DEMAND ESTIMATING AND FORCASTING

MUNTAQUIR HASNAINMBA(GENERAL)ROLL NO.-87DIVISION-B

FORCASTING

“Prediction is very difficult,especially if it's about the future.”

Nils Bohr

OBJECTIVESA. Give the fundamental rules of

forecasting

B. Calculate a forecast using a moving average, weighted moving average, and exponential smoothing

C. Calculate the accuracy of a forecast

WHAT IS FORECASTING?

Forecasting is a tool used for predicting future demand based onpast demand information

WHY IS FORECASTING IMPORTANT?

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

Demand forecasting and estimation gives businesses valuable

information about the markets in which they operate and the markets they plan to pursue. Forecasting and

estimation are interchangeable terms that basically mean predicting

what will happen in the future. If businesses do not use demand

forecasting and estimation, they risk entering markets that have no need

for the business's product.

Demand Forecasting And Estimation

Demand estimation predicts the needs of customers in a market

Purpose

The purpose of demand forecasting and estimation is to find a business's potential demand so

managers can make accurate decisions about pricing, business growth and market potential.

Managers base pricing on demand trends in the market. For example, if the market demand for

pizza is high in a city but there are few competitors, managers know they can price pizzas higher than if the demand was lower. Established businesses use demand forecasting and estimation if they consider

entering a new market. If the demand for their product is currently low, but will increase in the

future, they will wait to enter the market.

Techniques

Managers and business owners use multiple techniques for demand forecasting and estimation. Using historical data is one method to determine the potential demand for a product or service. For example, businesses with

high-end merchandise might examine census information to determine the average income of an area.

Larger businesses might use test markets to estimate demand. Test markets are micromarkets in small cities that are similar to larger markets. If the demand for a product is high in the test market, managers assume

that the product will perform well in the larger market.

Inventory Consequences

Demand forecasting and estimation is critical for inventory management. Businesses buy inventory

based upon demand forecasts. For example, grocery stores increase their stock of certain items during

hurricane season because they know from past data that demand increases. If businesses do not use

accurate demand forecasting and estimation methods, they risk purchasing too much or too little inventory.

Businesses with too much inventory might lose some of it to time and expiration dates. Businesses with too little

inventory will upset customers and miss revenue opportunities.

Considerations

Demand forecasting and estimation methods are typically accurate for short-term business planning.

Estimating demand for the long-term is difficult because there are many unforeseen factors that

influence demand over time. For example, demand estimation might not take into account an

economic recession or other financial problems. Natural disasters might also affect the demand for

a business's product. To forecast long-term demand, managers must account for the social, political and economic history of their markets.

 

DEMAND ESTIMATION

Demand estimation is a process that involves coming up with an estimate of the amount of demand for a product or service.

The estimate of demand is typically confined to a particular period of time, such

as a month, quarter or year. While this is definitely not a way to predict the future for

your business, it can be used to come up with fairly accurate estimates if the

assumptions made are correct.

PRICING

one of the reasons that companies use demand estimation is to assist with pricing. When you offer a new product or start a new business, you may not have any idea how to price your product. When you have an idea of what the demand will be for the product, you know approximately how much you have to price the product. This way, you can avoid overpricing your product and alienating some customers. You may also be able to avoid leaving money on the table.

PRODUCTION

Another reason that demand estimation is commonly used is so that it can help with production. Before a company puts a large amount of money into producing a product, it can have an estimate of the demand for that product. If the demand in the area is for 20,000 units, you should most likely not invest in making 1 million units during that time frame. This way, more of your capital can stay on hand instead of being invested into inventory.

CONSIDERATIONS

When making business decisions using demand estimation, it is important to remember that these estimations are only educated guesses as to what the demand for a product or service will be. If you have a high-quality product that people want, you may not be able to manufacture them fast enough to meet demand. Always allow some room for error in the estimation of the demand for your business. Otherwise, you may be in for some surprises as a business owner

Methods of Estimating Demand

Consumer survey

Market Experiment

Statistical methods

CONSUMER SURVEY

Seeking information through questionnaire , interviews etc.

Asking information about their consumption behavior ie, buying habits , motives etc.

Consumer survey

Advantage Disadvantage They give up to date information

about the current market scenario .

Much useful information can be obtained that would be difficult to uncover in other ways; for example, if on sumers are ignorant of the relative prices of different brands, it may be concluded that they are not sensitive to price changes.This can be exploited by the firms for their best possible interest.

Validity

Reliability

Sample Bias

MARKET EXPERIMENT

Here consumers are studied in an artificial environment .

Laboratory experiments or consumer clinics are used to test consumer reactions to changes in variables in the

demand function in a controlled environment.

Need to be careful in such experiments as the knowledge of being in the artificial environment can affect the

consumer behavior.

Market experiment

Advantage Disadvantage

Direct observation of the consumers takes place rather than something of a hypothetical theoretical model .

There is less control in this case, and greater cost; furthermore, some customers who are lost at this stage may be difficult to recover.

Experiments need to be long lasting in order to reveal proper result.

STATISTICAL METHODS

These are various quantitative methods to find the exact relationship between the dependent variable and the independent variable(s).

The most common method is regression

Analysis :

Simple (bivariate) Regression: Y = a + bX

Multiple Regression: Y = a +bX1 + c X2 +dX3 +..

LIMITATIONS OF STATISTICAL METHODS

They require a lot of data in order to be performed.

They necessitate a large amount of computation

DEMAND FORECASTING

1. Estimation or prediction of future demand for goods and services.

2. Nearer it is to its true value, higher is the accuracy. 3. Active and Passive forecasts. 4. Short term, long term and medium term. 5. Capacity utilization, Capacity expansion and Trade

Cycles. 6. Different forecasts needed for different conditions,

markets, industries. 7. Approaches to Forecasting: Judgmental,

Experimental, Relational/Causal, Time Series Approaches.

REQUIREMENTS FOR DEMAND FORECASTING

Elements related to Consumers.Elements concerning the Suppliers.

Elements concerning the Markets or Industry. Other Exogenous Elements like taxation, government policies,

international economic climate, population, income etc.

Estimating general conditions, estimating the total market demand and then calculating the firm’s market

share. Multiple methods of forecasting, used depending upon

suitability, accuracy and other factors. Subjective methods used when appropriate data is not

available

HISTORICAL ANALOGY METHOD

1. Forecasting for new product or new market/area.

2. Difficulties in finding similar conditions. 3. Test Marketing involves launching in a

test area which can be regarded as true sample of total market.

4. Difficulties of cost, time, variation of markets and imitation by competitors.

DEMAND FORECASTING

1. Systematic forces may show some variation in time series of sales data of a product.

2. Basic parameters like population, technology. Business cycles, seasonal variations and then random events.

3. Main focus is to find out the type of variation and then use it for long term forecasting.

4. Use judgment to extrapolate the trend line obtained from sales data.

5. OLS method to prepare a smooth curve is a better option. 6. We may obtain a linear trend, quadratic trend, logarithmic

trend or exponential trend each of which gives us a different information about the behavior of demand.

Demand Forecasting1) The sales curve eventually is

an S shaped ‘product life cycle curve’.

2) Price elasticities vary in different stages. Highest in later stages as substitutes are available.

3) All these stages give exponential shape to the curve.

4) Trend method assumes little variations in business conditions.

5) Knowledge of curve helps in planning marketing and planning for the product.

NEED FOR FORECASTING

Long Range Strategic PlanningCorporate Objectives: Profit, market share, ROCE,strategic acquisitions, international expansion, etc.

Annual BudgetingOperating Plans: Annual sales, revenues, profits

Annual Sales PlansRegional and product specific targets

Resource Needs PlanningHRM, Production, Financing, Marketing, etc

THANKS MA’AM

S HedgeEconomics Department

IMED Pune

HAPPY INDEPENDENCE DAY MA’AM