On the identification of sales forecasting models in the presence of promotions

On the identification of sales forecasting models in the presence of promotions

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Article ID: iaor201525402
Volume: 66
Issue: 2
Start Page Number: 299
End Page Number: 307
Publication Date: Feb 2015
Journal: Journal of the Operational Research Society
Authors: , ,
Keywords: retailing, marketing, statistics: regression
Abstract:

Shorter product life cycles and aggressive marketing, among other factors, have increased the complexity of sales forecasting. Forecasts are often produced using a Forecasting Support System that integrates univariate statistical forecasting with managerial judgment. Forecasting sales under promotional activity is one of the main reasons to use expert judgment. Alternatively, one can replace expert adjustments by regression models whose exogenous inputs are promotion features (price, display, etc). However, these regression models may have large dimensionality as well as multicollinearity issues. We propose a novel promotional model that overcomes these limitations. It combines Principal Component Analysis to reduce the dimensionality of the problem and automatically identifies the demand dynamics. For items with limited history, the proposed model is capable of providing promotional forecasts by selectively pooling information across established products. The performance of the model is compared against forecasts provided by experts and statistical benchmarks, on weekly data; outperforming both substantially.

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