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Demand Forecasting
Demand forecasting
Introduction & Need for Forecasting:
Demand forecasting is the activity of estimating the
quantity of a product or service that consumers will purchase in
future. The primary goal of management is to match supply to
demand. Having a forecast of demand is essential for determining
how much capacity or supply will be needed to meet the demand.
Furthermore, the forecasting exercise directly leads to detailed
production planning year.
The forecasting exercise also helps in establishing
performance targets for the year for various departments such as
production, materials, and marketing, as well as in the setting up
of control system. Forecasts are the basis for budgeting, planning
capacity, sales, production and inventory, personnel, purchasing,
and more. Forecasts play an important role in the planning
process because they enable managers to anticipate the future so
they can plan accordingly.
Two aspects of forecasts are important, one is the expected
level of demand & the other is the degree of accuracy that can be
assigned to a forecast. The expected level of demand can be a
function of some structural variation, such as a trend or seasonal
variation. Forecast accuracy is a function of the ability of
forecasters to correctly model demand, random variation, and
sometimes unforeseen events.
Features of a Good Forecast: The Forecast should be Timely.
The Forecast should be Accurate.
The Forecast should be Reliable.
The Forecast should be in Meaningful Units.
The Forecasting technique should be Simple to understand &
Easy to use.
FORECASTING METHODS
After gathering data from the primary and secondary
sources, the analysts then attempt to forecast the demand levels
in the future. The tools that are available for forecasting can be
divided into two broad categories:
1. Qualitative methods
2. Quantitative methods
Qualitative Methods
In qualitative type of demand forecasting, the accuracy of
forecasting depends on the ability of the person and hence it is
subject to personal bias and therefore it should not be used to
great extent.
The well known qualitative demand forecasting techniques are:
1. Delphi Technique
2. Sales Force Opinions
3. User Expectation Method/Survey of Buyer Intentions Method
1. Delphi Technique:
Delphi method is a structured communication technique or
method, originally developed as a systematic,
interactive forecasting method which relies on a panel of experts.
In this method a group of experts are sent questionnaires
through mail. The responses received are summarized without
disclosing the identities. Further mails are sent for clarification in
cases of extreme views. The process is repeated till the group
reaches to a reasonable agreement.
Delphi is based on the principle that forecasts (or decisions)
from a structured group of individuals are more accurate than
those from unstructured groups. The technique can also be
adapted for use in face-to-face meetings, and is then called mini-
MAn =
Di
i =1
Di = demand in period of i
n = number of period in the moving average
Example:
The MA is computed from the demand for order for the prior three
months in the sequence according to the following formula.
MA3 =
MA3 =
90+110+130
3
MA5 =
90+110+130+75+ 50
5
Order per
months
three months
moving average
five month
moving average
120
90
100
75
110
50
75
130
103.3333333
88.33333333
95
78.33333333
78.33333333
99
85
82
110
90
85
105
88
95
Novemb
er
110
91
3.
4.
5.
6.
Determine value of .
First forecast is not defined (F1=N.D.).
Second forecast is first actual sale (F2=D1).
Now use the formula to calculate rest of the forecasts
Fn = Dn-1 + (1-) Fn-1
5. Then calculate:
a. Mean Absolute Deviation (M.A.D.)
b. Mean Absolute Percentage Error (M.A.P.E.)
c. Mean Square Error (M.S.E.)
Problem:
Calculate: Mean Absolute Deviation (M.A.D.), Mean Absolute
Percentage Error (M.A.P.E.), Mean Square Error (M.S.E.) for the
following data using exponential smoothing.
Months
Actual
Sales
2
3
4
5
6
7
8
9
10
11
12
13
248
240
254 243 251 260 249 261 268 254 265 270 ?
Solutio
n:
0.7
Actual
Month
Sales
s
(Di)
1
240
2
248
3
254
4
243
5
251
6
260
7
249
8
261
9
268
10
254
11
265
12
270
13
M.A.D.
M.A.P.E.
M.S.E.
(Fi)
Exp(0.
7)
240.00
245.60
251.48
245.54
249.36
256.81
251.34
258.10
265.03
257.31
262.69
267.81
8.58
3.34
75.98
Error
Abs
Error
Abs. %
Error
Error Square
8.00
8.40
-8.48
5.46
10.64
-7.81
9.66
9.90
-11.03
7.69
7.31
8.00
8.40
8.48
5.46
10.64
7.81
9.66
9.90
11.03
7.69
7.31
3.23
3.31
3.49
2.17
4.09
3.14
3.70
3.69
4.34
2.90
2.71
64.00
70.56
71.91
29.77
113.14
60.98
93.26
97.95
121.68
59.15
53.40
1300
1800
2000
2000
Year
6
2000
2200
2600
2900
10
3200
Solution:-
Year
1
2
3
4
5
6
7
8
9
10
Totals
Annua
l sales
(y)
1000
1300
1800
2000
2000
2000
2200
2600
2900
3200
y=21
00
Time
period
(x)
1
2
3
4
5
6
7
8
9
10
x=55
xy
1
4
9
16
25
36
49
64
81
100
x=3
85
1000
2600
5400
8000
10000
12000
15400
20800
26100
32000
xy=133
300
a= ( x y x xy ) /( n x ( x )
b=( xy x y )/
n x ( x )
a=(385*21000)b=(10*13330)a=913.33
3
b=215.75
8
(55*133300)/(10*385-55)
(21000*55)/(825)