Quantitative and Qualitative Factors in Sales Forecasting

SHASTRY ACADEMY, shastryacademy@yahoo.com, shastrynotes@gmail.
com
WE PROVIDE GUIDANCE ON MBA PROJECT FOR ALL UNIVERSITIES
Course Code : MS 08
Course Title : Quantitative Analysis for Managerial
Applications
Assignment No. : 08/TMA/SEM-II/2010
1.The manager should seek some balance between quantitative and
qualitative factors in decision making’. Elaborate the statement giving the
situations in which various statistical tools are used.
Quantitative and Qualitative Factors in Decision Making
QUANTATIVE FACTORS
LET US TAKE
THE Investment Appraisal.
THE FACTORS CONSIDERED ARE
Payback period
NPV
ARR
Provide a numerical basis for decision making – reduces decisions to looking at a
monetary value for the next 3 years
The cost of a series of redundancies against the longer term financial benefits to the firm of this
process But: such data provides only part of the story Other factors need to be taken into account,
particularly the effects of decisions on stakeholder groups and their response to such decisions,
e.g. placed on different choices, e.g.
Forecasted sales figures
The takeover of Manchester United CLUB by Malcolm Glazer might make financial sense but
the reaction of the supporters might make the move unworkable.
QUALITATIVE FACTORS
Qualitative factors look to take account of these other issues that may influence the outcome
of a decision Can be wide ranging and especially need to consider the impact on human resources
and their response to decisions
CONDUCT THE SWOT ANALYSIS
A decisions (for example, investment in a new production plant) could be considered not only in
financial terms but also to apply other techniques of decision making to look at wider issues:
A SWOT analysis might be part of this:
-STRENGTHS
-WEAKNESSES
-OPPORTUNITIES
-THREATS
QUALITATIVE METHODS
PEST ANALYSIS
Might also need to factor in other external issues that might influence the decision making
process which can be summarized as:
-POLITICAL
-ECONOMIC
-SOCIAL
-TECHNOLOGOCAL
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SHASTRY ACADEMY, shastryacademy@yahoo.com, shastrynotes@gmail.com
Political could be in its widest sense, e.g. the internal politics of a firm as well as the national and
international political effect The decision to site a series of wind turbines in a coastal area might
be justified on financial grounds but:
What is the reaction of the local community?
Does government policy support such planning developments?
Are there social impacts – e.g. noise pollution, damage to eco-systems, etc?
Such factors may make the difference between success and failure
Human Resources Management
Impact on a firm’s human resources is essential to consider,
in particular the effects on:
Motivation
Morale
Recruitment and Retention
May be difficulty to assess and measure
May need to distinguish between short term effects and long term
Stakeholder Analysis
Wider impacts on stakeholder groups may also be necessary, such stakeholders include:
-EMPLOYEES
-SHAREHOLDERS
-MANAGERS
-ENVIRONMENT
-LOCAL COMMUNITY
-SUPPLIERS
-GOVERNMENT
-CONSUMERS
DECISION MAKING
Eventual decision may rest on the balance between the perceived effects of quantitative and
qualitative.
If the long term effect on the workforce for example was to reduce productivity or increase
absence because of the impact on motivation and morale, the fact that a decision makes financial
sense may be shelved!
Qualitative by its nature, therefore, is very subjective considerations in decision making, in
addition to the quantitative or financial factors highlighted by incremental analysis . They are the
factors relevant to a decision that are difficult to measure in terms of money. Qualitative factors
may include: (1) effect on employee morale, schedules and other internal elements; (2)
relationships with and commitments to suppliers; (3) effect on present and future customers; and
(4) long-term future effect on profitability. In some decision-making situations, qualitative
aspects are more important than immediate financial benefit from a decision.
====================================
HERE IS ANOTHER EXAMPLE OF THE QUANTITATIVE AND QUALITATIVE
FACTORS IN DECISION MAKING. SALES FORECAST FOR AN ORGANIZATION.
THE SALES MANAGER WOULD USE A COMBINATION OF THESE TOOLS TO ARRIVE
AT THE FINAL DECISION.
QUANTITATIVE METHODS
2
METHOD 1
• The field perspective, or “field assessment,” is based on a rollup
of individual forecasts, providing management with a bottom-up view
of current market conditions
TERRITORY 1 FORECASTS $5mill.
================================
NATIONAL TOTAL SALES FORECAST =$55 mill.
=================================
METHOD 2
• The pipeline perspective, or “pipeline assessment,” is generated by analyzing
opportunities at each stage of the pipeline, enabling management to
assess sales targets from an aggregate, top-down viewpoint.
1.MARKET POTENTAIL FORECAST $400 mill.
MARKET SHARE FORECAST 15% = $60 mill.
2.FIELDSALES FORECAST = $55 mill.
3. MARKETING CHANNEL FORECAST =$ 58 mill.
4. CUSTOMERS' END USE EXPECTATIONS FORECAST =$57 mill.
THE AVERAGE OF THIS WORKING = $57.5 mill.
============================================
METHOD 3
• The historical perspective, or “analytic assessment,” is based on a comparison
of current pipeline data with historical trends, allowing the company to apply
knowledge gained from prior periods to the current forecast.
YEAR 2004 $45mill. YEAR 2005 $48mill. YEAR 2006 $51mill. YEAR 2007 $54mill.
-----------------------------------------------------------
YEAR 2008 $57mill.
FORECAST
======================================
METHOD 4
Triangulated Forecasting provides a set of checks and balances that enables
management to quickly identify potential problems.
Additionally, the analytic assessment highlights that, at this point in the quarter,
the company’s forecasts are typically 20 percent above final attainment. Taking
all three perspectives into account, management can quickly recognize that
the company is unlikely to meet its original forecast unless corrective action
is taken immediately.
===========================================
3
METHOD 5
Simple moving average
A simple moving average (SMA) is the unweighted MEAN of the previous N data points.
For example, a 5 -YEAR simple moving average of closing SALES is the mean of the
previous 5 YEARS ' closing SALES .
If those SALES are YEAR1= 150, YEAR2 = 170, YEAR3=190, YEAR4= 200, YEAR5=210
,then the formula is
150+170+190+200+210=800/5 = FORECAST = 220
==============================================================
QUALITITATIVE METHODS
METHOD 1
The Delphi method
-is a systematic interactive forecasting method for obtaining forecasts from a panel of
independent experts. The carefully selected experts answer questionnaires in two or more
rounds. After each round, a facilitator provides an anonymous summary of the experts’ forecasts
from the previous round as well as the reasons they provided for their judgments. Thus,
participants are encouraged to revise their earlier answers in light of the replies of other members
of the group. It is believed that during this process the range of the answers will decrease and the
group will converge towards the "correct" answer. Finally, the process is stopped after a pre-
defined stop criterion (e.g. number of rounds, achievement of consensus, stability of results) and
the mean or median scores of the final rounds determine the results.
Delphi is based on well-researched principles and provides forecasts that are more accurate
than those from unstructured groups. The technique can be adapted for use in face-to-face
meetings, and is then called mini-Delphi or Estimate-Talk-Estimate (ETE). Delphi has been
widely used for business forecasting and has certain advantages over another structured
forecasting approach: prediction markets.
===========================================================
METHOD 2
Scenario analysis
-is a process of analyzing possible future events by considering alternative possible outcomes
(scenarios). The analysis is designed to allow improved decision-making by allowing more
complete consideration of outcomes and their implications.
For example, in economics and finance, a financial institution might attempt to forecast several
possible scenarios for the economy (e.g. rapid growth, moderate growth, slow growth) and it
might also attempt to forecast financial market returns (for bonds, stocks and cash) in each of
those scenarios. It might consider sub-sets of each of the possibilities. It might further seek to
determine correlations and assign probabilities to the scenarios (and sub-sets if any). Then it will
be in a position to consider how to distribute assets between asset types (i.e. asset allocation);
the institution can also calculate the scenario-weighted expected return (which figure will indicate
the overall attractiveness of the financial environment).
Depending on the complexity of the financial environment, in economics and finance scenario
analysis can be a demanding exercise. It can be difficult to foresee what the future holds (e.g. the
actual future outcome may be entirely unexpected), i.e. to foresee what the scenarios are, and to
assign probabilities to them; and this is true of the general forecasts never mind the implied
financial market returns. The outcomes can be modelled mathematically/statistically e.g. taking
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account of possible variability within single scenarios as well as possible relationships between
scenarios.
============================================================
METHOD 3
Rational and explicit methods
The whole purpose of the recitation of alternatives, is to show that there really is no alternative to
forecasting. If a decisionmaker has several alternatives open to him, he will choose among them
on the basis of which provides him with the most desirable outcome. Thus his decision is
inevitably based on a forecast. His only choice is whether the forecast is obtained by rational and
explicit methods, or by intuitive means.
The virtues of the use of rational methods are as follows:
They can be taught and learned,
They can be described and explained,
They provide a procedure followable by anyone who has absorbed the necessary training, and in
some cases,
These methods are even guaranteed to produce the same forecast regardless of who uses them.
The virtue of the use of EXPLICIT methods is that they can be reviewed by others, and can be
checked for consistency. Furthermore, the forecast can be reviewed at any subsequent time.
===================================================================
METHOD 4
Genius forecasting
- This method is based on a combination of intuition, insight, and luck. Psychics and crystal ball
readers are the most extreme case of genius forecasting. Their forecasts are based exclusively
on intuition. Science fiction writers have sometimes described new technologies with uncanny
accuracy.
There are many examples where men and women have been remarkable successful at predicting
the future. There are also many examples of wrong forecasts. The weakness in genius
forecasting is that its impossible to recognize a good forecast until the forecast has come to pass.
Some psychic individuals are capable of producing consistently accurate forecasts. Mainstream
science generally ignores this fact because the implications are simply to difficult to accept. Our
current understanding of reality is not adequate to explain this phenomena.
=================================================
METHOD 5
Cross-impact matrix method
- Relationships often exist between events and developments that are not revealed by univariate
forecasting techniques. The cross-impact matrix method recognizes that the occurrence of an
event can, in turn, effect the likelihoods of other events. Probabilities are assigned to reflect the
likelihood of an event in the presence and absence of other events. The resultant inter-
correlational structure can be used to examine the relationships of the components to each other,
and within the overall system. The advantage of this technique is that it forces forecasters and
policy-makers to look at the relationships between system components, rather than viewing any
variable as working independently of the others.
===========================================
Considerations in the choice of forecasting methods?
The selection of the forecast method should be based on several criteria taking into
account the applicability of the forecast methodcomplexity, i.e., forecast accuracy level, period of
time, the scope of initial data, forecast costs, and the level of result
appropriateness and applicability.
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Type of information (quantitative and qualitative forecast methods).
• Forecast time span (short-term, mid-term and longterm forecast development methods).
• Forecast object (micro and macro economic indicator forecast methods).
• Forecast goal (genetic and normative forecast methods).
CRITERIA FOR THE DECISION MAKING.
Accuracy
Ease of interpretation
Ease of use
Ease of using data
Credibility
Speed
Cost savings
Ease of implementation
Time horizon
Adaptive to condition
==========================================
2. Among the examinees in an examination 30%, 35% and 45% failed in Statistics, in Mathematics,
and in at least one of the subjects respectively. An examinee is selected at random. Find the
probabilities that
a. He failed in Mathematics only
b. He passed in Statistics, if it is known that he has failed in Mathematics
Solution:
Given: P (failed in statistics) = P(S.F) = 30% = 30/100 = 0.3
P (failed in maths) = P (M.F) = 35% = 35/100 = 0.35
P (passed in Statistics) = P (S.P) = 100 – 30 = 70% = 0.70
P (Failed in atleast one subject) = P (S.F U M.F) = 45%
= 45/100 = 0.45
(a) To find P (failed in Maths only)
P (S.F U M.F) = P (S.F) + P (M.F) – P ( S.F  M.F)
P ( S.F INERTSECTION M.F) = 0.3 + 0.35 – 0.45
= 0.20
P (failed in maths only) = P (M.F) – P(S.F  M.F)
= 0.35-0.20 = 0.15
(b) To find P( passed in statistics if known failed in maths)
= P (failed in maths) and P ( passed in statistics)

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= 0.35 * 0.70 = 0.245
3.From a set of 1000 observations known to be normally distributed, the mean is 534 cm and SD is
13.5 cm. How many observations are likely to exceed 561 cm? How many will be between 520.5 cm
and 547.5 cm? Between what limits will the middle 50% of the observations lie?
Solution:
Given: σ = 1 3.5 cm , µ = 5 34 cm , n = 1000
(i) P (X > 561)
Z=X-µ = ( 561 - 534) / 13.5 = 25/ 13.5 = 1.85
P (X>561) = P ( Z> 1.85)
= 0.5- P (0 < Z < 1.85)
= 0.5 – 0.4744 (From normal distribution the Table)
= 0.0256
Number of observations above 561 = 1000*0.0256 = 25.6
= 26cms (approx)
(ii) P (520.5<X<547.5)
Z = (520.5 – 534) / 13.5
= -13.5/13.5 = -1
Z= (547.5 – 534) / 13.5
= 13.5/ 13.5 = 1
P(-1< Z< 1) = P (-1< Z< 0) + P(0 < Z< 1)
= 2* P (0< Z< 1) = 2* 0.3413 = 0.6826
Number of observations between 520.5 and 547.5 = 1000* 0.6826 = 682.6 = 683cms
(approx)
(ii) Given 50% of middle value i.e Z = 0.5 on both sides of 0
i.e Z= 0.5/2 = 0.25 on one side of normal graph
The table value for 0.25 is 0.67
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Confidence interval
µ = Mean 0.67*σ
= 5 3 4  0.67∗ 13.5
= 5 2 4.955, 543.045
Τ he interval is from 524.955 to 543.045 where 50% of middle observations lie.
4. Write a note on “standard error. Distinguish between Standard error and Sampling
error
STANDARD ERROR
For a value that is sampled with an unbiased normally distributed error, the above depicts the
proportion of samples that would fall between 0, 1, 2, and 3 standard errors above and below the
actual value.
The standard error of a method of measurement or estimation is the standard deviation of the
sampling distribution associated with the estimation method.[1] The term may also be used to refer
to an estimate of that standard deviation, derived from a particular sample used to compute the
estimate.
For example, the sample mean is the usual estimator of a population mean. However, different
samples drawn from that same population would in general have different values of the sample
mean. The standard error of the mean (i.e., of using the sample mean as a method of estimating
the population mean) is the standard deviation of those sample means over all possible samples
(of a given size) drawn from the population. Secondly, the standard error of the mean can refer to
an estimate of that standard deviation, computed from the sample of data being analysed at the
time.
A mnemonic for remembering the term standard error is that, as long as the estimator is
unbiased, the standard deviation of the error (the difference between the estimate and the true
value) is the same as the standard deviation of the estimates themselves; this is true since the
standard deviation of the difference between the random variable and its expected value is equal
to the standard deviation of a random variable itself.
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In many practical applications, the true value of the standard deviation is usually unknown. As a
result, the term standard error is often used to refer to an estimate of this unknown quantity. In
such cases it is important to be clear about what has been done and to attempt to take proper
account of the fact that the standard error is only an estimate. Unfortunately, this is not often
possible and it may then be better to use an approach that avoids using a standard error, for
example by using maximum likelihood or a more formal approach to deriving confidence
intervals. One well-known case where a proper allowance can be made arises where the Student's
t-distribution is used to provide a confidence interval for an estimated mean or difference of
means. In other cases, the standard error may usefully be used to provide an indication of the size
of the uncertainty, but its formal or semi-formal use to provide confidence intervals or tests
should be avoided unless the sample size is at least moderately large. Here "large enough" would
depend on the particular quantities being analysed.
SAMPLING ERROR
In statistics, sampling error or estimation error is the error caused by observing a sample
instead of the whole population. The sampling error can be found by subtracting the value of a
parameter from the value of a statistic. In nursing research, a sampling error is the difference
between a sample statistic used to estimate a population parameter and the actual but unknown
value of the parameter . An estimate of a quantity of interest, such as an average or percentage,
will generally be subject to sample-to-sample variation. These variations in the possible sample
values of a statistic can theoretically be expressed as sampling errors, although in practice the
exact sampling error is typically unknown. Sampling error also refers more broadly to this
phenomenon of random sampling variation.
The likely size of the sampling error can generally be controlled by taking a large enough random
sample from the population,although the cost of doing this may be prohibitive; see sample size
and statistical power for more detail. If the observations are collected from a random sample,
statistical theory provides probabilistic estimates of the likely size of the sampling error for a
particular statistic or estimator. These are often expressed in terms of its standard error.
Sampling bias is a possible source of sampling errors. It leads to sampling errors which either
have a prevalence to be positive or negative. Such errors can be considered to be systematic
errors.
Sampling error can be contrasted with non-sampling error. Non-sampling error is a catch-all term
for the deviations from the true value that are not a function of the sample chosen, including
various systematic errors and any random errors that are not due to sampling. Non-sampling
errors are much harder to quantify than sampling error.
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5.Compute the two regression equations on the basis of the following data:
X Y
Mean 40 45
Standard Deviation 10 9
Given that the coefficient of correlation between X & Y is

0.50. Also estimate the value of Y for X=48?
Solution:
_ _
X = 40 ; Y = 45 ; σ = 10 ; σ = 9; r = 0.50
X Y
Regression equation of X on Y
_ _
X–X=r σ (Y – Y)
X
----
σ
Y
(X-40)= 0.5(10/9) (Y-45)

X-40= 0.56(Y-45)
X-40=0.56Y-25.2
X=0.56Y+ 14.8
Regression equation of Y on X
_ _
Y–Y=r σ (X-X)
Y
−−−
σ
X
Y-45 = 0.5 (9/10) ( X- 40)
Y-45 = 0.45X – 18
Y = 0.45X + 23
When X = 48 , Y = 0.45(48) + 23
= 44.6
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SHASTRY ACADEMY, shastryacademy@yahoo.com, shastrynotes@gmail.

P (failed in maths) = P (M.F) = 35% = 35/100 = 0.35

P (passed in Statistics) = P (S.P) = 100 – 30 = 70% = 0.70

P (Failed in atleast one subject) = P (S.F U M.F) = 45%

(a) To find P (failed in Maths only)

P (S.F U M.F) = P (S.F) + P (M.F) – P ( S.F  M.F)

P ( S.F INERTSECTION M.F) = 0.3 + 0.35 – 0.45

P (failed in maths only) = P (M.F) – P(S.F  M.F)

(b) To find P( passed in statistics if known failed in maths)

= P (failed in maths) and P ( passed in statistics)

Given: σ = 1 3.5 cm , µ = 5 34 cm , n = 1000

(i) P (X > 561)

Z=X-µ = ( 561 - 534) / 13.5 = 25/ 13.5 = 1.85

P (X>561) = P ( Z> 1.85)

= 0.5- P (0 < Z < 1.85)

= 0.5 – 0.4744 (From normal distribution the Table)

Number of observations above 561 = 1000*0.0256 = 25.6

Z = (520.5 – 534) / 13.5

Z= (547.5 – 534) / 13.5

P(-1< Z< 1) = P (-1< Z< 0) + P(0 < Z< 1)

= 2* P (0< Z< 1) = 2* 0.3413 = 0.6826

(ii) Given 50% of middle value i.e Z = 0.5 on both sides of 0

i.e Z= 0.5/2 = 0.25 on one side of normal graph

The table value for 0.25 is 0.67

Τ he interval is from 524.955 to 543.045 where 50% of middle observations lie.

Given that the coefficient of correlation between X & Y is

(X-40)= 0.5(10/9) (Y-45)

Y-45 = 0.5 (9/10) ( X- 40)

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