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Transcript of Demand Forcasting doc
7/22/2019 Demand Forcasting doc
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Demand
forecasting
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Why Demand Forecasting?
• Demand results in sales
• Which is the primary source of Revenue
• Predicting future demand for a product
• To avoid under or over production• Minimize the “Uncertainties”
• Rough estimate of the demand prospects
• Demand forecasting helps in planning to acquire inputs
( men & material), organizing production, advertisementand organizing sales channels.
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Purpose of Forecasting Demand
• Short –run Forecast :
– Seasonal patterns are important
– Forecasting helps in preparing suitable sales policy and
proper scheduling of output.
– Pricing policy and modification in advertising and sales
techniques
• Long-run Forecast :
– Capital planning – Planning of production, material, man-hours, machine
time
– Changes in variables are included
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Steps Involved in Forecasting
Identification of Objective
Nature of Goods
Selection of method
Of Forecasting
Interpretation of Results
Estimation of one /
more than one aspect
Goods havedifferent demand pattern
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Steps Involved in Forecasting
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Time Horizon
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Demand Forecast Determined
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Methods of Demand Forecasting
Techniques
Survey MethodsStatistical
Methods
Consumer Survey
Direct Interview
Opinion Poll
Methods
Trend
Projection
Econometric
Methods
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• Where the purpose is to make short- run forecast of
demand.
• Consumer surveys are conducted to collect information
about their intentions and future plans.
1) Survey of potential consumers on their intentions and
plan.
2) Opinion polling of experts
Survey Methods
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1) Consumer Survey Method
• Direct Interview with the potential consumers.
• Ask what quantity of the product would they buy at different
prices over a given period of time.
Consumer Survey
Method
Complete
Enumeration
Method
Sample Survey End-Use Metho
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a) Complete Enumeration Method:
– All potential users of the product are contacted and askedabout their future plans of purchasing the product
– The quantities indicated by the consumers are addedtogether to obtain demand of the product
• Dp = q1 + q2 + q3+…………..+ qn
n
= ∑ qi i = 1
Limitation:
1) Only successful if consumers are concentrated in a certainregion or locality.
2) Consumers actual demand in future may not be known
3) Consumers may give hypothetical answers
4) Consumers response could be biased to their expectations
5) Consumers plan may change with the change in factors not
included in questionnaire
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b) Sample Survey Method:
– Only few potential consumers /users are selected.
– Its through face to face/ telephonic interview or mailed / webquestionnaire
– On the information, the probable demand may be estimated.
– Less costly, less time- consuming
– Used to estimate short-term demand (yearly)
Dp = HR
HS
Dp = probable demand forecast
H = Census number of households
Hs = Sample Household
Hr = No of HH reporting demand for the product
Ad = Avg expected consumption ( Total quantity reported to beconsumed / no of hh)
( H. AD )
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– Business firms, Government departments and
Households plan their expenditure one year in advance.
– Therefore they can supply a fairly reliable estimate of
their future expectations.
Limitations:
– Similar to complete enumerations – Quantification of variables (e,g Feelings, opinions,
expectations) is not possible
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c) End- Use Method:
– Requires building up schedule for probable aggregate
future demands for inputs by consuming industries /
sectors
– Technological, structural & other changes which mightinfluence the demand are taken into account in the
process of estimation
– More relevant for B2B markets
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c) End- Use Method:
– Stage 1 : List all possible uses of the product
– Stage 2 : Fix suitable technical norms for each
end use
» Per unit of production of complete product /
per unit of investment / per capita use
» Questionnaires used to collect relevant
information
– Stage 3 : Application of Norms
» Necessary to know targeted levels of outputof individual industries for the target year
» And likely development in other economic
activities which use the product & likely
output targets
– Sta e 4 : A re ation of demand of each end use
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Limitations
• Enumeration of all possible uses – due to lack ofpublished data
• Despatch records of the manufactures, if available neednot enumerate all the final users.
• Impossible to organise and collect data of wide network ofwholesale and retail agencies
• Possibility of missing out end-uses or new applications
– Therefore estimations should provide some margin oferror
• Establishing norms – is difficult• Inaccuracy in estimating sales of target industries
Advantages
• Probing into current use-pattern of consumption of
product – it provides opportunity to determine the demandby types, categories & sizes etc
• It facilitates in diagnosis & pin-pointing as to where & whydid the actual consumption deviate from estimateddemand
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2) Opinion Poll Method
• Aims at collecting opinions of those who possess knowledgeof the market
• Sales representatives, sales executives, marketing experts
and consultants
Opinion Poll
Expert -Opinion Delphi methodMarket studies/
experiment
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a) Expert – Opinion Method:
– Firms having good network of sales representatives
can ask them to assess demand
– As they are in touch with consumers and consumption
pattern
– Can provide a approximate figure of likely demand
– Limitations:
• Estimates are reliable only to the extent of their
skill to analyse the market.
• The assessor may have subjective judgementwhich may lead to over / under estimation
• Inadequate information may be available to the
assessor as they may have narrow view of the
market.
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b) Delphi Method:
– To consolidate the expert opinions and arrive at
estimate of future demand.
– Experts are provided information on the estimates of
other experts, and they revise their own estimates
– The consensus of experts about the forecast
constitutes the final forecast
This technique can be used for cross – checkinginformation on forecasts.
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c) Market studies and experiments
To carry out studies on consumer behaviour under actual,
controlled market conditions.
Market studies:
– Firms select areas of market having similar features
( populations, income levels, cultural/ social
backgrounds, choices….) – Carry out experiments by changing variables of
demand functions
– Consequent changes in demand are recorded
– Assessment of demand of the product is made.
Experiments:
– Consumers are given money to buy goods with varying
prices, packages, displays…
– It reveals consumers responsiveness to the changes
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Limitations:
– Expensive – unaffordable for small firms
– Experiments are carried out on a small scale leads to
generalization
– Studies are based on short term and controlled
conditions may not exist in uncontrolled market.
– Changes in socio-economic , climatic conditions may
alter the results.
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• Advantages
– Subjectivity is minimum
– Method of estimation is scientific
– Estimates are relatively more reliable
– Involves smaller cost
Methods
1) Trend Projection Method
2) Econometric Method
Statistical Methods
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a Trend Projection
• It is a study of movement of variables through time.
• Requires long and reliable time-series data• Its based on the assumption that factors responsible for
the past trends will continue to be the same in future.
a) Graphical Method:
– Annual sales data is plotted on a graph – Line is drawn through the plotted points
– Free line is drawn that the total distance between theline and points is minimum.
– Second line drawn taking the mid values of variations.
– The trend line is then extended to forecast thedemand for next year.
• The projections may not be realisable as theextension of trend line involves subjectivity and
personal bias.
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1 Graphical Method
P
Year
Sales
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2 Fitting Trend equation:
b) Fitting Trend equation: Least square method:
Trend line is fitted to the time-series data
Linear best fit curve
Minimises the deviation of the actual line
S = a + bT
S = Annual sales
T = time (years)
a & b are constant
∑ S = na + b ∑ T
∑ ST = a ∑ T + b ∑ T2
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b) Econometric Method
• It combines statistical tools with economic theories toestimate economic variables.
• Forecast are more reliable
• This model try to identify all those economic and
demographic variables that influence the future value of
the variable under forecast.
Two types of method:a) Regression method
b) Simultaneous method
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b) Econometric Method
a) Regression method
• Establishes casual relationship between
– Dependent variable (demand)
– Independent variables (parameters that impact
demand)
• Most popular method
• As it combines
– Economic theory
• To specific determinants of demand & theirrelationship with demand
– Statistical techniques
• To estimate the values of parameter in the
equation. Or estimate the impact in the demand
for a unit change in the determinant
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b) Econometric Method
a) Regression method
• Simple / Bivariate regression
– If demand of a commodity depends on a single independent
variable• E.g. – demand for salt / sugar depends largely on
population
– The relationship can be established using ‘least square
method’• As used in time series
• Only difference is time is replaced by the ‘independent
variable’ on which the demand depends the most
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b) Econometric Method
a) Regression method
• Multi-variate regression
– If demand of a commodity depends on a more than oneindependent variables
• E.g. – demand for sweets, fruits, & vegetables depends
on price of the product, price of its substitutes,household income, population etc.
– Procedure
• Specify variables that have an impact on demand. Thiswill be different for different categories
• Next specify the form of equation – linear, logarithmic,power etc
• Collect the necessary data
• Estimate the value of co-efficient of the independentvariables through statistical techniques. Essentiallydone with the help of computer
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b) Econometric Method
a) Regression method
– It uses one single equation
– It assumes one-way causation i.e. only independent variable
causes
variation in dependent variable and not vice versa• However, realistically demand for a product also has an
impact on price of the product
– This issue can be addressed through simultaneous equation
model
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b) Econometric Method
b) Simultaneous method
• Is a complete & systematic approach to forecasting
• It involves solving several simultaneous equations for estimatingdemand.
• It takes two- way causation i.e: simultaneous interaction betweendependent and independent variable. As well as inter-dependence
of independent variables
– For instance• Demand for white goods depends on product price, price
of substitute, household income, consumer preference,availability of credit & interest rate
• Interest rate depends on Availability of credit
• Which in turn may depend on many other economicparameters & government policies at that point.
• And so on
– Thus estimation of demand will require solving all suchfunctions simultaneously
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Salient features of good forecasting
method
• Simplicity
• Accuracy
• Economy
• Availability• Applicability
Though mere possession of right tools is does not
necessarily mean accurate forecast. Equally important
is analysts judgement.