1 Sales Forecasting MKT 311 Instructor: Dr. James E. Cox, Ph.D

2 The Forecasting Process Set the objective of the forecast Select Possible Forecasting Technique(s) Data Collection and Preparation Parameterize the technique(s) Select Technique(s) to Be used: Technique Evaluation and Selection Application of Technique(s) and Forecast Revision Evaluation of technique Performance

3 Step 4: Parameterize the Techniques n Basic Procedure n Error Measurement >ME = mean error >MSE = mean squared error >MAD = mean absolute deviation >MPE = mean percentage error >MAPE = mean absolute percentage error >SD = standard deviation (or RMSE = root mean squared error) >SSE = signed square error

4 F t =X t-1 F t+1 =X t PeriodSalesForecastErrorAbs. ErrorError 2 Sign Error 2 % Error % Abs. Error /8= /10= /8= /12= SUM %90.83% AVG. (SUM/4) %22.71% MEMADMSESigned Error 2 MPEMAPE SSE SQRT(6.25) = 2.5 SD RMSE

5 Questions to Ask Regarding Which Error to Use 1.Is the manager looking for a long-term perspective; i.e. more interested in final result then by period-by-period accuracy? Is the period-by-period accuracy more important than ultimate accuracy? 2.Would the manager have trouble comprehending unless “regular” units are used to express error (accuracy ) ?

6 3.Is the manager willing to accept more error if the (sales) base is larger? 4.Would extreme error be very costly so that manager would be willing to take lower overall accuracy if extreme error could be avoided for any one period? 5.Does the direction (sign) of error makes a difference?

7 Characteristics of Error Measures  Mean Error (ME) - shows direction of error - does not penalize extreme deviations - errors cancel out (no idea of how much)  Mean Absolute Deviation (MAD) - shows magnitude of overall error - does not penalize extreme deviations - errors do not cancel out - no idea of direction of error

8  Mean Squared Error (MSE) - penalizes extreme errors - errors do not offset one another - not in original units - does not show direction of error  Standard Deviation (SD) - penalizes extreme errors - errors do not offset one another - in original units

9 Squared and Keep Sign (SSE) - penalize extreme errors - errors can offset one another - shows direction of error - not in original units

10  Mean Percentage Error (MPE) - takes percentage of actual sales - does not penalizes extreme error - errors can offset one another - assumes more sales can absorb more error in units  Mean Absolute Percentage Error (MAPE) - takes percentage of actual sales - does not cancel offsetting errors - no penalty for extreme errors - assumes more sales can absorb more error in units

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