NAME-AAYUSH PATEL

PROGRAM – MBA
SEMESTER-1
SECTION- A
ROLL NO- 057

MANAGERIAL ECONOMICS

TOPIC- Discuss different methods of demand forecasting and estimation

And a case study relating to it and explain .

What is Demand Forecasting?

Demand forecasting is a business process that estimates consumer demand for
goods. The process uses sales data over time, market conditions, competitor
analysis and input by experienced professionals to create a forecast that
attempts to predict future behavior.

By predicting what goods and in what quantities consumers will purchase in the
future, businesses can create plans to meet the demand efficiently
and profitably. Demand forecasting is used to plan many functions within an
enterprise. This includes financial health such as estimates of margins, cash
flow and capital expenditure. It is also used to plan operations for labor, training,
equipment utilization, capacity and expansion.

The problem with demand forecasting has traditionally been its reliance on
intuition and the expert opinions of those within the company experienced in
market behavior and performance of sales channels. Because of this subjective
element, demand forecasting has been considered as much an art as a
science. The reliance on subjective input impacts all downstream processes that
depends upon it. The result is the introduction of uncertainty to a process that
requires accurate data to produce the best forecasts possible.
What is Demand estimation?
Demand estimation in managerial economics refers to predicting how consumers will behave in relation to
your products and services in the future. The estimation is often based on a number of different variables
that can include changes in price, changes in how your competition increases or decreases its prices, and
economic factors such as a recession, which would affect consumer buying.

The Difference Between Estimation and Forecasting

Although estimation and forecasting are processes that are often used together, they aren't the
same. Estimation looks for links between data and operations, finding the reasons behind the
numbers and using this information to plan for the future. Forecasting is driven by numbers rather
than stories. It issues predictions based on past records without necessarily delving into why
certain patterns have occurred. An estimation process for a weather dependent business such as
a food concession could start with identifying the effects that sun, clouds and rain have on daily
sales, and then researching the average number of sunny, cloudy and rainy days per year. A
forecasting model could simply look at average sales during a particular month or season over
several previous years. It would then factor in developments such as new products being
introduced. This information would provide the basis for forecasting sales during an upcoming
period.

The Importance of Estimation and Forecasting

Your business will use the information you get from estimation and forecasting to plan production
and inventory. This is especially important if your production process requires considerable lead
time to obtain parts from manufacturers and perform a series of interdependent tasks. If your
estimation is faulty and your forecasting is too high, you may lose money by ending up with
excess inventory that you can't use. If your forecast falls short of demand, you may lose money by
receiving orders that you can't fill. Apart from the immediate sales lost, this situation could also
hurt your business by making potential customers reluctant to order from you in the future. A
business with a shorter production cycle will be better able to adjust for a shortfall caused by a
faulty forecast by scrambling and producing extra, but you'll probably pay extra for parts ordered
in small quantities on short notice. Your payroll may also increase because last minute orders
often require overtime hours.
The methods of forecasting can be classified into two broad categories:

1. Survey Methods: Under the survey method, the consumers are contacted directly
and are asked about their intentions for a product and their future purchase plans.
This method is often used when the forecasting of a demand is to be done for a
short period of time.

The survey method includes:

• Consumer Survey Method

• Opinion Poll Methods

2. Statistical Methods: The statistical methods are often used when the forecasting of
demand is to be done for a longer period. The statistical methods utilize the time-
series (historical) and cross-sectional data to estimate the long-term demand for a
product. The statistical methods are used more often and are considered superior
than the other techniques of demand forecasting due to the following reasons:

• There is a minimum element of subjectivity in the statistical methods.

• The estimation method is scientific and depends on the relationship between the
dependent and independent variables.
• The estimates are more reliable
• Also, the cost involved in the estimation of demand is the minimum.
The statistical methods include:

• Trend Projection Methods

• Barometric Methods
• Econometric Methods
3 Advantages and 3 Disadvantages of
Forecasting
Forecasting isn’t easy. But when done right, it can offer tremendous advantages to companies.
And in today’s ultra-competitive business landscape, any advantage over the competition is
positive. That said, there are a few disadvantages that are worth exploring. While we don’t believe
they are obstacles to implementing a forecasting process, they should be weighed when
considering which forecasting process is right for you.

Three advantages of forecasting

1. You’ll gain valuable insight

Forecasting gets you into the habit of looking at past and real-time data to predict future demand.
And in doing so, you’ll be able to anticipate demand fluctuations more effectively. But more than
that, it’ll give you insight into your company’s health and provide you with an opportunity to
course-correct or make adjustments.

2. You’ll learn from past mistakes

You don’t start from scratch after each forecast. Even if your prediction was nowhere close to
what ended up coming to pass, it gives you a starting point. It’s common to review where and why
things didn’t happen the way you predicted. Your forecasts should eventually improve. But more
than that, you’ll get into the habit of reflecting upon past performance as a whole. And self-
reflection can be a powerful driver of company growth.

3. It can decrease costs

When done right, anticipating demand will help you tweak your processes to increase efficiency
all along the supply chain. Because you’re better able to predict what customers will want and
when they’ll want it, you may also be able to decrease excess inventory levels, thus increasing
overall profitability.
Three disadvantages of forecasting
1. Forecasts are never 100% accurate

Let’s face it: it’s hard to predict the future. Even if you have a great process in place and
forecasting experts on your payroll, your forecasts will never be spot on. Some products and
markets simply have a high level of volatility. And in general, there is just an endless number of
factors that influence demand.

2. It can be time-consuming and resource-intensive

Forecasting involves a lot of data gathering, data organizing, and coordination. Companies
typically employ a team of demand planners who are responsible for coming up with the forecast.
But in order to do this well, demand planners need substantial input from the sales and marketing
teams. In addition, it’s not uncommon for processes to be manual and labor-intensive, thus taking
up a lot of time. Fortunately, if you have the right technology in place, this is much less of an
issue.

3. It can also be costly

On a related note, hiring a team of demand planners is a significant investment. When you add to
that the cost of using good quality tools, upfront costs can add up. But investing in advanced
software, high-quality talent and solid forecasting processes is just that: an investment. We’re
confident you’ll see a return when all of that is done right.

Forecasting is a business practice that every company engages in to one extent or another. And it
can be hugely valuable, providing those companies who have implemented a solid forecasting
process with a leg up on their competition. What’s more, even the disadvantages can be overcome
with the right people, technology and processes. So learn how partnering with our Forecast Xperts
and implementing our Atlas Suite can make a difference.
Demand Forecasting For A Telecom Provider In Germany | A Telecom Retail Case Study

Maximizing Customer Recontracts And Improving Overall Sales Productivity For A Top-Tier
Telecom Provider In Germany

Objective
A top-tier telecom provider in Germany was looking to centralize procurement for all mobile devices it plans to sell in
the future in global markets. In order to accurately manage product lines for each country, negotiate the best prices
from handset vendors, and align promotions and subsidies with customer upgrade cycles, it needed to forecast
demand six months in advance for handset devices at the SKU level. The forecasts will enable the telecom provider to
better allocate inventory of handset models, reduce inventory costs, and increase recontract rates to maximize sales
productivity and ARPU.
The Challenge
The project was complex because it required predicting future trends for every device model at the SKU level. Lynx
Analytics had to factor in the influence of manufacturer discounts and product bundles on customer demand. The
forecast needed historical data for sales and inventories for each SKU and distribution channel, but the carrier did not
have a consistent method of identifying devices across systems. Lynx Analytics needed to find a way to cull
appropriate data from relevant data sets. It also needed to predict demand for new handset models that do not have
any history in the market.
High volume of historical data for sales and inventories for each SKU and distribution channel
Disparate systems with different aggregation logic that added complexity in identifying devices
Predicting demand for new handset models that do not have any history in the market

The Solution
The first step was to create reliable data from the data sources to characterize device inventories, sales, promotions,
customer contracts, and other factors. To achieve this, Lynx engineered an automated data pipeline to collect and
cleanse the data. Following that, Lynx Analytics leveraged machine learning techniques to predict the demand for
existing handset device models. This approach incorporated inputs from Google Trends to forecast demand for
handset models.
The Outcome
Lynx Analytics delivered the demand forecasting model within three months of project startup. The solution, which
was automated and integrated into the customer’s operations provided a prediction of all SKU sales in Germany, six
months in advance, with 80% accuracy.
With these very granular forecasts, the carrier was able to better allocate SKU level handset inventories, increasing
the sell-through rate by 18%. The carrier minimized purchases of low-demand handsets, reducing inventory cost by
7%. It was able to improve the relevance of marketing promotions to increase customer recontracts by 13%.