Demand Forecasting

Manmeet Kaur

Demand and Forecasting

It is an important aid in objective and efficient

planning. Accurate Demand and Forecasting is essential for a firm to enable it to produce the required quantities at right time and arrange well in advance for various factors of production viz. raw material, labor, etc. Demand forecasting is also helpful in industrially advanced countries where demand conditions are always uncertain.

Objectives or Purpose
Short term objectives Appropriate production schedule. Reduction in cost of purchase of raw material Pricing policy Sales targets Advertising Forecasting short term financial requirement. Long Term Objectives Expansion. Long term financial requirement. Planning manpower requirement.

Steps involved in Forecasting

Identification of objectives

Determining the nature of goods under

consideration Selecting a proper method of forecasting Interpretation of data

Techniques of forecasting
Survey methods

Statistical methods

Methods of demand forecasting

1.

Survey method: Its most direct method of estimate demand in short period also known as opinion survey .In this method customers are asked directly what they are planning to buy for the forthcoming time period.
1.

Consumer survey method: Complete enumeration

1. 2. Sample survey The end use method

Opinion poll methods

Delphi Method: It consists of an attempt to arrive at

consensus in an uncertain area by questioning a group of experts repeatedly until responses appear to converge along single line. Advantages: Saving of time and resources Maintains anonymity of respondents identity

3.

Expert Opinion Method: In this method experts are asked to give their estimates of sales in near future. Experts may include executives directly involved in the markets such as dealers, distributors and suppliers or whose main interest is in the forecast.
Advantages: Simple method Time saving Less use of statistical techniques.

Disadvantages of expert opinion method

It depends on the skills and of experts.

It involves subjective judgments.

Assessment of the market demand is usually

based on the inadequate information. Macro factors are kept out of purview.

4.

Collective opinion method: Its also sales force poling. Under this method sales man are required to estimate the expected sales in their respective territories and sectors. Then estimates of individual sales mans are consolidated to find out total estimated sales.
Advantages: Simple No use of statistical technique Directly connected with sales Helpful in forecasting demand of new product Disadvantages: Subjective Useful in short term forecasting only Salesman doesnt have perfect knowledge of market.

Statistical methods
In this historical and cross sectional data is

utilized to estimate short run and long run demand forecasting. Statistical methods are used mainly because of: Element of subjectivity is minimum. Method of estimation is scientific. Estimates are more reliable. It involves smaller cost.

2. Statistical methods 1. Nave Model: It is based upon historical observations of sales like earning etc. The model do not explain causal relationship between variables. these are generally used where situations are stable or experiencing gradual change. Advantages: Inexpensive Easy to use Disadvantages: Store and operate data Ignore causal relationship

2. Smoothing Techniques: These are higher forms of nave models. a) Moving averages: They are the averages that are updated as new information is received. In it a manager employs most recent observations and drops oldest ones. In earlier calculation & calculates an average which is used as the forecast for next time period. Advantages: Simple to use Easily understandable Disadvantage: Storage of data, Time consuming Expensive

b) Exponential smoothing: It uses weighted average of past data as basis of forecast. It gives heavier weight to recent information and smaller weight to observations in past. Formula yt+1= ayt+(1-a)yt Y new= a y old+(1-a)y old

 ARIMA or Box Jenkin technique= It is auto

regressive moving averages method. it combines smoothing method with auto regressive method. Stages: Removal of trend Model identification Parameter estimation Verification Forecasting

Continue..
.3 Time series and trend projections: A firm which has been in existence for some time will have accumulated considerable data on sales related to different time period. Such data when arranged chronologically yield time series. Most popular method in it is projection of trend. A trend line can be fitted through means of statistical techniques like method of least square. There are three techniques of trend projection based on time series data. Graphical method Least square method Box jenkins method

4. Economic indicators: includes Barometric Method of Forecasting. 1. Construction contract by estimating raw material. 2. Personal income for consumer goods. 3. Agriculture income for demand of agricultural inputs. It also includes leading, co incidental, lagging series. Steps for using economic indicators See whether relationship exists between demand for a product and certain economic indicators. Establish the relationship through least

5. Controlled experiments: An effort is made to conduct controlled experiment. An effort is made to vary separately certain determinants of demand which can be manipulated eg price , advertising. Etc. Disadvantages : Expensive Time consuming Difficult to satisfy the condition of homogeneity of markets.

Econometric Model
The econometric model combines statistical tools

with economic variables and forecast the intended economic variable. These are most widely used to forecast demand for a product. Steps= Identification of variables and the functional forms Estimation of parameters Finding the forecast value

Classification
Single equation models

Simultaneous models

Continue
6. Judgmental approach: Management may have to make use of its own judgment when analysis of time series and trend projection is no feasible. Moreover they can use their judgment approach when most statistical methods are not available.

Conclusion
Demand forecasting is essential for making

proper use of available resources with minimum wastages.