QUESTION 1

WHAT DO YOU MEAN BY DEMAND FORECASTING?

Planning is the integral part of managers job. Managers finds difficulties if there is
uncertainties in the planning horizon. Forecast helps manager to reduce the uncertainties
thereby (in that way) enabling them to develop more meaningful and effective plan. A forecast
is a statement about the future value of a variable such as demand. Forecasting is one input to
all types of business planning and control both inside and outside the operations function.
A root problem in project management is the unavoidable uncertainty in predicting future
demand. This condition manifests itself in the unreliable sales forecasts that form the heart of
many inventory management and planning systems. Contributing to this nebulous nature of
predicting the future is the distortion of past facts as the usual communication platforms.
Forecasting helps managers and businesses develop meaningful plans and reduce uncertainty
of events in the future. Managers want to match supply with demand; therefore, it is essential
for them to forecast how much space they need for supply to each demand.
A forecast is a statement about how the future will turn out based on evidence or assumptions.
In business, project forecasts often involve the analysis of data, such as the performance history
of a particular project. The purpose of forecasting is to give managers insight into how
profitable projects are likely to be in the future. Managers may choose to forego new projects
or stop current projects if forecasts are unfavorable. In general terms, forecasting presents an
unresolved philosophical dilemma. From project management point of view, long run estimates
of overall demand for the products and services of a project are of crucial importance. Even
more detailed estimates are needed for specific items or subcomponents that go into each
product.
DEMAND FORECASTING
Demand can be defined as various quantities of a given commodity or services which
consumers would buy in one market in a given period of time at various prices or at various
incomes, or at various prices of related goods. Demand is both willingness to buy and ability to
buy. We can express demand mathematically,
D=f(x
1,
x
2,
x
3,
x
4
.)
Here,
X
1
=Price of the product
X
2
=Consumers Income
X
3
=Prices of the related goods
X
4
=Population size etc.
The above expression shows demand is a function of many variables. Among all the variables
that effect demand, price is the most important one. The amount of commodity people buy
depends on price. The higher the price of a product, other things remain same, the less people
are willing to buy and vice versa.
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.
Customer demand for products and services changes constantly. Forecasting and capacity
planning ensure that resources are managed so that customer demand is met in the right
amount, at the right time, with the right quality. Demand forecasting helps companies
determine the supply of products and services needed to meet customer demand. 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.
Demand forecasts are necessary since the basic operations process, moving from the suppliers'
raw materials to finished goods in the customers' hands, takes time. Most firms cannot simply
wait for demand to emerge and then react to it. Instead, they must anticipate and plan for
future demand so that they can react immediately to customer orders as they occur. In other
words, most manufacturers "make to stock" rather than "make to order" they plan ahead and
then deploy inventories of finished goods into field locations. Thus, once a customer order
materializes, it can be fulfilled immediately since most customers are not willing to wait the
time it would take to actually process their order throughout the supply chain and make the
product based on their order.

WHAT ARE THE ELEMENTS AND STEPS OF GOOD FORECASTING?

ELEMENTS OF A GOOD FORECAST
A properly prepared forecast should fulfill certain requirements:
1. The forecast should be timely. Usually, a certain amount of time is needed to respond to the
information contained in a forecast. For example, capacity cannot be expanded overnight, nor
can inventory levels be changed immediately. Hence, the forecasting horizon must cover the
time necessary to implement possible changes.
2. The forecast should be accurate, and the degree of accuracy should be stated. This will enable
users to plan for possible errors and will provide a basis for comparing alternative forecasts.
3. The forecast should be reliable; it should work consistently. A technique that sometimes
provides a good forecast and sometimes a poor one will leave users with the uneasy feeling
that they may get burned every time a new forecast is issued.
4. The forecast should be expressed in meaningful units. Financial planners need to know how
many dollars will be needed, production planners need to know how many units will be
needed, and schedulers need to know what machines and skills will be required. The choice of
units depends on user needs.
5. The forecast should be in writing. Although this will not guarantee that all concerned are using
the same information, it will at least increase the likelihood of it. In addition, a written forecast
will permit an objective basis for evaluating the forecast once actual results are in.
6. The forecasting technique should be simple to understand and use. Users often lack
confidence in forecasts based on sophisticated techniques; they do not understand either the
circumstances in which the techniques are appropriate or the limitations of the techniques.
Misuse of techniques is an obvious consequence. Not surprisingly, fairly simple forecasting
techniques enjoy widespread popularity because users are more comfortable working with
them.
7. The forecast should be cost-effective: The benefits should outweigh the costs.




STEPS OF GOOD FORECAST
There are six basic steps in the forecasting process:

1. Determine the purpose of the forecast: How will it be used and when will it be needed?
Detailed level of requirement needed and that can be justified and the level of accuracy
necessary.

2. Establish a time horizon: The forecast must indicate a time interval, keeping in mind that
accuracy decreases as the time horizon increases.


3. Select the forecasting: Which forecasting is essential for particular purpose should be
identified and select.

4. Gather and analyze relevant data: Before a forecast can be made, data must be gathered
and analyzed. Identify any assumptions that are made in conjunction with preparing and
unsung the forecast.

5. Make the forecast: After performing the above element make forecast.

6. Monitor the forecast: A forecast has to be monitored to determine whether it is
performing in a satisfactory manner. If it is not reexamine the method, assumption,
validity of data and so one; modify as needed; and prepare a revised forecast.












DISCUSS THE VARIOUS METHODS OF DEMAND
FORECASTING?
Methods of Demand forecasting

Broadly speaking, there are two approaches to demand forecasting- one is to obtain
information about the likely purchase behavior of the buyer through collecting experts opinion
or by conducting interviews with consumers, the other is to use past experience as a guide
through a set of statistical techniques. Both these methods rely on varying degrees of
judgment. The first method is usually found suitable for short-term forecasting, the latter for
long-term forecasting. There are specific techniques which fall under each of these broad
methods
Sample Survey Method
Experts Opinion Poll: In this method, the experts are requested to give their opinion or feel
about the product. These experts, dealing in the same or similar product, are able to predict the
likely sales of a given product in future periods under different conditions based on their
experience. If the number of such experts is large and their experience-based reactions are
different, then an average-simple or weighted is found to lead to unique forecasts. Sometimes
this method is also called the hunch method but it replaces analysis by opinions and it can
thus turn out to be highly subjective in nature.
Reasoned Opinion-Delphi Technique: This is a variant of the opinion poll method. Here is an
attempt to arrive at a consensus in an uncertain area by questioning a group of experts
repeatedly until the responses appear to converge along a single line. The participants are
supplied with responses to previous questions (including seasonings from others in the group
by a coordinator or a leader or operator of some sort). Such feedback may result in an expert
revising his earlier opinion. This may lead to a narrowing down of the divergent views (of the
experts) expressed earlier. The Delphi Techniques, followed by the Greeks earlier, thus
generates reasoned opinion in place of unstructured opinion; but this is still a poor proxy
for market behavior of economic variables.
End-user Method of Consumers Survey: Under this method, the sales of a product are
projected through a survey of its end-users. A product is used for final consumption or as an
intermediate product in the production of other goods in the domestic market, or it may be
exported as well as imported. The demands for final consumption and exports net of imports
are estimated through some other forecasting method, and its demand for intermediate use is
estimated through a survey of its user industries.

Complex Statistical Methods
Time series analysis or trend method: Under this method, the time series data on the under
forecast are used to fit a trend line or curve either graphically or through statistical method of
Least Squares. The trend line is worked out by fitting a trend equation to time series data with
the aid of an estimation method. The trend equation could take either a linear or any kind of
non-linear form. The trend method outlined above often yields a dependable forecast
The advantage in this method is that it does not require the formal knowledge of economic
theory and the market; it only needs the time series data. The only limitation in this method is
that it assumes that the past is repeated in future. Also, it is an appropriate method for long-
run forecasts, but inappropriate for short-run forecasts. Sometimes the time series analysis
may not reveal a significant trend of any kind. In that case, the moving average method or
exponentially weighted moving average method is used to smoothen the series

Barometric techniques or lead or leg methods:
This consists in discovering a set of series of some variables which exhibit a close association in
their movement over a period or time. For example, it shows the movement of agricultural
income (AY series) and the sale of tractors (ST series). The movement of AY is similar to that of
ST, but the movement in ST takes place after a years time lag compared to the movement in
AY. Thus if one knows the direction of the movement in agriculture income (AY), one can
predict the direction of movement of tractors sale (ST) for the next year. Thus agricultural
income (AY) may be used as a barometer (a leading indicator) to help the short-term forecast
for the sale of tractors.
Generally, this barometric method has been used in some of the developed countries for
predicting business cycles situation. For this purpose, some countries construct what are known
as diffusion indices by combining the movement of a number of leading series in the economy
so that turning points in business activity could be discovered well in advance. Some of the
limitations of this method may be noted however. The leading indicator method does not tell
you anything about the magnitude of the change that can be expected in the lagging series, but
only the direction of change. Also, the lead period itself may change overtime. Through our
estimation we may find out the best-fitted lag period on the past data, but the same may not
be true for the future. Finally, it may not be always possible to find out the leading, lagging or
coincident indicators of the variable for which a demand forecast is being attempted.
Simultaneous equations Methods
Here is a very sophisticated method of forecasting. It is also known as the complete system
approach or econometric model building. In your earlier units, we have made reference to
such econometric models. Presently we do not intend to get into the details of this method
because it is a subject by itself. Moreover, this method is normally used in macro-level
forecasting for the economy as a whole; in this course, our focus is limited to micro elements
only. Of course, you, as corporate managers, should know the basic elements in such an
approach. The method is indeed very complicated. However, in the days of computer, when
package programs are available, this method can be used easily to derive meaningful forecasts.
The principle advantage in this method is that the forecaster needs to estimate the future
values of only the exogenous variables unlike the regression method where he has to predict
the future values of all, endogenous and exogenous variables affecting the variable under
forecast. The values of exogenous variables are easier to predict than those of the endogenous
variables. However, such econometric models have limitations, similar to that of regression
method.
The method is indeed very complicated. However, in the days of computer, when package
programs are available, this method can be used easily to derive meaningful forecasts. The
principle advantage in this method is that the forecaster needs to estimate the future values of
only the exogenous variables unlike the regression method where he has to predict the future
values of all, endogenous and exogenous variables affecting the variable under forecast. The
values of exogenous variables are easier to predict than those of the endogenous variables.
However, such econometric models have limitations, similar to that of regression method.













QUESTION 2:
WHAT IS TECHNICAL APPRAISAL? DISCUSS THE
ESSENTIAL COMPONENTS OF TECHNICAL APPRAISAL.
Project appraisal is the process of assessing and questioning proposals before resources are
committed. It is an essential tool for effective action in community renewal. Its a means by
which partnerships can choose the best projects to help them achieve what they want for their
community.
But appraisal has been a source of confusion and difficulty for projects in the past. Audits of
the operation of Single Project Budget schemes have highlighted concerns about the design and
operation of project appraisal systems, including:
Mechanistic, inflexible systems
A lack of independence and objectivity
A lack of clear definition of the stages of appraisal and of responsibility for these stages
A lack of documentary evidence after carrying out the appraisal

Project appraisal is a requirement before funding of programs is done. But tackling problems
like those outlined above is about more than getting the systems right on paper. Experience in
projects emphasizes the importance of developing an appraisal culture which involves
developing the right system for local circumstances and ensuring that everyone involved
recognizes the value of project appraisal and has the knowledge and skills necessary to play
their part in it.




TECHNICAL APPRAISAL
Technical appraisal is a part of project appraisal. By technical appraisal we mean analysis of
technical and engineering aspects, which is mainly done when a development project is being
examined and formulated. Technical appraisal is an in-depth study to ensure that a project is (i)
soundly designed, (ii) appropriately engineered and (iii) follows accepted standards. These
considerations differ from project to project. But, in any case, the emphasis is on the inputs
needed for the project and the resulting outputs of goods & services.
Put another way, such an appraisal determines whether the pre-requisites of a successful
project have been covered and good choices have been made in regard to (i) location, (ii) plant
capacity, (iii) raw materials requirements and (iv)other such factors as availability of required
professional, technicians and workers.

Technical analyses of a project are aimed at ensuring the following:
i. To confirm the source of the project proposal, nature of the studies including
feasibility studies undertaken before the proposal, and the nature of decisions taken by
all relevant authorities involved
ii. That the problem or the need to be resolved by the project has been clearly stated
iii. That the project has been clearly spelled out with the correct technical design details
(such as size, location, timing, and technology)
iv. That the required materials have been correctly determined and their source identified
v. That the costs of the project have been clearly established, expected product prices
projected, and payment modalities and schedules agreed to



ESSENTIAL ELEMENTS OF TECHNICAL APPRAISAL
Development projects may be of various sizes and nature and their technical coverage may be
different. The analysis for determining the technical viability of the development project is
based on the technical data and information given in the PC-I form as well as the earlier
experience of carrying out similar projects. The technical tests and yard-sticks to be used to
determine the technical viability differ from project to project and from sector to sector. In
cases where high level technology is involved and the country has little or no experience,
foreign consultants are also employed to prepare the feasibility studies. The technical analysis
concerns the project's input (supplies) and output (production) of real goods and services. For
example, in an agricultural project, technical analysis will determine the potential yields in the
project area, the co-efficient of production, potential cropping patterns, and the possibilities for
multiple cropping. The technical analysis will also examine the marketing and storage facilities
required for the successful operation of the project. The aspects like soil/ground water or
collection of hydrological data may also be examined. Knowledge about farmers in the project
area, their current farming practices, and their social values to ensure realistic choices about
technology is also examined. But considering the goals and objectives of the development
projects, the technical appraisal should cover the following essential aspects
Materials and Inputs
Production Technology
Product Mix
Plant Capacity
Project /Plant Locations and Sites
Machinery and Equipment
Structure and civil Works
Promotion of Sub-Contracting Activities
Environmental Factors
Evaluation of Project Charts and Layouts
Evaluation of Work Schedule
Materials and Inputs
Technical analysis is concerned with defining materials and utilities required, specifying their
properties and setting up their supply program. Materials and Inputs may be classified into four
categories:
Raw Materials
Processed industrial materials and components
Auxiliary materials and factory supplies
Utilities

Production Technology
For manufacturing a product /service often two or more alternative technologies are available
.During appraisal the following major factors are to be considered.
Choice of technology
Plant Capacity
Principal Inputs
Investment outlay and Production Cost
Proven Technology
Product Mix
Latest Developments
Ease of Absorption
Acquiring Technology
Transfer of Technology

Product Mix
Product mix is dependent on market requirements. Product mix holds quality, performance, or
innovative features. While planning the production facilities of the firm, some flexibility with
respect to the product mix mist is sought.
Plant Capacity
Plant capacity refers to the volume or number of units that can be produced during a given
period. Following factors should be looked into on capacity decision.
Technological Requirement
Specific Site Selection

Project /Plant Locations and Sites
The choice of location and site follows an assessment of demand, size, and input requirement.
The choice of location is influenced by variety of considerations proximity to raw materials and
market, availability of infrastructure, government policies and other factors.
Machinery and Equipment
The requirement of machinery and equipment is dependent on production technology and
plant capacity. The type of project also influences. The equipment required for the project may
be classified into following types: Plant equipment, mechanical equipment, electrical
equipment, instruments, controls, internal transportation system and other machinery and
equipment. In case of technical appraisal of machinery and equipment, like the case of
production technology, it should be ensured that the level of technology aspects should be
necessary and sufficient for the requirement, technology is proven and obsolete machinery and
equipment are avoided.
Structure and civil Works
In case of technical appraisal, structures and civil works associate with the project must be
properly examined. Structures and civil works may be divided into three categories:
Site preparation and development ( grading and leveling of the site, demolition and
removal of existing structure, relocation of existing pipelines, cables, roads, power lines
etc, connection of public network like electric power, water, communications,
transportations etc. )

Building and Structures ( factory or process building, ancillary buildings, administrative
buildings, residential buildings)

Outdoor works (supply and distribution of utilities, handling and treatment of emission,
wastages, transportation, supervision etc.)


Promotion of Sub-Contracting Activities
In case of new large industries, there should be enough provision for promotion of
subcontracting activities through small manufacturing units. It may help large industries to be
economic during operations without being much dependent on the original suppliers for
spares; which can be produced by small subcontractors of the country.
Environmental Factors
Depending on the nature of the project, it is important that the project is seen to comply with
the various environmental requirements. The proposed project would not pose any
environmental hazards. In case of technical appraisal, proper care should be taken for making
adequate arrangement so that environment pollution remains at tolerable level for the
neighborhood in accordance with the requirement of the pollution control agency.
Evaluation of Project Charts and Layouts
Once the data is available on the principal dimensions of the project-market size, plant capacity,
required technology, equipment and civil works, conditions obtaining at plant site and supply of
imports to the project-project charts and layouts may be prepared. These define the scope of
the project and provide the basis for detailed project engineering and estimation of investment
and production costs. The Major project charts and layouts to be evaluated
General Function Layouts: These show the general relationship between equipment,
building and civil work.
Flow Diagrams: These show the flow of materials, utilities, intermediate products, final
products, by products and emissions.
Transport Layouts: These show the distances and means of transport outside the
production line.
Communication Layouts: These indicate how the various parts of the project will be
connected with telephone telex, intercom, computer network etc.
Utility Consumption Layouts: This indicates the principal consumption points of utilities
(power, gas, water etc.) along with quantity and quality require.
Organizational Layouts: These indicated the organizational setup of the project along
with the information on location, personnel required for each department and their
inter relationship.
Plant Layouts: These are concerned with the physical layouts of the plants.

Evaluation of Work Schedule
The work schedule reflects the plan of work concerning installation as well as initial operation.
The purpose of work schedule is:
To anticipate problems likely to arise during the installation phase and suggest possible
means for coping with them
To establish the phasing of investments taking into account the availability of finances
To develop a plan of operations covering the initial period