Presented by team 4

SO
WHAT

“IS”

DEMAND

FORECASTING?
Activity of determining the quantity of goods
to be purchased in future
Forecasting customer demand for products
and services.
It is a proactive process of determining what
products are needed where, when, and in
what quantities.
Consequently, demand forecasting is a
customer–focused activity.
It supports other planning activities such as
capacity planning, inventory planning, and
even overall business planning.
OBJECTIVES OF DEMAND
FORECASTING

1. Helping for continuous production

2. Regular supply of commodities
3. Formulation of price policy
4. Arrangement of finance
5. Labor requirement
 Characteristics of demand
5 main characters of demand are-
Average
Demand tends to cluster around a specific level.
Trend
Demand consistently increases or decreases over time.
Seasonality
Demand shows peaks and valleys at consistent intervals. These
intervals can be hours, days, weeks, months, years, or seasons.
Cyclicity
Demand gradually increases and decreases over an extended period
of time, such as years. Business cycles (recession/expansion)
product life cycles influence this component of demand.
Elasticity
Degree of responsiveness of demand to a corresponding
proportionate change in factors effecting it.
 Why We Study forecasting?
Reduces future uncertainties, helps study markets

that are dynamic, volatile and competitive

Allows operating levels to be set to respond to

Allows
demand managers to
variations plan personnel, operations of
purchasing & finance for better control over wastes
inefficiency and conflicts.
Inventory Control-reduces reserves of slack resources

to meet uncertain demand

Effective forecasting builds stability in operations.
Setting Sales Targets, Pricing policies, establishing
controls and incentives
 Types of Forecasting Models
Types of Forecasts
Qualitative --- based on experience, judgement,
knowledge;
Quantitative --- based on data, statistics;
Forecasting Examples
Examples from student projects:
 Demand for tellers in a bank;
 Traffic on major communication switch;
 Demand for liquor in bar;
 Demand for frozen foods in local grocery warehouse.

Example from Industry: American Hospital Supply Corp.

 70,000 items;
 25 stocking locations;
 Store 3 years of data (63 million data points);
 Update forecasts monthly;
 21 million forecast updates per year.
 THE FORECAST

STEPS INVOLVED IN FORECASTING:

Step 1 Determine purpose of forecast
Step 2 Establish a time horizon
Step 3 Select a forecasting technique
Step 4 Gather and analyze data
Step 5 Prepare the forecast
Step 6 Monitor the forecast
 LEVELS OF FORECASTING

AT FIRMS LEVEL

AT INDUSTRY LEVEL

AT TOTAL MARKET LEVEL

KEY FACTORS FOR
SELECTING A RIGHT
METHOD
Forecasting Horizons
 Long Term
 5+ years into the future
 R&D, plant location, product planning
 Principally judgment-based
 Medium Term
 1 season to 2 years
 Aggregate planning, capacity planning, sales forecasts
 Mixture of quantitative methods and judgment
 Short Term
 1 day to 1 year, less than 1 season
 Demand forecasting, staffing levels, purchasing, inventory
levels
 Quantitative methods
METHODS OF
DEMAND
FORECASTING.
 2 MAIN CATEGORIES
MICROECONOMIC METHODS
(QUANTITATIVE)
- involves the prediction of activity of particular firms,
branded products, commodities, markets, and
industries.
- are much more reliable than macroeconomic methods
because the dimensionality of factors is lower and often
can easily be incorporated into a model.
COND..
MACROECONOMIC METHODS
(QUALITATIVE)
- involves the prediction of economic aggregates such as
inflation, unemployment, GDP growth, short-term interest
rates, and trade flows.
- is very difficult because of the complex interdependencies
in the overall economic factors
QUALITATIVE METHODS
- SURVEY OF BUYERS INTENSIONS
- EXPERTS OPINION METHOD
- DELPHI METHOD
- MARKET EXPERIMENTATION METHOD
- COLLECTIVE OPINIONS METHOD
QUANTITATIVE METHODS
- TIME SERIES MODELS
- TREND ANALYSIS
- MOVING AVERAGES METHODS
- EXPONENTIAL SMOOTHING
- CAUSAL MODELS
- REGRESSION MODELS
 BUYERS INTENSION SURVEY
Features
 Employs Sample Survey Techniques
For Gathering Data.
 Data Is Collected From End Users Of

Goods - Consumer, Producer,mixed.

 Data Portrays Biases And Preferences Of
Customers.
 Ideal For Short And Medium Term Demand
Forecasting, Is Cost Effective And Reliable.
ADVANTAGES
Helps In Approximating Future
Requirements Even Without Past
Data.
Accurate Method As Buyers

Needs And Wants Are Clearly

Identified & Catered To.
Most Effective Way Of

Assessing Demand For New Firms

LIMITATIONS
People may not know what
they are going to purchase
They may report what they
want to buy, but not what they
are capable of buying
Customers may not want to
disclose real information
Effects of derived demand may
make forecasting difficult
 EXPERTS OPINION METHOD
FEATURES

Panel Of Experts In Same Field With Experience

& Working Knowledge.
Combines Input From Key Information Sources.
Exchange Of Ideas And Claims.
Final Decision Is Based On Majority Or
Consensus, Reached From Expert’s Forecasts
Sometimes this method is also called the “hunch
method”
 Advantages
 This method is very easy and less costly to carry out.

 This method produces quick results

 When a firm intends to bring a new product, this method is very useful
to elicit the opinion of experts on its marketing plans .
 Can Be Undertaken EasilyWithout The Use Of Elaborate Statistical
Tools.
 Incorporates A Variety Of Extensive Opinions From Expert In The
Field.
Disadvantage
 The experts must have wide knowledge and experience
otherwise their opinion may be personal based on guess
work.

 Experts opinion may be biased for a number of reasons.

 DELPHI METHOD
Panel Of Experts Is Selected.
One Co-ordinator Is Chosen By
Members Of The Jury
Anonymous Forecasts Are Made By
Experts Based On A Common
Questionnaire.
Co-ordinator Renders An Average Of
All Forecasts Made To Each Of The
Members.
3 Consequences- Diversion,
Consensus Or No Agreement.

2 To 3 Cycles Are Undertaken.

Convergence And Diversion Is

Acceptable.

Forecasts Are Revised Until

A Consensus Is Reached By All.
ADVANTAGES
Eliminates Need For Group
Meetings.
Eliminates Biases In Group
Meetings
Participants Can Change Their
Opinions Anonymously.
It is a cheap method, save time and
resources.
LIMITATIONS
Time Consuming -Reaching
A Consensus Takes A Lot Of Time.
Participants May Drop Out.
 The success of this method depends upon
wide knowledge and experience of experts.
 It could be tedious and costly method if the
experts are not too large and are cooperative
and forecaster has the necessary funds and
ability to perform the task.
MARKET EXPERIMENTATION
Involves Actual Experiments & Simulations.
Coupons Are Issued To Few Select Customers.
Selected Customers Purchase The Products.
Proximity With Consumers Makes
Information Collected Reliable.
Information From Interactions Between Sales Personnel &
Customers Is Used For Forecasting.
Best Used If Sales Personnel Are Highly
Specialised And Well Trained.
ADVANTAGES
Uses Knowledge Of Those Closest To The
Market.

Helps Estimating Actual Potential

For Future Sales.

Provides Feedback For Improving

Customizing & Offering Made To
Customers.
COLLECTIVE OPINIONS METHOD
Opinions From Marketing &
Sales Specialists Are Compiled.
2 Types a Of Targets Estimated-
Ambitious Targets.
Conservative Targets.

Combines Expertise Of Higher

Level Management & Sales
Executives.
LIMITATIONS
Power Struggles May Occur
Between Specialists.
Consensus May Not Be Reached In
Good Time.
Differences And Prejudices In
Opinions May Also Exist.
“QUANTITATIVE
METHODS”
Naïve Approach
Assumes that demand in the next period is the same
as demand in most recent period; demand pattern
may not always be that stable
For example:
If July sales were 50, then Augusts sales will also be 50
 TIME SERIES MODELS
TREND ANALYSIS
 Trend analysis: A firm which has been in
existence for a long time will have accumulated
data on sales pertaining to different time
periods.
 When such data is arranged, chronologically it
is know as “Time Series”.
 A typical time series has four components,
trend, cyclical fluctuations, seasonal variations
and random or irregular fluctuations.
 The main advantage of this method is that it
does not require the formal knowledge of
economic theory and the market, it only needs
the time series data.
TREND EQUATION

Y^ = a + bX

Y^ = Estimated value of Y
a = Constant or Intercept
b = slope of trend line
X = independent variable
 MOVING AVERAGE METHOD
Data from a number of consecutive
past periods is combined to provide
forecast for coming periods.Higher
the amount of previous data, better
is the forecast.
Since the averages are calculated
on a moving basis, the seasonal and
cyclical variations are smoothened
out.
Moving average

Week(t) xt Forecast(ft)
 Three period moving average
Week(t) xt Forecast(ft)
1 338 -
2 219, -

3 278 -
4 265 278.33

5 314 254.00

6 323 285.67

7 299 300.67

8 259 312.00

9 287 293.67

10 302 281.67
 EXPONENTIAL SMOOTHING
Used in cases where the variable
under forecast doesn’t follow a
trend.
2 Types- Simple and Weighted
Simple smoothing- simple average of
specific observation called order.
Weighted smoothing- weights assigned
in decreasing order as one moves
from current period observations to
previous observations.
The formula is Ft+1 = Ft +  (At - Ft)
Exponential smoothing
Exponential Smoothing
We will calculate The monthly demand forecast for
the Previous Example by using two exponential
smoothing models.

The first model uses an  value of 0.2 and the second

uses a value of 0.8
Exponential Smoothing
For  = 0.2;
FMar = FFeb + 0.2 (AFeb – FFeb)
FMar = 1004 + 0.2 (920 – 1004) = 987.2
Exponential Smoothing
 CASUAL MODELS
REGRESSION MODEL

It is a statistical technique for

quantifying the relationship between
variables. In simple regression analysis,
there is one dependent variable (e.g.
sales) to be forecast and one independent
variable. The values of the independent
variable are typically those assumed to
"cause" or determine the values of the
dependent variable.
 For example
Assuming that the amount of
advertising dollars spent on a
product determines the amount of
its sales, we could use regression
analysis to quantify the precise
nature of the relationship between
advertising and sales. For
forecasting purposes, knowing the
quantified relationship between the
variables allows us to provide
forecasting estimates
 STEPS IN REGRESSION ANALYSIS
1.Identification of variables
influencing demand for product
under estimation.
2.Collection of historical data on
variables.
3.Choosing an appropriate form of
function
4.Estimation of the function.
 REGRESSION EQUATION
Y= α  x
Where
Y= value being forecasted
xx

 = constant value
 = coefficients of regression
x = independent variable
BENEFITS OF EFFECTIVE DEMAND FORECASTING

Higher Revenues
Sales Maximization
Reduced Investments For Safety
Stocks
Improved Production Planning
Early Recognition Of Market Trends
Better Market Positioning
Improved Customer Service Levels