Demand Forecasting

Demand Forecasting
In this chapter we will discuss: Economic Forecasting Demand Forecasting Risk and Decision-making Capital Budgeting

Session Objectives:
What is Demand forecasting Importance of demand forecasting in decision making.

Demand Forecasting
Forecasting is a prediction/estimation of a future situation. Demand forecasting can be termed as a process of prediction/estimation of the future demand of the product. Since the future is uncertain, no forecast can be cent percent correct. Demand forecasting has various benefits both at macro and micro levels

Aim of the Demand Forecasting

Aim of the Demand Forecasting is to reduce the risk or uncertainty that the firm face in its short-term operational decision making and planning for its long term growth.

Two kind of Forecasting

1. Passive Forecasts: Predict the future situation in the absence of any action by the firm. 2. Active forecasts: estimate the future situation taking into account the likely future action of the firm.

Demand forecasting
Forecasting helps managers to predict the demand and to come up with a proper production mix. Forecasting future demand requires relevant information gathered at the right time. Demand forecasting can be broadly classified into quantitative and qualitative techniques. Qualitative techniques: (include expert opinion, surveys and market experiments) Quantitative techniques: are time series analysis

Forecasting Techniques
Qualitative Techniques
Expert Opinion Method Consumer Survey Method

Quantitative Techniques
Trend Method Regression Method Leading Indicator Method Simultaneous Equation Method

Complete Enumeration Survey Method

Sample Survey Method

End Use Method

Determinants of Demand Forecasting Techniques

1. Data availability 2. Time availability 3. Cost of preparing the forecasting.

Qualitative/Survey techniques:
Qualitative techniques are often used to make short term forecasts when, quantitative data are not available. These qualitative techniques can also be useful for supplementing quantitative forecasts that anticipate change in consumer tests or business expectation about future economic condition.

Qualitative /Survey techniques:

1. Expert Opinion Survey: In this method the experts on the particular product whose demand is under study are requested to give their Feel about the likely sales in the future period. Experts can predict the likely sales in future period under different conditions based on their experience. Advantage: Simple, Minimum statistical work, Less time & money consuming. Limitation: Experts may be biased for forecasting

Qualitative /Survey techniques:

2. Consumer Survey Methods: This the most direct approach to demand forecasting is to ask the consumers themselves about their future consumption plans. Three types of Consumer survey a. Consumer survey by Complete Enumeration: b. Consumer survey by Sampling Enumeration: c. Consumer survey by End use Method:

Qualitative/Survey techniques 2. Consumer Survey Methods: Three types a. Consumer survey by Complete Enumeration: Under this method, the forecaster undertakes a complete survey of all consumers of the commodity whose demand he wish to forecast. He ask every consumer the amount of that commodity he would like to buy in the forecast period.

Qualitative/Survey techniques 2. Consumer Survey Methods: Three types b. Consumer survey by Sampling Enumeration: Under the sample survey method, the forecaster select a few consuming units out of the relevant population and then obtain probable demand of each of the selected units in the forecast period.

Qualitative/Survey techniques 2. Consumer Survey Methods: Three types c. Consumer survey by End use Method: Under end use method, the sales of a commodity X are projected through a survey of its end users. The demand for commodity is for two purpose (Final consumption, and Intermediate goods) The demand for the final consumption estimated through some forecasting methods. Demand for intermediate use is estimated through a survey of its user industries regarding their production plans and input-output coefficients.

Quantitative/Statistical Techniques:
In this section, we will explain statistical method which utilize historical (time- series) data analysis for estimating long term demand. Statistical methods are considered to be superior techniques of demand estimation for the following reasons. 1. The element of subjectivity is minimum 2. Method of estimation is scientific 3. Estimates are relatively more reliable. 4. Estimation involve smaller cost.

Quantitative/Statistical Techniques:
Quantitative/Statistical Techniques of demand projection include the following techniques: 1. Trend Projection Methods: 2. Barometric Method of Forecasting: 3. Regression Method: 4. Simultaneous Method:

Quantitative/Statistical Techniques: 1. Trend Projection Methods: It is a classical method of business forecasting. The use of this method requires a long and reliable time-series data. Assumption: Factors responsible for the past trends in the variable to be projected will continue to play their part in future in the same manner and the same extent as they did in the past in determining the magnitude and direction of the variable.

Quantitative techniques / Time Series Analysis

Time Series Data: Data gathered over a period of time are collected is called time series data. Time Series Analysis uses the least square method to forecast. It is one of the most common quantitative method used to predict the future demand for a product. Here, the past sales and demand are taken into consideration.

Quantitative techniques / Time Series Analysis Time series analysis is divided into four categories Trends Seasonal variations Cyclical variations Random fluctuations.

Time series analysis

1) Trends Methods 2) Seasonal variations 3) Cyclical variations are the variations in demand due to fluctuations in the business cycle boom, recession and depression. 4) Random fluctuations may happen due to natural calamities like flood, earthquake, etc. which cannot be predicted accurately

Barometric analysis
Barometric analysis or forecasting can be defined as the prediction of turning points in one economic time series through the use of observations on another time series called the barometer or the indicator. In barometric analysis, the economic time series are divided into three groups leading indicators, coincident indicators lagging indicators.

Leading indicators
Leading indicators compares the existing data available Composite of leading indicators (CLL) is useful in understanding the business cycle . The lagging indicator composite includes changes in labor costs per unit, ratio of inventory to sales, and figures on installment credit and loans, among other items.

 Market experiments are of two types: 2) In controlled experiments, a sample of customers of the target market is selected. They are requested to visit the store, where the various brands are kept. There purchasing patterns are recorded. Based on these, the company predicts the future demand. Merits : Accurate result than consumer surveys Drawbacks: My biased in the process of selection of a sample of consumers.

RISK AND DECISION-MAKING

Risk and Uncertainty: Certainty: Certainty is a condition, if a businessman is sure about the outcome of a certain business decision. Risk & Uncertainty: when the outcome of a decision is not known, then such a decision is said to be taken under conditions of risk and uncertainty

Risk and Uncertainty:

Risk : is a condition where the firm is aware of all the possible outcomes of a decision. Also, the firm is capable of associating each possible outcome with a probability. Uncertainty: is a condition, when the businessman is not able to associate probability to the possible outcomes.

Distinction between Risk and Uncertainty

Risk is calculable risk is measurable
Uncertainty is non calculable. Uncertainty cannot be measured.

Risk and decision making

Decision making under risky conditions involves computation of expected values for each strategy. The strategy which has the highest expected value is chosen by the decision maker

Summary
Economic forecasting involves the process of foretelling the future economic conditions of a nation either in full or in part. Demand forecasting helps in forecasting future demand patterns for products or services in the economy. Thus, demand forecasting is a useful tool that helps businessmen in taking right business decisions.

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