Forecast Management
PART II.
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Many factors influence a forecast's accuracy and, once identified, they should be used to adjust the forecast. The factors outside the control of a company include: the economy, competitive activity and circumstances of nature. In addition, there are activities within a company that will affect the sales of a product, including promotions and sales of other related products. What is needed and, fortunately, readily available is a method of enhancing the present mathematical forecast to include some adjustment for known inside and outside influences. This enhancement is reached by adjusting the seasonal indices in a simple exponential smoothing model. Figure 1 represents a sales pattern that displays three fundamental patterns. These are: a base (or magnitude), a regular variation (or seasonality) and a trend. The dotted lines represent a forecast that may have been developed using the historical data. It claims that what happened in the past will happen in the future since the pattern is a virtual repetition of the solid line pattern. The formulas for the forecast are as follows:
Trend, = (3 (Base Value, - Base Value ,., ) + (1-0) * (Trend profile, i.e., it will always react to any change after the change has occurred. This is shown by the dotted line, which does not rise fast enough during the beginning of the promotion and predicts higher sales after the promotion is over. Increased backorders during the promotion and excess inventories after its close can result.
/ActualDemand,\ Seasonal Index s = Y (————————-) + U-Y) * (Old Indexs) v Base Value, ' Forecast t+x = (Base Value, -t- X * Trend ,) * Index ,+x-m where
Indexs = Seasonal Index for the Seasons
The seasonal index used in this method adjusts the trend-enhanced forecast with a multiplier that is based on an average month (i.e., an index of 1 is an average sales month and an index of 1.2 indicates a month in which sales are 20% above average). To be Continued STAY CONNECTED To stay current on bullet-proofed manufacturing solutions, subscribe to our free ezine, "The Business Basics and Best Practices Bulletin." Simply fill in the below form and click on the subscribe button. We'll also send you our free Special Report, "Five Change Initiatives for Personal and Company Success." Your
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