Demand Forecasting Class Slides[1]

8/8/2019 Demand Forecasting Class Slides[1]

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Demand forecastingDemand forecasting


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Accurate demand forecasting is essential for a firm to enable it toAccurate demand forecasting is essential for a firm to enable it toproduce the required quantities at the right time and arrangeproduce the required quantities at the right time and arrangewell in advance for the various factors of production, viz., rawwell in advance for the various factors of production, viz., rawmaterials, equipment, machine accessories, labour, buildings,materials, equipment, machine accessories, labour, buildings,etc.etc.In a developing economy like India, supple forecasting seemsIn a developing economy like India, supple forecasting seemsmore important. However, the situation is changing rapidly.more important. However, the situation is changing rapidly.The National Council of Applied Economic Research.The National Council of Applied Economic Research.

Factors involved in Demand ForecastingFactors involved in Demand Forecasting1.1. How far ahead?How far ahead?

a. Long terma. Long term eg., petroleum, paper, shipping. Tactical decisions. Withineg., petroleum, paper, shipping. Tactical decisions. Withinthe limits of resources already available.the limits of resources already available.b. Shortb. Short--termterm eg., clothes. Strategic decisions. Extending or reducingeg., clothes. Strategic decisions. Extending or reducing

the limits of resources.the limits of resources.


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Factors involved in forecastingFactors involved in forecasting

2.2. Undertaken at three levels:Undertaken at three levels:

a.a. MacroMacro--levellevelb.b. Industry level eg., trade associationsIndustry level eg., trade associations

c.c. Firm levelFirm level3. Should the forecast be general or specific (product3. Should the forecast be general or specific (product--wise)?wise)?4. Problems or methods of forecasting for new vis4. Problems or methods of forecasting for new vis----visvis

well established products.well established products.5. Classification of products5. Classification of products producer goods, consumerproducer goods, consumer

durables, consumer goods, services.durables, consumer goods, services.

6. Special factors peculiar to the product and the market6. Special factors peculiar to the product and the market risk and uncertainty. (eg., ladies dresses)risk and uncertainty. (eg., ladies dresses)


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Purpose of forecastingPurpose of forecasting

Purposes of shortPurposes of short--term forecastingterm forecasting

a.a. Appropriate production scheduling.Appropriate production scheduling.b.b. Reducing costs of purchasing raw materials.Reducing costs of purchasing raw materials.

c.c. Determining appropriate price policyDetermining appropriate price policyd.d. Setting sales targets and establishing controls and incentives.Setting sales targets and establishing controls and incentives.e.e. Evolving a suitable advertising and promotional campaign.Evolving a suitable advertising and promotional campaign.f.f. Forecasting short term financial requirements.Forecasting short term financial requirements. Purposes of longPurposes of long--term forecastingterm forecasting

a.a. Planning of a new unit or expansion of an existing unit.Planning of a new unit or expansion of an existing unit.

b.b. Planning long term financial requirements.Planning long term financial requirements.c.c. Planning manPlanning man--power requirements.power requirements.


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Length of forecastLength of forecast

ShortShort--term forecaststerm forecasts upto 12 months, eg., salesupto 12 months, eg., sales

quotas, inventory control, production schedules,quotas, inventory control, production schedules,

planning cash flows, budgeting.planning cash flows, budgeting. MediumMedium--termterm 11--2 years, eg., rate of2 years, eg., rate of

maintenance, schedule of operations, budgetarymaintenance, schedule of operations, budgetary

control over expenses.control over expenses.

LongLong--termterm 33--10 years, eg., capital expenditures,10 years, eg., capital expenditures,

personnel requirements, financial requirements,personnel requirements, financial requirements,

raw material requirements.raw material requirements.


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Forecasting demand for new productsForecasting demand for new products JoelJoelDeanDean

1.1. Project the demand for a new product as anProject the demand for a new product as anoutgrowth of an existing old product.outgrowth of an existing old product.

2.2. Analyse the new product as a substitute for someAnalyse the new product as a substitute for someexisting product or service.existing product or service.

3.3. Estimate the rate of growth and the ultimateEstimate the rate of growth and the ultimatelevel of demand for the new product on the basislevel of demand for the new product on the basisof the pattern of growth of established products.of the pattern of growth of established products.


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4. Estimate the demand by making direct enquiries from the ultimate4. Estimate the demand by making direct enquiries from the ultimatepurchasers, either by the use of samples or on a full scale.purchasers, either by the use of samples or on a full scale.

5. Offer the new product for sale in a sample market, eg., by direct mail or5. Offer the new product for sale in a sample market, eg., by direct mail orthrough one multiple shop organisation.through one multiple shop organisation.

6. Survey consumers reactions to a new product indirectly through the6. Survey consumers reactions to a new product indirectly through theeyes of specialised dealers who are supposed to be informed abouteyes of specialised dealers who are supposed to be informed aboutconsumers need and alternative opportunities.consumers need and alternative opportunities.

Criteria of a good forecasting methodCriteria of a good forecasting method1.1. AccuracyAccuracy measured by (a) degree of deviations between forecastsmeasured by (a) degree of deviations between forecasts

and actuals, and (b) the extent of success in forecasting directionaland actuals, and (b) the extent of success in forecasting directionalchanges.changes.

2.2. Simplicity and ease of comprehension.Simplicity and ease of comprehension.3.3. Economy.Economy.4.4. Availability.Availability.5.5. Maintenance of timeliness.Maintenance of timeliness.


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Role of MacroRole of Macro--level forecastinglevel forecasting

in demand forecastsin demand forecasts Various macro parameters found useful forVarious macro parameters found useful for

demand forecasting:demand forecasting:

1.1.National income and per capita income.National income and per capita income.2.2.Savings.Savings.3.3.Investment.Investment.4.4.Population growth.Population growth.5.5.Government expenditure.Government expenditure.6.6.Taxation.Taxation.7.7.Credit policy.Credit policy.


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Techniques of demand forecastingTechniques of demand forecasting

1.1. Survey methodSurvey methoda) Complete enumeration.a) Complete enumeration.b) Sample surveyb) Sample survey

c)End use method.c)End use method.22 opinion poll methodsopinion poll methods

a) Expert opiniona) Expert opinionb)Delphi methodb)Delphi method

c) Market studies and experiments.c) Market st

udies and experiments.33 statistical methodsstatistical methods

a)a) Trend projection method a) graphical methodTrend projection method a) graphical methodb)b) Fitting trend equation or least square method.Fitting trend equation or least square method.


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1 survey methods1 survey methods

Complete enumerationComplete enumeration Best in shortBest in short--run period.run period.

All the buyers are contacted.All the buyers are contacted. Is best done in a particular region .Is best done in a particular region . Bias may creep in.Bias may creep in.

Buyers may not know their actual demand.Buyers may not know their actual demand. Uncertainty.Uncertainty.


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Sample methodSample method Again for the short period.Again for the short period.

Direct interview or through mailed q

uestionnaireDirect interview or thro

ugh mailed q

uestionnaire Used generally by govt dept,or the dept whichUsed generally by govt dept,or the dept which

takes the policies for a year.takes the policies for a year. End use method:usedEnd use method:used for those industriesfor those industriesusing inputs,what is the demand for them in theusing inputs,what is the demand for them in the

industries.industries. All the technological ,structural and otherAll the technological ,structural and other

changes are also studied.changes are also studied.


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Opinion poll methodsOpinion poll methods

1Expert opinion:1Expert opinion:To ask experts in the field to provideTo ask experts in the field to provideestimates, eg., dealers, industry analysts, specialistestimates, eg., dealers, industry analysts, specialistmarketing consultants, etc.marketing consultants, etc.

Advantages:Advantages:

1.1. Very simple and quick method.Very simple and quick method.2.2. No danger of a groupNo danger of a group--think mentality.think mentality.2.2. Delphi methodDelphi method: it consists of an effort to arrive at a: it consists of an effort to arrive at a

consensus in an uncertain area by questioning a group ofconsensus in an uncertain area by questioning a group ofexperts repeatedly until the results appear to convergeexperts repeatedly until the results appear to convergealong a single line of the issues causing disagreement arealong a single line of the issues causing disagreement areclearly defined.clearly defined.


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AdvantagesAdvantages

1.1. Facilitates the maintenance of anonymity of the respondentsFacilitates the maintenance of anonymity of the respondentsidentity throughout the course.identity throughout the course.

2.2. Saves time and other resources in approaching a large number ofSaves time and other resources in approaching a large number ofexperts for their views.experts for their views.

Limitations/presumptions:Limitations/presumptions:

1.1. Panelists must be rich in their expertise, possess wide knowledge andPanelists must be rich in their expertise, possess wide knowledge andexperience of the subject and have an aptitude and earnestexperience of the subject and have an aptitude and earnestdisposition towards the participants.disposition towards the participants.

2.2. Presupposes that its conductors are objective in their job, possessPresupposes that its conductors are objective in their job, possessample abilities to conceptualize the problems for discussion,ample abilities to conceptualize the problems for discussion,generate considerable thinking, stimulate dialogue among panelistsgenerate considerable thinking, stimulate dialogue among panelistsand make inferential analysis of the multitudinal views of theand make inferential analysis of the multitudinal views of theparticipants.participants.


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Analysis of time series andAnalysis of time series and

trend projectionstrend projections The time series relating to sales represent the past patternThe time series relating to sales represent the past pattern

of effective demand for a particular product. Such dataof effective demand for a particular product. Such datacan be presented either in a tabular form or graphicallycan be presented either in a tabular form or graphically

for further analysis. The most popular method of analysisfor further analysis. The most popular method of analysisof the time series is toof the time series is toproject the trendproject the trendof the time series.aof the time series.atrend line can be fitted through a series either visually ortrend line can be fitted through a series either visually orby means of statistical techniques.by means of statistical techniques. Popular becausePopular because::simple, inexpensive, time series data often exhibit asimple, inexpensive, time series data often exhibit apersistent growth trend.persistent growth trend.

DisadvantageDisadvantage: this technique yields acceptable results so: this technique yields acceptable results solong as the time series shows along as the time series shows apersistent tendency to movepersistent tendency to movein the same direction.in the same direction.Whenever aWhenever a turning point occurs,turning point occurs,however, thehowever, the trend projection breaks down.trend projection breaks down.


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solvesolve

YearYear 19921992

19931993 19941994 19951995

19961996 19971997 19981998

SalesSales 1010

1212 1111 1515

1818 1414 2020

Demand Forecasting Class Slides[1]

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