CHAPTER 4CHAPTER 4DEMAND FORECASTINGDEMAND FORECASTING
Dr. Vasudev P. IyerDr. Vasudev P. Iyer
Who said it…..?Who said it…..?
TV won’t be able to hold on any market it captures after the first six months. People will soon get tired of staring at a plywood box every night’’.
– 2020thth Century Fox’s Daryl Zanuck, 1946 Century Fox’s Daryl Zanuck, 1946..
And this….?And this….?
“ “ I think there is a world I think there is a world market for about five market for about five computers”computers”
Thomas J. Watson of IBM in 1974.Thomas J. Watson of IBM in 1974.
1. THE OBJECTIVES
2. THE CONCEPTUAL ISSUES
3. PREREQUISTIE OF A GOOD FORECAST
4. IMPORTANCE OF DEMAND FORECASTING
5. FORECASTING TECHQ.
6. CURRENT FORECASTING PRACTICES IN BUSINESS
THE OBJECTIVESTHE OBJECTIVES
To understand the meaning of demand To understand the meaning of demand forecastingforecasting
To understand how uncertainty can be To understand how uncertainty can be minimized with the of demand forecastingminimized with the of demand forecasting
To understand the relevant forecasting To understand the relevant forecasting techniques available. techniques available.
To understand the current forecasting To understand the current forecasting techniques used in the industry.techniques used in the industry.
1. THE OBJECTIVES
2. THE CONCEPTUAL ISSUES
3. PREREQUISTIE OF A GOOD FORECAST
4. IMPORTANCE OF DEMAND FORECASTING
5. FORECASTING TECHQ.
6. CURRENT FORECASTING PRACTICES IN BUSINESS
Meaning of ForecastingMeaning of Forecasting
Forecasting is a scientific technique Forecasting is a scientific technique of predicting of predicting future value of a future value of a variablevariable on the basis of on the basis of current current and and past trendspast trends..
Demand, sales, price, cost etc; are the Demand, sales, price, cost etc; are the common variables that are forecasted by a common variables that are forecasted by a firmfirm
Levels of forecastsLevels of forecasts
FIRM LEVEL
INDUSTRYLEVEL
MACROLEVEL
•Sales, cost and expenses
•Industry as a whole or•A product manf. by the indu.
•National income growth•Employment
1. THE OBJECTIVES
2. THE CONCEPTUAL ISSUES
3. PREREQUISTIE OF A GOOD FORECAST
4. IMPORTANCE OF DEMAND FORECASTING
5. FORECASTING TECHQ.
6. CURRENT FORECASTING PRACTICES IN BUSINESS
Prerequisites of a Good ForecastPrerequisites of a Good Forecast
A good forecast shouldA good forecast should
be consistent with other parts of the business.be consistent with other parts of the business.be based on adequate knowledge of the be based on adequate knowledge of the
relevant past.relevant past.take into consideration the economic and take into consideration the economic and
political environment.political environment.be timely.be timely.
Joel Dean’s CriteriaJoel Dean’s Criteria
• AccuracyAccuracy• SimplicitySimplicity• DurabilityDurability• FlexibilityFlexibility• AvailabilityAvailability
1. THE OBJECTIVES
2. THE CONCEPTUAL ISSUES
3. PREREQUISTIE OF A GOOD FORECAST
4. IMPORTANCE OF DEMAND FORECASTING
5. FORECASTING TECHQ.
6. CURRENT FORECASTING PRACTICES IN BUSINESS
Thus Spoke the Guru….Thus Spoke the Guru….
““The company that The company that doesn’t see trouble doesn’t see trouble ahead is headed for ahead is headed for real trouble”real trouble”
““That is why it hires That is why it hires economistseconomists, , consultants and consultants and futurists”futurists”
Marketing Insights From A to Z: Philip Kotler, John Wiley & Sons, 2003
Why Forecasting?Why Forecasting?
Reduces uncertainty Reduces uncertainty
Helps in planning productionHelps in planning production
Helps in inventory controlHelps in inventory control
Helps in future planning Helps in future planning
Helps in fixing investment Helps in fixing investment targets for different industriestargets for different industries
1. THE OBJECTIVES
2. THE CONCEPTUAL ISSUES
3. PREREQUISTIE OF A GOOD FORECAST
4. IMPORTANCE OF DEMAND FORECASTING
5. FORECASTING TECHQ.
6. CURRENT FORECASTING PRACTICES IN BUSINESS
Forecasting TechniquesForecasting Techniques
Expert opinionExpert opinion
Opinion polls Opinion polls
Market researchMarket research
Economic indicatorsEconomic indicators
ProjectionsProjections
Expert opinion-Jury MethodExpert opinion-Jury Method
Jury of executive opinionJury of executive opinion: A forecast : A forecast generated by experts (e.g., corporate generated by experts (e.g., corporate executives) in meetings.executives) in meetings.
The major drawback is that persons with The major drawback is that persons with strong personalities may exercise strong personalities may exercise disproportionate influence.disproportionate influence.
Expert opinion- Expert opinion- Opinions of Sales RepresentativesOpinions of Sales Representatives
Under this method, salesmen are required to estimate expected future DD of the product in their respective territories.
RATIONALESalesmen have the most intimate feel of the market. R eview ed b y Top E xecu tives
R eview ed b y D ep t. H ead s
D ata co llec ted b y S M s
PROCESS
Expert opinion- Expert opinion- Delphi MethodDelphi Method
Traced back to the Greek times.Traced back to the Greek times.
PROCESSPROCESS: An attempt to arrive at a consensus in an : An attempt to arrive at a consensus in an uncertain area is made by questioning a group of uncertain area is made by questioning a group of experts repeatedly. The process is moderated by a experts repeatedly. The process is moderated by a co-coordinator.co-coordinator.
MERITSMERITS: [1] Less expensive & [2] Opinions of the : [1] Less expensive & [2] Opinions of the experts can be gathered at one place.experts can be gathered at one place.
DEMERTIS:DEMERTIS: [1] A tedious method, [2] Depends upon [1] A tedious method, [2] Depends upon the skill and insight of the experts and [3] Subjective the skill and insight of the experts and [3] Subjective
Opinion PollsOpinion Polls
A forecasting method in which sample A forecasting method in which sample populations are surveyed to determine populations are surveyed to determine consumption trends.consumption trends.
Points to be kept in mind:Points to be kept in mind:– may identify changes in trends– choice of sample is important– questions must be simple and clear
Market ResearchMarket Research
Closely related to opinion pollsClosely related to opinion polls
Market research indicates:Market research indicates:
– why the consumer is or is not buying, why the consumer is or is not buying, – who the consumer is, who the consumer is, – how he or she is using the product, how he or she is using the product, – what characteristics the consumer thinks are what characteristics the consumer thinks are
most important in the purchasing decision.most important in the purchasing decision.
Economic IndicatorsEconomic Indicators
Method of forecasting in which economic Method of forecasting in which economic data are formed into indexes to reflect the data are formed into indexes to reflect the state of the economystate of the economyIndexes of:Indexes of:– leading, leading, – coincident, and coincident, and – lagging lagging
indicators are used to forecast changes in indicators are used to forecast changes in economic activity.economic activity.
Leading, Coincident & LaggingLeading, Coincident & Lagging
Leading indicators predict changes in Leading indicators predict changes in future economicfuture economic activity. activity.
Coincident indicators identify Coincident indicators identify peaks and peaks and troughstroughs in economic activity. in economic activity.
Lagging indicators confirm Lagging indicators confirm upturns and upturns and downturnsdownturns in economic activity. in economic activity.
TIME
recessionpeak trough
recovery
TroughTrough
Things look like they are at their Things look like they are at their worseworse
People are looking for the bottomPeople are looking for the bottom
RecoveryRecovery
Stock prices risesStock prices rises Unemployment flatten outUnemployment flatten out People begin to “feel better”People begin to “feel better” Interest rate flatten outInterest rate flatten out
PeakPeak
The economic growth rate picks upThe economic growth rate picks upRise in pricesRise in pricesBanks may become a little unstableBanks may become a little unstableInterest rates riseInterest rates riseLow unemployment rate. However, Low unemployment rate. However,
it may begin to pick up.it may begin to pick up.Euphoric conditionsEuphoric conditions
General rule of thumbGeneral rule of thumb
If, after a period of increases, the leading If, after a period of increases, the leading indicator index sustains three consecutive indicator index sustains three consecutive declines, a recession (or a slowing) will declines, a recession (or a slowing) will followfollow
DrawbacksDrawbacksLeading indicators occasionally forecast Leading indicators occasionally forecast recessions that do not occur. recessions that do not occur. A change in the index does not indicate the A change in the index does not indicate the precise size of the decline or increase.precise size of the decline or increase.The data are subject to revision in the ensuing The data are subject to revision in the ensuing months.months.
Projections- The Time Series Projections- The Time Series MethodMethod
A method of forecasting from past data by A method of forecasting from past data by using least squares statistical methods. using least squares statistical methods. By time series we mean the variable By time series we mean the variable changes with change in time. changes with change in time. A time series analysis usually examines– Trends– Cyclical fluctuations– Seasonal fluctuations– Irregular movements.
Time Series ProjectionsTime Series Projections
ADVANTAGESADVANTAGES
1.1. Easy to calculateEasy to calculate
2.2. Does not require analytical skillDoes not require analytical skill
3.3. Usually reasonably reliable in the short Usually reasonably reliable in the short runrun
CASELET (12)CASELET (12)
PRACTICAL APPLICATION OF PRACTICAL APPLICATION OF TIMES SERIES METHODTIMES SERIES METHOD
THE FIRST STEPTHE FIRST STEP
DEFINE THE TIME SERIES MODEL
THE MODELD = a + b (t)
THE SECOND STEPTHE SECOND STEP
CALCULATE THE VALUES OF a & bWith the help of the formula
a = ∑D/nb= ∑D /∑t2
1. THE OBJECTIVES
2. THE CONCEPTUAL ISSUES
3. PREREQUISTIE OF A GOOD FORECAST
4. IMPORTANCE OF DEMAND FORECASTING
5. FORECASTING TECHQ.
6. CURRENT FORECASTING PRACTICES IN BUSINESS
Ocean Spray CranberriesOcean Spray Cranberries
Annual sales: US $ 1.5 billionAnnual sales: US $ 1.5 billion
Forecasting group: 7 employeesForecasting group: 7 employees
Predominant model used : Time series Predominant model used : Time series modelmodel
No of items forecasted: 300No of items forecasted: 300
The Wholesale IndustryThe Wholesale Industry
Telephone interviews were conducted Telephone interviews were conducted with 484 wholesale companies in 22 US with 484 wholesale companies in 22 US states.states.Sample size 411 small companiesSample size 411 small companiesExpert opinion was the popular method Expert opinion was the popular method used.used.This was followed by sales force This was followed by sales force estimates and customer survey.estimates and customer survey.
CONSUMER CONFIDENCE CONSUMER CONFIDENCE INDEXINDEX
Published in the Economic Times Published in the Economic Times 24/01/200324/01/2003
100+ optimism 100+ optimism
< 100 indicate pessimism.< 100 indicate pessimism.
The CCI stood at The CCI stood at 8181 on the scale of 0 to on the scale of 0 to 100100..
Used of economic indicatorsUsed of economic indicators
PRESENT TO FUTURE [CCI]PRESENT TO FUTURE [CCI]
CATERGORY Present Situation
Future Expectations
Gen. Business Condition
76 99
Job Availability 46 67
Family Income 88 109
Top Related