Demand Forecasting Shashank

7/29/2019 Demand Forecasting Shashank

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DEMAND FORECASTING

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 educatedguesses, 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 entera new market.


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Demand for products and services is usually uncertain.

Forecasting can be used for

Strategic planning (long range planning)

Finance and accounting (budgets and cost controls)

Marketing (future sales, new products)

Production and operations

Why is forecasting

important?


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What is forecasting all about?

Demand for Mercedes EClass

TimeJa

n

Fe

b

Mar Apr May Jun Jul Aug

Predicted

demand

looking

back sixmonths

We try to predict thefuture by looking back

at the past


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Objectives of Demand

Forecasting

Short term

ObjectivesLong term

Objectives


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Short term Objectives

Drafting of Production Policy:

Demand forecasts facilitate in draftingappropriateproduction policy so that there may not beany space between future demand andsupply of a

product. Routine Supply of Materials:

Demand forecasting assists in figuring outthepreferred volume of production. The essentialprerequisite of raw materials infuture can be calculated

on the basis of such forecasts. This guaranteesregularand continuous supply of the materials inaddition to managing the amount of supply at theeconomic level


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Best Possible Use of

Machines:Demand forecasting inaddition expedites cuttingdown inactivecapacity because only the necessaryamount of machines and equipments are

set up to meet future demand Drafting of Price Policy: Demand

forecasts facilitate the management to

prepare a few suitable pricing systems,so that the level of price does not rise andfall to a great extent during depression orinflation


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Long Term Objectives

Labour Requirements:Spending on labour is oneof the most vital elements of costof production.Dependable and correct demand forecasts canfacilitate themanagement to evaluate suitable

labour requirements. This can ensure finestlaboursupply and uninterruptedproduction procedures

Organising Funds On the basis of demandforecast, an individual can find out themonetary

requirements of the organisation in order to bringabout the desiredoutput. This can make it possibleto cut down on the expenditure of acquiring funds


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Need & Significance of

Demand Forecasting

Business managers, depending upon their

functional area, need various forecasts.

They need toforecast demand, supply,

price, profit, costs, investment, and whathave you.

Allocation of resources can be made

effectively only when demand estimatesfor future period is available.


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Steps in demand forecasting

1. Determination of objectives :

2. Selection of Products :

3. Selection of Methods :

4.Interpreting the Results :


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Statistical analysis

Market research

Expert judgment

Forecasting Approaches


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Methods & Techniques

Of Demand Forecasting

Consumer Surveys

Expert Opinion Method

Business Barometers


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Consumer Surveys: It involves gathering of information about consumer

behavior from a sample of consumers which is

analyzed and then further projected onto the

population.

Surveys are conducted to assess consumersperception of various aspects, such as new

variations in products, variations in prices of the

product and related products, new variations in

services provided etc. The drawback of this method is that the consumer

has to respond to hypothetical situations.


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Expert Opinion Method

This technique of forecasting demandseeks the views of experts on the likely

level of demand in the future. They have

a rich experience of the behaviour of

demand. If the forecasting is based on the

opinion of several experts, then it is known

as panel consensus


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Business Barometers

A very economical method for demandforecasting is the business barometers orindicators

Some important indicators in demandforecasting

Gross national profit

Employment

Wholesale prices Consumer Credit

Stock Prices


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Quantitative or statistical

Techniques

Trend Projection MethodThis technique assumes that whatever has been

the pattern of demand in the past, will continue

to hold good in the future as well.In this method, historical data is collected andfitted into some kind of trend, i.e. repetitivebehaviour pattern . This trend is then extrapolated

into the future to get the demand for the forecastperiod. The trend could be linear or curvilinear orhave any other complex shape.


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Graphical methodYear wise sales of cars

Year Sales ( in 000 )

96-97 28

97-98 38

98-99 46

99-00 40

00-01 56

01-02 49

02-03 58


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car sales

0

10

2030

40

50

60

70

96 -97 97-98 98 -99 99-

2000

2000-

01

2001-

02

2002-

03

years

sale

s

(000)

Series1


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Least square methodUsed to

1. To wipe out fluctuations in actual data2. To project demand in the future

for this a new trend line is derived

the equation for such a trend lineis given in ageneral form

Y = a + b X.

Where , y = estimated value of variable

a = intercept / constantb = estimate of the trend factor

X = unit of time


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For determining the values of b & a following

formulae's are used

N * XY ( X ) * ( Y )

b = -------------------------

N *X2 ( X )2

Y X

a = -------- - b * (--------)

N N


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Year wise sales of cars

Year Sales-Y(000)

X X Y X2

96-97 28 1 28 1

97-98 38 2 76 498-99 46 3 138 9

99-00 40 4 160 16

00-01 56 5 280 25

N= 5 Y =208 X = 15 XY=682 X2 =55


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N * XY ( X ) * ( Y )

b = -------------------------

N * X2 ( X )2

5 * 682 (15 ) * (208 )

b = -------------------------

5 * 55 (15 )2

3410 3 120 290

b = ---------------- = ------ = 5.8

275 225 50


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Y X

a = -------- - b * (--------)

N N

208 15

a = -------- - 5.8 * (--------)

5 5

a = 41.6 5.8 * (3)

a = 41.6 17.4

a = 24.2


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X Year Sales a + b * x Trend value

1 96-97 28 24.2 + 5.8 * 1 30.0

2 97-98 38 2 35.8

3 98-99 46 3 41.6

4 99-00 40 4 47.4

5 00-01 56 5 53.2

6 01-02 6 59.0

7 02-03 7 64.8

8 03-04 8 70.0

9 04-05 9 76.4


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new trend line

0

20

40

60

80

100

96-97

98-99

2000-

01

2002-

03

2004-

05

year

trend

value

trend value


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Demand Forecasting Shashank