110

How to choose

the best tecbniqueor combination of techniques -

to help solve YOUI particular forecasting dilemma

Manager's guide to forecasting

David NI. Georgoff and Robert G. NIurdick

On« thUlg may be more ct:nam for manag· as oday than anythmg else: they have almost tOO much to thmi< about and kup III mind Ul rrying to as.sess problems realistically and solve them. Some respond by deveJopmg preludices agQJDS[ any new Jdea because they don't have enough ame co learn the nA!:W concepts properly. Others throw up thelI hands and adm.zt they (;41l'C judge the idea WIth everytlung use they are handling.

Lookuig ac [orecasung a[ a time when they may Dud good jorecasts more than ever, man managers are downplaying iheu l1:lpOtUUlce. One re<lSon may be tha[ -dike many other tlungs-« when [orecasts art nght, you don't hear about them. Bur. wben they're wrong ....

In response to tillS problem. the authors have compiled 0 chan that profiles the 20 most common forecasung tecbniques and rOles their amibu~ against 16 imporom[ evaluative dimensions. The result is a practical guide that will belp executlves sore OUt their priorities when ChOOSlllg a rechruque and enable them to combwe me mods [0 achieve the best possible results.

Mr. Georgoff IS professor of marketing at Flonda Atlantic UniversIty (IIld chairman 01 the Depart» tuen: 01 Management. Marketing. and lntemational Business. He bas published articles and worked as a consulli111t to large cotporations m th« areas 01 new produce marketing, marketing planning. market research. and forecasting.

Mr. Murdick IS professor of management at Florida Atlantic University. Previously he worked a[ the Ceneral Elecmc Company for 14 years. Well known in the /leld 01 management iniormation systems. he IS th« author or coauthor of 18 books on management and markeung, me most recent of which IS MiS: Concepts and Dcs~ {Pren nee- Hall. second edioon,1986j.

Early Ul 19 4, the Houston-based COMPAQ Computer Corporaoon, manufacturer of IBM·compatible microcompurers, faced a ecision tho would profoundly affect its fUrure. Recognizing that IBM would soon introduce its version of the portable computer and threat n COMPAQ's dommance in thi: profitable market, the company had twO Options. It could elect to specialize in this product line and continue to market its highly regarded portables aggressively, or it could expand mar °et oiicl"..ngs 0 include desktop microcomputers. The latter move would fore the year-old company to confrom IBM on Its home ground. Moreover, COMPAQ would have 0 make a substantial investment in product developzaen and working capital and expand its organization and DUIll facturing capacity.

COMPAQ's management laced several important unknowns, including the pcrennal mar er size, structure, and competitive intensiry Mana emer recognized that the company's VlU.l"ty rmghc senousl erode if it did not expand its produc lii,e. If the expaesion were successfu . COMPAQ l1lIght ernoy ecoaomies of scale that could help ensure its survival Ul a dynamic and very competitive industry. [£ COMPAQ. market assumptions were incorrect however, Its rorure might be blea c.

Man)" of roday's managers race similar new market reahnes and uncertamces. COD~ confronted with issues criucal to their compaa es competitive future, they must deal wah novel aa • =.;: idly changing environments. In shor .thev must .

a broad r~nge 0 dissimilar influences.

For more than 3 decade, aew roreca -ing techniques have theoreticallv e ped m;_"'ta-e:s evaluate these varied facrors.I uch 0 the ::use.

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112

swer 00 to a question, you don't have to look across that row.

In responding to question I, make note of diose techniques whose rime span matches your needs. We have found It easiest lor forecasters to write down the technique's column letter. The row number of each dimension and the column letter of each technique are written along the horizontal and vertiC3.1 axes. With regard to question 1, for example, if your forecsse horizon is short-term, you can write down the cell letters for naive extrapolation lA), sales-force composite IS), jury of execunve opinlon [C], and so forth. But

you would ignore the letters for scenario methods [D], Delphi technique lEI, historical analogy (FI, and so on.

The columns you have DOW listed represent techniques that are qualified for further consideranon. ext read down the eolumn of each of these tec.hruques and note any gray cells. Ii these gray cells are associated WIth questions to which you have answered yes, then the dimension either precludes use of the rechmque or the technique can be used but it has difficulty accommodanng that dimension. Such precauuons will help you determine whether you mustor wish to-velimmare certain techniques hom further consideration. An arrow in a cell indicates that us evaluation IS the same as the cell to its left.

After you have answered all the ques[lOrIS and have a usc of surviving techniques, note the cells that are highligh ted 1D color, Those cells represent specific strengths of a technique and can guide you in makillg a final selection.

In the course of the exercise, you may have eliminated a technique that you like, have heard about, or routinely use. You can go back to hat one and compare its strengths and weaknesses with those of the methods chat the chart bas indicated would be best for you. You C30 then decide wbether you would raeher proceed with the technique that the chan indicates corresponds most closely to your specUic requirements or whether you can accommodate the ehminanng factors in order [0 use the technique that you initially favored.

Important considerations

When considering each qUe500n, you should remember some "tricks of the trade" concerning:

rune borizcn. Most manage~ Will

Want the forecast results to extend 3S far ineo the future as possible. Too long 3 period, however, may make the technique selection process even more confusing because of the varying abilities of the techniques to accommodate different orne spans. In choosing an ex-

Hu\'ud BuSIness Rev; e .,

tended time honzon, the forecaster Increases the cornpleXJty, COSt, and time required to develop the Dna! product.

You can break down the rune needed co produce a forecast IIItO development IDev) and execunon [Exl time. Development ime includes the gathering and entry of da <I, the modificaoon 0 programs to the company's specific requirements, and the Start-UP of the system. Execunon time IS the ume i takes to produce a forecast With a particular echaique.InitialJy, of course, development time IS a SIgnificant concern for the forecaster; once the forecast technique IS finnly est;>blished, however, execution time is a more appropriate concern.

'Iechnical ophistication. Experience shows thar computer and mathemauca sophrs ication is mtegral 0 many techniques. Although many executives have improved their skills III this area, not all bave sharpened their quanntauve skills enough co be comfortable WIth some of the forecast results a cornputer will spill OUt.

COSt. The COSt of any technique is geaerally more unporune at the beguuung when it IS being developed and installed, after that, any technique's potencial value to a decision maker usually exceeds the expense o generaung an updated forecast .

•

Data availability. Before choosmg a technique, the forecaster must consider the extensivecess, currency, accuracy, and represemauveness 0 the available data. More data tend {O Improve accuracy, and detailed data are more valuable than those presented in the aggregate. Because 3 rechruque's ability to handle fluctuations is Important to a forecast'S success, the manager must match the sensniviry and stability of a technique to the random and systematic variability components of a data series.

Vari;oilility and consistency or data, Beyond changes that might occur III the company's structure or its environmenr, the manager must look at he kind of stable relationsrup assumed among a model's Independent vanables [represented by the "external stability" dimensioa]. For example. while most histoncally oriented quanritative forecasts ID.lght use expected levels of automobile producnon as a basis for determining demand for steel, the forecast model may not reflect changes over ime in the average amount of steel used in automobiles. These relanon hips sometimes do change, but any vanarion IS usually so gradual that it wul nor alfee! a short-term forecast. When the Iorecasts are long-term, however, or when the company expects a subscanual change UI :I vi t3 relationship, the forecaster should either apply judgment In a quantitative technique or use a qualitauve method.

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PIII.r Srownlng lind Conrlntlntal Whll. C4p (8)

With time. he became a public supporter of 8rownlng and the need for change.

From the start. Browning mvued Bob White to sit In on all company occasions and involved him In all re rement dinners. nus honcrarv role con j ued and was appreoaeed by W1ut~ Cappers.

Jim Star!( and Marketing

Brow, ing saw the revitallzaucn of w'hite Cap'S marketing team as a top prionty and concluded tha he needed a new director-someone who could rally :he team together. who was in touch with he competitive crisis White Cae faced. and who could eventuallv take over responSibility for all sales and marketU1g. granted the proper grooming, Browning moved quickly; by June 98~ he had replaced lim Stark With Vince Kegan, a hard-chargrng regrenal sales manager ior t.'le ~ . ortheast.

'01 wanting to disregard Stark's accomplishments nor to sam .ce his strong customer relations s. ' Is. Browning reassigned him as director of packaging development in a new effo:t to tum around the mat that plastic packagtng had presented to White Cap's ma:ke share, Stark was able to boost wru'te Cap's presence drama really among manufacturers of plastic packagtng and to develop a significant number of nondisclosure agreements with hose n.:ms while White Cap'S engineers worked to develop a new plasac closure. He was so succesSful that he was awarded a SIgnificant personal bonus in 1985.

Tom Green and Human Resources

Despite hiS irunal disappolnenent. Browning tried to work with Tom Green in his £irst four or five months a White Cap. He scheduled weekly meetings with Green'in an eiiort to signal his commitment to the human resources function and to reeduca e Green concerrung t.'le role he eou d play in Browrung's change efforts at Wlute Cap. 3rowrung clearly communicated to Green that e was being teseed. and when h.ts performance did no improve, he let him go Ul August 1935 with a severance and out-placement package

Browning then brought lo Cindy Hansen as human resources manager, Besides the fact t! at she and Browning had worked well together at Bondw re, Hansen was somewhllt known at

Wlute Cap, having worked there for 12 years before the Sondware assignment. Hansen was an avrd propone:lt of Browning's confident and er.thusiastic style. Together they worked Out numerous organizational cha ges. both symbolic and concrete.

Browning's First Year

Unlike his predecessors. Browning couJd often be seen at NS desk or in t e haUs of Will e Cap's comfor able l ort brook offices, Infor· mally attired 1:'1 shir sleeves and ie. Other managers foUowed ius lead. He encouraged hrs senior staff :0 !tUX with other White Cap employees over lunch in the company cafeteria, and he modeled :Ius behavior himself. Browning prided himself on his openness and accessibility WI h his senior staff, his plant employees. and the corporate officers of the Coniine tal Group.

White Cap senior staff meetings began to take on a new flavor. Previously these monthlv meeangs hac carried an air of furmality as each manager would spea • in tum. directly to Bob White about his or her area of responsibility, be.i.ng careful to avoid any "bad news." Browning. however. began to set focused genda ior these meetings and to take the minutes himself. Commenting on Browning's style, one manager

xplained: "Peter is repetitious on pOlOts of frankness. and he encourages those who may be complalruag to actually do something."

When 3row:llng looked at White Cap's large nation accounts, he was convinced that those cuseomers no longer recognized - e service and advantages that their dollars to W'rute Cap were buyi.ng for hem. In response. Browning set a year's target at seven forma! "Why White Cap" presentanons to major accounts. Featunng ail the senior management tea:n members, induding Browning. these presentations employed videotape. pnnt matertals, CUStOmIZed research, and personal appearances to explain the divlslon's "Total Sys em" to customers. Deseite resistance from some senior managers who felt !!'us effort was unnecessary. Browning pushed the idea, convinced that these attitudes would change, once his staff felt the goodwill and team spinr these prestn ations could generate.

Early on in his tenure at White Cap. Browning ~ured approval and a financial commitment :rom Connnenral's corporate office to

t.~ / ,- 3-C~

Exercises on Interpreting Data

25

QUESTIO Who was the more valuable player, wit~ respect to batting statistics, in 1991?

How could Murray h"at Merced both as a lefthanded and a right-handed batter and still have a lower batting average?

EXERCISES ON

INTERPRETING DATA [CHAP1EX.XLS]

Problem 1: Batting Averages

In 1991, Eddie Murray of the Los Angeles Dodgers and Orlando Merced of the Pittsburgh Pirates both played first base in ba eball's ational League. Murray and Merced were olid "switch hitters," which means they could bat either lefthanded or right-handed.

A pia er's batting average (BA) is one of the most important tatistics in baseball. The BA is calculated by dividing the number of hits by the number of plate appearances-or at bat. So a batter who gets a hit one out of every three times at the plate would have a BA of .333. When contracts are negotiated and player trades are considered, a difference of onJy a few BA points can be worth hundreds of thousands of dollars.

Switch hitters are valuable pJayers because they can adjust to different types of pitchers. Facing a left-handed pitcher, a switch hitter would usually bat right-handed because the ball is more likely to move in toward the batter, making it easier to hit. Managers need to know a switch hitter's BA from each side of the plat when deciding wh ther to have that player face a left-handed or right-handed pitcher.

The SWitch-hitting statistics for Eddie Murray and Orlando Merced looked like those shown in Table 1.5.

Table 1.5 _

QUEST10N:

Provide a forecast of the number of replacement tires that will be demanded. (Remember, every pas enger mile is driven on four tires.)

1991 Left- and Right-Handed Batting Stati tics

EOOlll MURRAY ORLANDO MERC'roO
BATI1NC AVERACE S"TTlNC AVER"CE
LEFT'-HA OED .295 .285,
RlcHi-HANDEO .217 .208
TOTAL .260 .275 Problem 2: Replacement-lire foreca t

The tire industry manufactures tires for a vari ty of vehicles and aircraft around the world. Demand forecasts for tireslS are developed separately for different vehicle type , by geographic region, and by whether the tires are for "original equipment" (i.e., tires that are bundled in the sale of new vehicles) or "replacement."

W hall be concerned h re with automobile passenger tires sold in Iorth America in the replacement market Tires on automobiles are replaced when they w ar out or are damaged beyond repair. The annual demand for replacement tires depends, therefore, on their longevity (the number of miles driven befor a tire wears out) and t.he total number of pa enger miles dri en per year.

IS Thls probl~rtI .. based on d4t1in FrrrslON Ti,um! R.rb«r C""'pony("" Cha.pt ... 4).

( of the overall efficacy of our partitioning the sample data into cells: have we really reduced the forecast uncertainty by this partitioning?

Table 3

$149,205 $7,050 2

All Ten Houses

Size Range 1,600-1,799

J, 400-1, 599

1,800-1,999

Sample Average $133,618 Sample Standard Deviation $ J2,406

umber of Observations 10

SQ7200 $12,381 4

$132,243 $8,513 4

To shed light on these questions we start by defining a ample residual as the difference between an actual valu of the dependent variable and its estimated or forecast value. The first bouse in our sample belongs to the 1,400-1.599 cell. Its selling price was $109,360. The average selling price of the four houses in tbat cell was $)27,200, and that was OUT point Iorecast for each of those four houses. The residual is then $109 360-$127,200 = -$17, O. We can calculate residuals for tbe remaining sample observations in the same way: (or each bservation, we identify its cell use the cell average as a point forecast, and compute a its residual its actual selling price les the forecast, In Table 4 we show residuals computed in [hi way for th ten houses in your sample. (Negative numbers are shown in parentbcscs.) otice that the mean of the residuals is zero.3

Table 4
( SeUing
Price Residuals Size
$109,360 ($17,840) 1,404
$137980 $)0,7 0 1,477 i:ze =
$131,230 $4,00 1,50 1400-1,599
$130,230 $3,030 1,552
Average $127200
$125,410 ($6,833) 1608
$)24,370 ($7,873) 1,633 Si~e =
$139,030 $67 1,717 1,600-1799
$140,160 $7,91 1,775
Menge $132,243
$144,220 ($4985) 1,832 ize =
$154,190 $4,9 1,934 1800-1,999
A erage $149,205
Average SO
um or Squares 727,0]2, 25
Degrees or Fl'eedom 7
RD $10,191
l
3. The mean of the readuats 10 any cell must be zero, since eecn residual is the dtfference between a value in a ceU and tbe cell mean, As a result, tbe mean or the residuals across all cells mu t be zero.

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