Saturday, September 29, 2007

Quantitative Methods Of Forecasting: Naive Approach

If somebody ordered a pepperoni pizza for dinner every Friday night for the last year, what would you predict that person would order the following Friday? Exactly. You'd forecast that the person would order a pepperoni pizza.

This is a simple example for a simple concept. Forecasted demand and sales for the next period will be the same a the actual demand and sales from the current period. This is a cheap and easy method of forecasting. Unfortunately, it is the "naive" approach because things rarely turn out exactly the same as they did the period before. Using the naive approach, anybody looking at sales of PDA's last year would have expected sales to be the same for this year. This turned out to be absolutely untrue as PDA sales dropped by 40% from this time last year (read article).

The Naive Approach is a good entry into quantitative forecasting, but it only scratches the surface. My next entry will show you how to perform moving averages in your forecasts. Thanks for visiting ------Sincerely, Trevor Stasik.

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