecast for June is found as 320 bikes
(Use a smoothing coefficient 0.7 to weight the
recent demand most heavily) and find the
demand forecast for August.

                                                                             
 
                                                                                                                     
 Quality Concepts

Dr. Inderdeep Singh,

Department of Mechanical and Industrial Engineering,
Indian Institute of Technology Roorkee
 Introduction
• The rapidly increasing global competition
over the past decade has led to the
emergence of new scenarios for most of
the industrial sectors. The competitiveness
of a company is mostly dependent on its
ability to perform well in dimensions such
as cost, quality, delivery, dependability
and speed, innovation and flexibility to
adapt itself to variations in demand.
 Introduction
• Aiming at improving organizational
performance through the effective use of
production capability and technology,
operations strategy such as total quality
management (TQM), quality function
deployment (QFD), six sigma, business
process re-engineering (BPR), just in time
(JIT), benchmarking, performance
measurement and many others are
commonly used.
 Introduction
• The concept of quality has evolved from mere
specifications, controls, inspections, systems,
and methods for regulatory compliance to a
harmonized relationship with business strategies
aimed at satisfying both the internal and external
customer.
• Today, quality and value are, first and above all,
given, and the customer expects them.
 Introduction
• Quality in the successful organization is
fully integrated into all of the business
processes and is an extension of
everything else that has to happen along
the path to success, both for the company
and for the people involved.
 Quality: Definition

• Quality is fitness for use (JURAN)

• Quality is conformance to requirements
(CROSBY)  
• The efficient production of the quality that the
market expects (DEMING)
• Quality is what the customer says, it is
(FEIGENBAUM)
 Continued….

• A quality system is the agreed on company wide

and plant wide operating work structure,
documented in effective, integrated,  technical
and managerial procedures for guiding the co-
coordinated actions of people, the machines, or
the information of company in the best and most
practical ways to assume customer quality
satisfaction and economical costs of quality.
(FEIGENBAUM)
 Dimensions of Product Quality

• Performance         
• Reliability              
• Durability                
• Serviceability              
• Aesthetics    
•  Features                
•  Perceived quality  
As prescribed by Garvin, the eight
dimensions of quality are:
• Performance   (will the product do the intended
job?)
• Reliability        (how often the product fails?)
• Durability         (how long the product lasts?)
• Serviceability   (how easy is to repair the
product?)
• Aesthetics        (what does the product look like?)
• Features           (what does the product do?)
• Perceived quality   (what is the reputation of a
company or its products?)
 Dimensions of Service Quality

• Reliability
• Responsiveness
• Competence
• Courtesy
• Communication
• Credibility
• Security
 Evolution of Quality

• In the 1920's statistical theory began to be

applied effectively to quality control, and in 1924
Shewhart made the first attempt of a modern
control chart. His work was later developed by
Deming and the early work of Shewhart,
Deming, Dodge and Romig constitutes much of
what today comprises the theory of statistical
process control (SPC). However, there was little
use of these techniques in manufacturing
companies until the late 1940's.
• In the early 1950's, quality management
practices developed rapidly in Japanese
plants, and became a major theme in
Japanese management philosophy, such
that, by 1960, quality control and
management had become a national
preoccupation. 
• Total quality management (TQM) came
into existence in 1980 by the western
world. TQM is now part of a much wider
concept that addresses overall
organizational performance and
recognizes the importance of processes.
 Historical Aspects of Quality
• Edward Deming
– Postulated Statistical QUALITY Control
Principles
– 14 Points of QUALITY Management
– these Principles successfully adapted by
Japanese Manufactures 
•      William Crosby
– Emphasized Humanistic Behavioral Aspects of
QUALITY Improvement
– Becoming More Important Now
 Historical Aspects of Quality
• Joseph Juran's QUALITY Trilogy
A. QUALITY Planning
– Set of QUALITY Goals
– Set Plans for Operations Based on these Goals 
B. QUALITY Control
– Responsible for Meeting QUALITY Goals
– Prevent Adverse Changes
– Set and Observe
•        Performance Measures
•        Compare with Industry Standards
•        Benchmarking  
 Historical Aspects of Quality

C. QUALITY Improvement
– Moving from Current Level to the Next Higher
Level
– Organize Teams, Train Operators to identify
and Correct QUALITY Problems
The three aspects of quality and their linkages
with each other have been depicted in the
figure below:
 Quality of Design:
Consumer's Perspective
• The product must be designed to meet the
requirement of the customer. The product
must be designed right first time and every
time and while designing all aspects of
customer expectations must be
incorporated into the product. The factors
need to consider while designing the
product are:
 Quality of Design:
Consumer's Perspective
• Type of product
•      Cost
•      Profit policy of the company
•      Demand
•      Availability of the parts
 Quality of Conformance:
Manufacturer's Perspective
• The product must be manufactured exactly as
designed. The activities involved at this stage
include: defect finding, defect prevention, defect
analysis, and rectification. 
• The difficulties encountered at the manufacturing
stage must be conveyed to the designers for
modification in design, if any. The two-way
communication between designer and
manufacturing may help to improve the quality of
the product.
 Quality of Performance

• The product must function as per the

expectations of the customer. The two way
communication between designers and
customer is the key to have a quality
product.
 Value Engineering

Dr. Inderdeep Singh,

Department of Mechanical and Industrial Engineering,
Indian Institute of Technology Roorkee
 Outline…
Theory
- basic concept
- understanding value, function
- definition
- comparison to cost reduction
- To be or not to be in Value Engineering
Practice
Organizing a Value Engineering Program
Money is of no Value; It cannot spend itself.
All depends on the skill of the spender

(Ralph Waldo Emerson (1803-1882))

Spend the company’s money as you would your own

(20 Techniques of Value Engineering)
 Value Engineering (VE): Concept
• Globally competitive environment
• Important Questions :
- How companies are able to launch a new
product with upgraded quality at a lower
price?
- Are these companies selling at loss?
- Are they manipulating with the Quality and
performance of the product ?
• The Answer to last two questions is NO.
 Value Engineering…

• In 1947 a vice president at General

Electric, Harry Erlicker, observed the
occurrence of a rather unusual
phenomenon that had been appearing
throughout industry…

and the unusual phenomenon led to the

development of Value Engineering
 What is Value ?

• Value - A Philosophy
- monetary or material worth, as in commerce
or trade
(Random House Dictionary)
- A synonym for worth (Roget’s Thesaurus)
- Nothing can have value without being an
object of utility
(Karl Marx)
- Value is the lowest price you must pay to
provide a reliable function or service
(L.D. Miles)
 Understanding Value

• Use Vs Esteem Value

- Tie Clip
(holds tie, keeps tie out of
soup)
- Car (both use as well as
esteem value, the decision
lies with the customer)
 Understanding Function

• Basic function and Secondary function

• Example of a Pencil
change attitudes
communicate ideas
transmit thoughts
write words
make marks
spread lead
How and Why type questions help to
identify the function
 What is Value Engineering?

• Is it cost reduction?
• Is it item elimination?
• Is it function deletion?
• Is it use of cheaper material?
• Is it use of lower cost process?

Answer to all these question is NO!! It is

more than this …
 Defining Value Engineering (VE)
• An analysis of materials, processes, and
products in which functions are related to cost
and from which a selection may be made so
as to achieve the desired function at the
lowest overall cost consistent with
performance.
• An Organized, Creative, Cost Search
Technique for Analyzing the Function of a
Product with the purpose of Value
Enhancement without Compromising with it’s
Quality, Performance & Efficiency.
 More definitions…

• Maximum Value is obtained when essential

function is achieved for Minimum Cost

• The lowest cost to reliably provide the required

function or service at the desired time and place
and with the essential quality.
 More definitions…

• The Society of American Value

Engineering defines value engineering as "
the systematic application of recognized
techniques which identify the function of a
product or service, establish a monetary
value for that function, and provide the
necessary function reliability at the lowest
overall cost.
 How is it defined?

• What is it? (definitions…)

• What does it do? (achieves required
function at the lowest cost)
• What does it cost? (at least break-even is
certain)
• What else will do the job? (cost-cutting in
materials and labor)
• What does that cost?
 Definition

Miles Says ”Value analysis is a philosophy

implemented by the use of specific set of
techniques, a body of knowledge, and a group of
learned skills. It is an organized creative
approach which has as it’s purpose the efficient
identification of unnecessary cost, i.e., cost
which provides neither quality, nor use, nor
appearance, nor customer features”.
 An Example…

• A hypothetical Bolt that holds the

wing on a transport airplane

What if the bolt fails???

 Value Engineering Vs Cost Cutting

Value
Cost Cutting
Engineering

Equipment/mate
It is Function based
rial based
Poor value
Focus Big cost items
functions
Results Increased value Scope reduction
Optimizes Overall design Local design
Client
Clarifies Nothing
requirements
Value Engineering Vs Cost Cutting

The Value Engineering approach attempts

to find the lowest cost way to perform the
desired function rather than the lowest
cost way of producing the product,
therefore, VE challenges the very
specification, design requirement, and the
design itself…
The Value Engineering Cycle
 To be or not to be in VE ?
• We are too small to practice VE
• Our product varies too much in size, quality, use,
purpose, and price range
• We buy a large percentage of the parts that go
into our product
• Our company is involved in R & D, producing
first time, highly technical products. The
production quantities required to realize the full
potential of VE are not there
• We are a service business; VE is for hardware
When to apply Value Engineering?

The Design team has the greatest impact

on the cost savings
 Application Areas

• Used on new plants/revamps:

- clarifies scope
- encourages focus on poor value
- encourages alternatives
- basis for cost reduction
• Used on existing plants:
- highlights poor value operations
- encourages alternative operations
- compares costs of operation with benefits
 Organizing a VE Program

• Questions that must be solved if the VE

program is to be successful are:
- Can VE be profitably used by the company?
- In what areas should it be used?
- Who should be responsible for it?
- How many people will be required, and at what
level should they report?
- How much will the program cost, and what return
may be expected from it?
 Organizing…

• Answers to these questions vary according to

the size and the character of the organization…

such as
Is the organization a product- or service type?
What is it size?
What is it’s existing organizational structure?
What is it’s product cost content?
 Planning and Organizational Steps
• Research in value engineering philosophy and
techniques
• Review of value engineering functions,
responsibility, authority, and content and method of
operation
• Analysis of specific factors within a company that
affect value engineering
• Indoctrination of top and middle management
• Selection of director for the value program
• Selection of consultants
• Selection of value personnel
 Steps…
• Program initiation
• Personnel training
• Program operation
• Measure effectiveness and reporting
• Implementation
 Research in VE

• Basic knowledge, what is VE?

• Knowledge of VE without any practical
experience is not of much use …
it’s like knowledge of sailing
gained by reading a book without actually
entering the waters…
Therefore, a sound understanding with practical
experience (successful case studies) is a must
for undertaking a VE program.
 Method of Operation
It is the function of value engineering to improve profits
by improving the value of the company’s product or
services

The task is fulfilled by:

- Training personnel
- Providing VE services to engineering during design
and development, setting cost targets for designs
- Organizing and directing the application VE task
force groups to improve existing designs or assisting
Engineering in meeting cost targets on new designs
 Method of operation cont…

- Organizing and directing the application of VE

techniques in purchasing, manufacturing, and
other company functions
- Accumulating and disseminating cost
information necessary for value studies
- Accumulating and disseminating information on
special products and speciality vendors
- Establishing policies, controls, and reporting
procedures for the value program
 Size and Physical Location
• Question: Whether to have a centralized or a de-
centralized VE Task Force?
• Answer: Relative advantages and disadvantages
of both…
Centralization – Advantages (VE a recognized
corporate function, multi-skilled competent teams,
operating across all company functions)
Disadvantages – (may lose contact with the
mainstream and thereby may become ineffectual)
Value engineer should be “Where the action is”.
 Furthermore…

4. Indoctrination of top and middle

management
5. The value engineer or manager
6. Professional background of Value
engineer
7. Use of Consultants
Indoctrination of top and middle
management, training all decision making
personnel in VE techniques, assistance in
selecting personnel for VE responsibilities,
recommending organizational
arrangements as well as policies and
procedures, providing training and
teaching aids, conducting periodic
program follow-up and audit
 Program Initiation
• Where will it be placed in the organization?
• To whom it will report?
• Who will head it up?
• Will it be staff or line function?
• Will it be centralized or decentralized?
• How many members will be needed?
• How will it function?
By issuing such a policy statement
management can put to rest all doubts and
apprehensions
 and finally…

9. Formal training programs

10. Selection of personnel
11. Program operation
(Informal follow-up training, advanced training,
product evaluation, consultation, value standard
and data development, calculation of savings
and reporting)