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Contents
Demand Forecasting Features
Managerial Uses
Levels of Forecasting Criteria of a Good Demand Forecasting Methods and Illustrations Conclusion
Demand Forecasting
Demand Forecasting refers to an estimation of most likely future demand for a product under given conditions.
Production planning Sales forecasting Estimates short run financial requirements Reduce the dependence on chances
Business Planning Manpower Planning Financial Planning Business Control Determination of the growth rate of the firm
Statistical Methods:
1. Trend Projection Methods 2. Economic Indicators
SURVEY METHODS
Approach:
Small group of upper-level managers collectively develop forecasts Opinion of Group.
Typical Applications:
Short-term and medium-term demand forecasting.
Main Drawbacks:
1. 2. 3. 4. 5. Expensive. No individual responsibility for forecast quality. Risk that few people dominate the group. Subjective. Reliability is questionable.
Delphi Method
Rationale
Eliciting the opinions of a group of experts with the help of mail survey. Anonymous written responses encourage honesty and avoid that a group of experts are dominated by only a few members.
No
Consensus reached?
Yes
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Main Drawbacks:
1. Slow process. 2. Experts are not accountable for their responses. 3. Little evidence that reliable long-term forecasts can be generated with Delphi or other methods.
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Output Method
This method forecasts the demand based on the consumption coefficient of the various uses of the product. Suitable for estimating demand for intermediate products. Also called as consumption coefficient method.
Steps: 1. Identify the possible uses of the products. 2. Define the consumption coefficient of the product for various uses. 3. Project the output levels for the consuming industries. 4. Derive the demand for the project.
STATISTICAL METHODS
More complicated. The results are valid only when certain conditions are satisfied.
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Linear trend line y = 35.2 + 1.72x Forecast for period 13 y = 35.2 + 1.72(13)
70 60 50 Demand
= 57.56 units
Actual
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Linear trend line 30 20 10 0 | 1 | 2 | 3 | 4 | 5 | | 6 7 Period | 8 | 9 | 10 | 11 | 12 | 13
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Moving Average
Naive forecast
Demand in current period is used as next periods forecast.
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Di i=1
MAn =
where n = number of periods in the moving average Di = demand in period i
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Di i=1
MA3 = 3 =
90 + 110 + 130 3
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Di i=1
MA5 =
5
90 + 110 + 130+75+50 5
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Smoothing Effects
150 5-month 125 100 Orders
75
50 Actual 25 0 | Jan | Feb | Mar | | Apr May | | June July Month | Aug | Sept | Oct | Nov 3-month
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Wi Di
n
Wi = 1.00
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WEIGHT
17% 33% 50%
DATA
130 110 90
3
November Forecast
WMA3 =
Wi Di i=1
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Econometric Method
An advanced forecasting tool, it is a mathematical expression of economic relationships derived from economic theory. Economic variables incorporated in the model.
Econometric Method
2. Simultaneous equation method: GNPt = Gt + It + Ct It = a0 + a1 GNPt Ct = b0 + b1 GNPt Where, GNPt = gross national product for year t.
Gt = Governmental purchase for year t. It = Gross investment for year t.
Econometric Method
Advantages: The process sharpens the understanding of complex cause effect relationships. This method provides basis for testing assumptions.
Disadvantages: It is expensive and data demanding. To forecast the behaviour of dependant variable, one needs the projected values of independent variables.
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Methods of forecasting:
Inability to handle unquantifiable factors Unrealistic assumptions Excessive data requirement
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Conclusion
Forecasting has taken an essential part of our life also.