DEMAND FORECASTING

Managerial economics
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MMS 1st Year DIV C TEAM

Team Member
ANSARI THARIME ASAD ALI ATTARWALA AFTAB DALVI AAMER SHAIKH BUSHRA SHAIKH ASIF SHAIKH TAUSEEF SHAIKH ZIAUL HAQUE SIDDIQUI PRATHAMESH WALUNJ

Roll No
04 06 11 38 39 43 45 50 53

ACKNOWLEDGEMENT
Perseverance, Inspiration and Motivation have always played a key role in the success of any venture. So hereby its our pleasure to record thanks and gratitude to the people involved. Firstly, we thank Prof. Hema Jaganathan for his continuous support, stimulating suggestion and helping us all the time during our project. Special thanks go to our whole team and friends who were always ready to listen and give advice. Finally, thanks to the Director of our Management Institute Mr. Lukman Patel and the entire faculty for being so supportive.

Thanks To All..

Index
Sr. No 1 2 3 4 5 6 7 8 9 10 Topic Introduction Principle of Forecasting Types of Forecasts Approaches to Forecasting Types of Quantitative & Qualitative Methods Characteristics, Strength and Weakness of Quantitative Approaches Component of Demand Forecasting Time Horizons of Forecasting Stages in Demand Forecasting Conclusion Page 05 06 07 08 09 13 14 16 18 20

Introduction
Demand forecasting is the activity of estimating the quantity of a product or service that consumers will purchase. Demand forecasting involves techniques including both informal methods, such as educated guesses, and quantitative methods, such as the use of historical sales data or current data from test markets. Demand forecasting may be used in making pricing decisions, in assessing future capacity requirements, or in making decisions on whether to enter a new market. Forecasting product demand is crucial to any supplier, manufacturer, or retailer. Forecasts of future demand will determine the quantities that should be purchased, produced, and shipped. Demand forecasts are necessary since the basic operations process, moving from the suppliers' raw materials to finished goods in the customers' hands, takes time. Demand forecasting is the area of predictive analytics dedicated to understanding consumer demand for goods or services. That understanding is harnessed and used to forecast consumer demand. Knowledge of how demand will fluctuate enables the supplier to keep the right amount of stock on hand. If demand is underestimated, sales can be lost due to the lack of supply of goods. If demand is overestimated, the supplier is left with a surplus that can also be a financial drain. Understanding demand makes a company more competitive in the marketplace.

Why Do We Need Forecast

In general, forecasts are almost always wrong. So, throughout the day we forecast very different things such as weather, traffic, stock market, state of our company from different perspectives. Virtually every business attempt is based on forecasting. Not all of them are derived from sophisticated methods. However, Best" educated guesses about future are more valuable for purpose of Planning than no forecasts and hence no planning.
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Principles of Forecasting
Many types of forecasting models that differ in complexity and amount of data & way they generate forecasts: 1. Forecasts are rarely perfect. 2. Forecasts are more accurate for grouped data than for individual items. 3. Forecast are more accurate for shorter than longer time periods.

- The diversity of organizations involved in the supply chain across numerous countries, covering various stages of a products lifecycle, using different methodologies, with different base data sets, makes it very difficult to provide one answer on how to forecast. - It is not possible, nor arguably desirable, to strive for a single or limited set of methods and sources for forecasting. It is, however, possible and necessary to reduce the variation in forecast outputs and increase the confidence of all players in the market with the accuracy of the forecasts produced. - While principles in and of themselves will not solve all the challenges of producing demand forecasts, they should provide a context and environment in which forecasting can occur and serve as a compass to guide both forecasters and their customers .

Types of Forecasts
Forecast: A prediction, projection, or estimate of some future activity, event, or occurrence.

1. Economic forecasts:- Predict a variety of economic indicators, like money supply, inflation rates, interest rates, etc. 2. Technological forecasts:- Predict rate of technological progress. - Impacts development of new products. 3. Demand forecasts:- Predict sales of existing products and services.

APPROACHES TO FORECASTING
There are two general approaches to forecasting: qualitative and quantitative. 1. Qualitative methods: - It consists mainly of subjective inputs, which often defy precise numerical description. - These types of forecasting methods are based on judgments, opinions, intuition, emotions, or personal experiences and are subjective in nature.

Qualitative techniques permit inclusion of soft information (e.g., human factors, personal opinions, hunches) in the forecasting process.

- Those factors are often omitted or downplayed when quantitative techniques are used because they are difficult or impossible to quantify. - This method is used when situation is vague and little data exist. This method is also used in the New products, New technology, Involves intuition, experience. 2. Quantitative methods:- It involves either the projection of historical data or the development of associative models that attempt to utilize causal (explanatory) variables to make a forecast. - Quantitative techniques consist mainly of analyzing objective, or hard, data. They usually avoid personal biases that sometimes contaminate qualitative methods. - In practice, either approach or a combination of both approaches might be used to develop a forecast.

Types of Quantitative Methods

The following Quantitative Methods points re-present a variety of forecasting techniques or model that is classified as Time-Series, and Associative.

Quantitative Methods

Time-Series Models Forecasts that project patterns identified in recent time-series observations.

Associative Models Associative models (often called Causal model) Forecasting technique that uses explanatory variables to predict future demand.

1. Time-Series Models:- It is simply attempt to project past experience into the future. These techniques use
historical data with the assumption that the future will be like the past.

- Some models merely attempt to smooth out random variations in historical data;
others attempt to identify specific patterns in the data and project or extrapolate those patterns into the future, without trying to identify causes of the patterns. - Forecasts that project patterns identified in recent time-series observations.Assumes information needed to generate a forecast is contained in a time series of data.

2. Associative Models:-

It is use equations that consist of one or more explanatory variables that can be used to predict demand. For example, demand for paint might be related to variables such as the price per gallon and the amount spent on advertising, as well as to specific characteristics of the paint (e.g., drying time, eases of cleanup). It assumes that the variable being forecasted is related to other variables in the environment. They try to project based upon those associations.

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Types of Qualitative Methods

The following Qualitative Methods points re-present a variety of forecasting methods that is classified as Executive Opinions, Market Research, and Delphi Method.

Qualitative Methods

Executive Opinion Approach in which a group of managers meet and collectively develop a forecast.

Market Survey Approach that uses interviews and surveys to judge preferences of customer and to assess demand.

Delphi Method Approach in which consensus agreement is reached among a group of experts.

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1. Executive Opinion:-

A small group of upper-level managers (e.g., in marketing, operations, and finance) may meet and collectively develop a forecast. This approach is often used as a part of long-range planning and new product development. It has the advantage of bringing together the considerable knowledge and talents of various managers.

- However, there is the risk that the view of one person will prevail, and the possibility that diffusing responsibility for the forecast over the entire group may result in less pressure to produce a good forecast.

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2. Consumer Market Survey :- Because it is the consumers who ultimately determine demand, it seems natural to solicit input from them. In some instances, every customer or potential customer can be contacted. - However, usually there are too many customers or there is no way to identify all potential customers. Therefore, organizations seeking consumer input usually resort to consumer surveys, which enable them to sample consumer opinions. - The obvious advantage of consumer surveys is that they can tap information that might not be available elsewhere. On the other hand, a considerable amount of knowledge and skill is required to construct a survey, administer it, and correctly interpret the results for valid information. 3. Delphi Methods:- It is an iterative process intended to achieve a consensus forecast. This method involves circulating a series of questionnaires among individuals who possess the knowledge and ability to contribute meaningfully. - Responses are kept anonymous, which tends to encourage honest responses and reduces the risk that one persons opinion will prevail. - Each new questionnaire is developed using the information extracted from the previous one, thus enlarging the scope of information on which participants can base their judgments. - The Delphi method has been applied to a variety of situations, not all of which involve forecasting. The discussion here is limited to its use as a forecasting tool.

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Characteristics, Strength and Weakness Of Quantitative Approaches

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Components of Demand Forecasting

Trend Component
A long-term upward or downward

Cyclical Component
Wavelike variations lasting more than one year.

Seasonal Component
Short-term regular variations related to the calendar or time of day.

Random Component
Residual variations after all other behaviors are accounted for.

1. Trend Component:- Trend refers to a long-term upward or downward movement in the data. Population shifts, changing incomes, and cultural changes often account for such movements. 2. Cyclical Component:-

Cycles are wavelike variations of more than one years duration. These are often related to a variety of economic, political, and even agricultural conditions.

3. Seasonal Component:-

Seasonality refers to short-term, fairly regular variations generally related to factors such as the calendar or time of day. Restaurants, supermarkets, and theaters experience weekly and even daily seasonal variations.

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- Regular pattern of up and down fluctuations. Due to weather, customs, etc. Occurs within a single year.

Period

Length

Number of Seasons

Week Month Month Year Year Year

Day Week Day Quarter Month Week

7 4-4.5 28-31 4 12 52

4. Random Component:- Random components are residual variations that remain after all other behaviors have been accounted for. - Erratic, unsystematic, residual fluctuations. Due to random variation or unforeseen events. Short duration and no repeating.

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Time Horizons of Forecasting

Short term forecasting Demand forecasting Middle term forecasting Long term forecasting

1. Short-Range :- Up to 1 year, generally less than 3 months. - Purchasing, job scheduling, workforce levels, job assignments, production levels. - Appropriate production schedule. Reduces cost of purchasing raw-materials. - To evolve a proper promotion policy. To forecast short term financial requirements.

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2. Middle Term:- Duration of this forecasting is 3 months to 3 years. - Sales and production planning, budgeting.

3. Long Term:- Duration of this forecasting is 3+ years. - It is used for new product planning, facility location, research and development. - Planning of a new unit or expansion of an existing unit. - To plan for man-power requirement and also to plan for long term financial requirements.

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Stages in Demand Forecasting

Select the items to be forecasted.

Gather the data

Validate and implement results

Determine the time horizon of the forecast.

Make the forecast

Select the forecasting model(s)

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CONCLUSION

Demand forecasting is very much critical in nature. It gives a competitive age to the company over its rivals. By forecasting the demand a company can estimate the amount of sales it can make in future, which in turn helps it to decide the production levels. Demand forecasting is at times inaccurate, so companies should not completely rely on the forecast because it can lead to heavy losses if the forecast is very inaccurate. Hence in a nutshell demand forecasting plays a vital role in the success of a company.

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