Demand Forecasting

Demand forecasting is the activity of estimating the quantity of a product or service that consumers will purchase. Demand forecasting involves techniques including both informal methods, such as educated guesses, and quantitative methods, such as the use of historical sales data or current data from test markets. Demand forecasting may be used in making pricing decisions, in assessing future capacity requirements, or in making decisions on whether to enter a new market. Forecasting is the prediction of demand for a good or service, for the forecast period, on thebasis of present and past behavior patterns of some related events. It is often used to predict the growth in demand or sales growth, assess the possible market share and to gather information on proper product--mix. These forecasts help companies to reduce risk and uncertainty associated with such short run operational decision making. Overproduction and underproduction can be avoided in the near future by these measures, Long run production decisions like purchase of plants, advertising of product, and major capital investments can be made with the help of forecasts. A good forecast should be accurate, simple, economical, consistent and timely. A sound estimate of future demand should be based on adequate knowledge of relevant past. The forecast should be simple to understand, made within the allocated budget, and consistent with the objectives of the firm. It should be made within the time limit.

Elements of a Good Forecast:

A properly prepared forecast should fulfill certain requirements: The forecast should be timely. The forecast should be accurate and the degree of accuracy should be stated. The forecast should be reliable, it should work consistently The forecast should be expressed in meaningful units. The forecast should be in writing The forecast technique should be simple to understand and use.

Determination of the demand forecasts is done through the following steps:

Determine the purpose of the forecast Determine the time horizon of the forecast Select the forecasting technique Gather and analyze the appropriate data Prepare the forecast Monitor and implement the forecast

The following diagram shows these steps in sequence:

Determining the purpose of the forecast

Establish a time horizon

Select a forecasting technique

Monitor the forecast

Prepare the forecast

Gather and analyze the appropriate data

Methods of Demand forecasting

Broadly speaking, there are two approaches to demand forecasting- one is to obtain information about the likely purchase behavior of the buyer through collecting experts opinion or by conducting interviews with consumers, the other is to use past experience as a guide through a set of statistical techniques. Both these methods rely on varying degrees of judgment. The first method is usually found suitable for short-term forecasting, the latter for long-term forecasting. There are specific techniques which fall under each of these broad methods.

ARMIA
This method is based on the assumption that a probability model generates the time series data. Futures values of the time series are assumed to be related to past values as well as to past errors. A time series must be stationery and one, which has constant mean, variance, and auto correlation function, In order for an ARIMA model to be applicable. For no consistency series, sometimes differences between successive values can be applied.

Survey
It is the most extensively used method. In the survey method, consumers are approached and asked to express their opinion of a particular product. It is easy to apply in practical situation. There is a scope of data manipulation here.
Do you intend to buy an automobile within the next six months?

0 No Chance

0.1 Very slight Possibility

0.2 Slight Possibility

0.3 Some Possibility

0.4 Fair Possibility

0.5 Fairly good Possibility

0.6 Good Possibility

0.7 Probably

0.8 Very Probably

0.9 Almost sure

1 Certain

This is called Purchase probability scale. Survey method is the most extensively used method. In the survey method, consumers are approached and asked to express their opinion of a particular product as stated above. Advantages: The method is easy to apply in the practical situation. The reasons of consumers preference ideas easily are identified. The cost of effectively reaching consumers is small. Limitations: The consumers may hide their actual intentions. There is a scope of data manipulation.

Experts Opinion Poll

In this method, the experts are requested to give their opinion or feel about the product. These experts, dealing in the same or similar product, are able to predict the likely sales of a given product in future periods under different conditions based on their experience. If the number of such experts is large and their experience-based reactions are different, then an average-simple or weighted is found to lead to unique forecasts. Sometimes this method is also called the hunch method but it replaces analysis by opinions and it can thus turn out to be highly subjective in nature. Advantages The method is easily applicable and in the practical situation. It does not involve much time to conduct. The validity of the data is very much reliable and realistic. Limitations Some time without involving the consumer present data may not possible to obtain. There is a scope of data manipulation since experts are being in specially invited..

Reasoned Opinion-Delphi Technique

This is a variant of the opinion poll method. Here is an attempt to arrive at a consensus in an uncertain area by questioning a group of experts repeatedly until the responses appear to converge along a single line. The participants are supplied with responses to previous questions (including seasonings from others in the group by a coordinator or a leader or operator of some sort). Such feedback may result in an expert revising his earlier opinion. This may lead to a narrowing down of the divergent views (of the experts) expressed earlier. The Delphi Techniques, followed by the Greeks earlier, thus generates reasoned opinion in place of unstructured opinion; but this is still a poor proxy for market behavior of economic variables.

End-user Method of Consumers Survey

Under this method, the sales of a product are projected through a survey of its end-users. A product is used for final consumption or as an intermediate product in the production of other goods in the domestic market, or it may be exported as well as imported. The demands for final consumption and exports net of imports are estimated through some other forecasting method, and its demand for intermediate use is estimated through a survey of its user industries.

Qualitative Methods
Qualitative methods are mainly basic on educated opinions, workforce experience, and surveys. Besides that, it cans also using simple mathematical tools to combine different forecasts. It is usually used for short-term forecasts. For example, new product/service is launched on the market, changing product packing, or future demand pattern is expected to be affected by political changeovers. The most widely used qualitative methods are Expert Opinion Method and Consumer Survey Method. Quantitative methods are mainly basic on sufficient historical demand or relationships between variable to generate simulation models or mathematical. It is usually used for medium-term or long-term forecasts. The most widely used quantitative methods are Mechanical Extrapolation, Barometric Techniques, and Regression Method

Time series analysis or trend method

Under this method, the time series data on the under forecast are used to fit a trend line or curve either graphically or through statistical method of Least Squares. The trend line is worked out by fitting a trend equation to time series data with the aid of an estimation method. The trend equation could take either a linear or any kind of non-linear form. The trend method outlined above often yields a dependable forecast
In general, a time series will be reflect below different components The long-term trend Cyclical movements Seasonal movements Irregular movements and random movements

The advantage in this method is that it does not require the formal knowledge of economic theory and the market; it only needs the time series data. The only limitation in this method is that it assumes that the past is repeated in future. Also, it is an appropriate method for longrun forecasts, but inappropriate for short-run forecasts. Sometimes the time series analysis may not reveal a significant trend of any kind. In that case, the moving average method or exponentially weighted moving average method is used to smooth the series

Barometric techniques or lead or leg methods

This consists in discovering a set of series of some variables which exhibit a close association in their movement over a period of time.

For example, it shows the movement of agricultural income (AY series) and the sale of tractors (ST series). The movement of AY is similar to that of ST, but the movement in ST takes place after a years time lag compared to the movement in AY. Thus if one knows the direction of the movement in agriculture income (AY), one can predict the direction of movement of tractors sale (ST) for the next year. Thus agricultural income (AY) may be used as a barometer (a leading indicator) to help the short-term forecast for the sale of tractors. Generally, this barometric method has been used in some of the developed countries for predicting business cycles situation. For this purpose, some countries construct what are known as diffusion indices by combining the movement of a number of leading series in the economy so that turning points in business activity could be discovered well in advance. Some of the limitations of this method may be noted however. The leading indicator method does not tell you anything about the magnitude of the change that can be expected in the lagging series, but only the direction of change. Also, the lead period itself may change overtime. Through our estimation we may find out the best-fitted lag period on the past data, but the same may not be true for the future. Finally, it may not be always possible to find out the leading, lagging or coincident indicators of the variable for which a demand forecast is being attempted.

In sum of forecasting is the critical for analysis and a demand forecast is the prediction of what will happen to your company's existing product sales. It would be best to determine the demand forecast using a multi-functional approach. The inputs from sales and marketing, finance, and production should be considered. The final demand forecast is the consensus of all participating managers. You may also want to put up a Sales and Operations Planning group composed of representatives from the different departments that will be tasked to prepare the demand forecast. Also I have discussed about elements of forecast, steps of forecast and different method of forecast with example.

Assignment
On
Economics Analysis for Managers Between
Demand Forecasting, Elements, Steps and Different Method of Forecasting.

Submitted To Dr. Kaniz Fatema Course Instructor

Submitted by
SL. No 1 Name Md. Sanowar Hossain ID EMBA 2013-2-91-033

Course Code Course Title Submission Date Semester

: EMBA_504 : Economics Analysis for Managers : 03th November 2013 : Fall 2013