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Forecasting Techniques

Part 4 of 6


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The Forecasting Process

Start the process by developing a reasonable baseline forecast for the product line under consideration. At this point you want to develop an annual figure. Review this data with Sales to find out

• Why is it trending? Find out why the customers want this product. Understand their needs.
• Will the trend stay the same? Are you gaining or losing customer base or market share? Will a substantial amount of products be added to or dropped from the line?

With Sales/Marketing input, adjust the trend if needed to get a good annual forecast. When you have a reasonable baseline established, you are ready to start adjusting for seasonality.

If no promotions are being planned, start by checking your files to find another year of history without promotions. But don't just stop there, talk the Sales and Marketing folks to find out if anything unusual happened during the historical year, or may happen during the year under review. You need to consider any substantial differences between the two years that are important to your business. Examples might be unusual weather, low mortgage rates that increased new home starts, or other factors that could have substantially altered demand for your product.

If no substantial differences are found, you've probably got a good snapshot of what your seasonality should look like. Use that to develop the seasonal indices for the year under review. If there were differences, assess their importance and probable impact, and, with help from Sales or Market­ing, develop a scenario that appears more likely. The idea, quite simply, is to develop a seasonal pattern that makes sense in light of the differences, and use that to develop your seasonal indices.

If a promotion is in the future, find something in your history that seems the most similar. You could use your Promotion Date files, Seasonal Index files, history on a product group or individual items, or anything appropriate that you may have. Now talk to Sales/Marketing about any differences.

• Timing—Could placement in the year make a differ­ence? Will either this promotion or your historical example follow closely on the heels of another promo­tion which could eat into volume expected? Is/was one or the other of the promotions in a traditional peak or slack period?
• Program Features—Are the Products/Lines/Items the same in both programs? Will higher or lower discounts change the expected volume from one to the next?
• Other Influences—Have economic differences changed the buying habits of customers? Is this a response to a competitor's program?

If there are no differences to speak of, then you've got a good pattern to use to influence the seasonal pattern of your forecast. If there are differences, ask for advice on what a more likely scenario would look like. You don't necessarily need to worry about getting it down to the last detail with your Sales folks. With the thorough understanding of the program that you have just gained, you'll be able to get it down to the right detail and carry the principle to a variety of products.

To be Continued


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