METHODS OF FORECASTING

• Forecasting: It is a prediction or estimation

of future situation under given conditions.
• Demand Forecasting: It is predicting or
estimating the future demand for a product.
It is undertaken for the purpose of Planning
and making long term decisions.
• Too much emphasis should not be placed on
statistical techniques of forecasting. Though
statistical techniques are essential in
clarifying relationships and providing
techniques of analysis, they are not
substitutes for judgment.
• Forecasting also should not be left entirely to
the judgment of the so-called experts.
• What is needed is some commonsense mean
between pure guessing and too much
mathematics.
 Types of Forecasts
• PASSIVE FORECASTS
– Where the factors being forecasted are assumed
to be constant over a period of time and changes
are ignored.
• ACTIVE FORECASTS
– Where factors being forecasted are taken as
flexible and are subject to changes.
 Why Study forecasting?
• Reduces future uncertainties, helps study markets
that are dynamic, volatile and competitive
• Allows operating levels to be set to respond to
demand
• Allows management to 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
6 steps to 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 Firm level
– At Industry level
– At Macro level
• TIME PERIOD
– SHORT TERM (3-6 Months, Operating Decisions, Eg- Production
planning)
– MEDIUM TERM (6 months-2 yrs, Tactical Decision, Eg-Employment
changes)
– LONG TERM (Above 2 years, Strategic Decision, Eg-R & D)
Demand Forecasting Techniques
• QUANTITATIVE METHODS
- Time Series Models
- Trend Analysis
- Moving Averages Methods
- Exponential Smoothing
- Causal Models
- Regression Models
• QUALITATIVE METHODS
- Survey of Buyers Intentions
- Experts Opinion Method
- DELPHI Method
- Market Experimentation Method
- Collective Opinions Method
Statistical Methods (Quantitative)

• Statistical methods are considered to be

superior due to the following reasons
– The element of subjectivity is minimum
– Method of estimation is Scientific.
– Estimates are more reliable.
– It is very economical method.
Trend Analysis Method
• This method is used when a detailed estimate
has to be made
• Time plays an important role in this method
Time Series
• This method uses historical and cross –
sectional data for estimating demand
• Finding a Trend value for a specific year
• Finding seasonal fluctuations in the variable
• Predicting turning points in future movements
of the variable
Linear Trend
• It is represented: Y = a+bx (I)
– Y=Demand
– X= Time Period
– a & b are constants .
• For calculation of Y for any value of X
requires the values of a & b These are :
– Σ Y=na + bΣX
– ΣXY=aΣX + bΣX²
Problem & Solution
• The data relate to the sale of generator sets
of a company over the last five years.
Year 2013 2014 2015 2016 2017

Sets 120 130 150 140 160

Estimate the demand for generator sets in

the year 2022 if the present trend continues
Year X Y x² Y² XY

2013 1 120

2014 2 130

2015 3 150

2016 4 140

2017 5 160

TOTAL 15 700
Year X Y x² Y² XY

2013 1 120 1 14400 120

2014 2 130 4 16900 260

2015 3 150 9 22500 450

2016 4 140 16 19600 560

2017 5 160 25 25600 800

TOTAL 15 700 55 99000 2190

ΣY = na+bΣX (II)
ΣXY = aΣX+bΣX² (III)
• Substituting table values in equation (II) & (III)
we get
700 = 5a +15b (IV)
2190 = 15a +55b (V)

By multiplying equation (IV) by 3 and

subtracting it from equation (V) we get
10b = 90
b=9
• Substitute the value of b in equation (IV) we
have,
700 =5a +15 b
700 = 5a +15 (9)
5a =565
a = 113
Trend equation Y=113 + 9x

For 2022, X will be 10

2022 = 113+9 x 10 =203 sets
Simple Linear Regression
• Linear regression analysis establishes a
relationship between a dependent variable and
one or more independent variables.
• In simple linear regression analysis there is
only one independent variable.
• The dependent variable is whatever we wish
to forecast.
• If the data is a time series, the independent
variable is the time period.
Regression Equation
• This model is of the form:
Y = a + bX
Y = dependent variable
X = independent variable
a = y-axis intercept
b = slope of regression line
• Once the a and b values are computed, the
future value of X can be entered into the
regression equation and a corresponding value
of Y (the forecast) can be calculated.
Problem
• The data of a firm relating to sales and
advertisement is given below. If the manager
decides to spend Rs 30 million in the year
2005, what will be the prediction for sales?
Year Advt Exp Sales x² XY
(millions) (000 units)
1995 5 45
1996 8 50
1997 10 55
1998 12 58
1999 10 58
2000 15 72
2001 18 70
2002 20 85
2003 21 78
2004 25 85
N=10 ΣX= ΣY= Σx²= ΣXY=
Year Advt Exp Sales x² XY
(millions) (000 units)
1995 5 45 25 225
1996 8 50 64 400
1997 10 55 100 550
1998 12 58 144 696
1999 10 58 100 580
2000 15 72 225 1080
2001 18 70 324 1260
2002 20 85 400 1700
2003 21 78 441 1638
2004 25 85 635 2125
N=10 ΣX=144 ΣY=656 Σx²=2448 ΣXY=10254
a = (ΣX²) (ΣY) - (ΣX)(ΣXY)
NΣX² - (ΣX)²

b= NΣXY - (ΣX)(ΣY)
NΣX² - (ΣX)²
a = (2448) (656)- (144)(10254)
10 (2448) - (144)2

= 1605888 - 1476576
24480 - 20736
= 129312
3744
a = 34.54
b= 10(10254)-(144)(656)
10 (2448) -(144)2

= 102540 -94464
24480 -20736
= 8076
3744
b= 2.15
 Y =a + bx
• Substituting the values of a & b, in the above
equation,
Y=34.54 +2.15 x , where, x =30
Y =34.54+2.15 (30)
Y = 99,000
Advantages of demand Forecasting

• Helps to Predict The Future

• Keep Your Customers Happy
• Remain Competitive
• Reduce Inventory Costs
• Helps Prepare for a Drop in Sales
• Prepare for New Business
Limitations of Demand Forecasting

• Change in Fashion
• Consumers’ Psychology
• Lack of Past Data
• Lack of Experienced Experts
Qualitative Methods
BUYERS INTENSION SURVEY

• Features
• Employs sample survey techniques for
gathering data.
• Data is collected from end users of goods –
Consumers, Producers.
• 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 and 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
and 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.
DELPHI METHOD

• Panel of experts is selected.

• One co-ordinator is chosen by the 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.
Market Experimentation
• Involves actual experiments and 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 and 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 customising
and offering made to customers.
Collective opinion method
• Opinions from marketing and sales specialists
are compiled.
• 2 types of targets estimated
– Ambitious targets
– Conservative targets
• Combines expertise of higher level
management and sales executives.