DEMAND FORECASTING

GROUP 1
SHWETHA RAGHAVAN
SWATI MEHTA
DEEPTI MALLELA
ABHISHEK BANSAL
SANJEEV
MOHIT NARULA
 DEMAND FORECASTING
Demand forecasting refers to the
prediction or estimation of a future
situation under given constraints.

TYPES OF FORECASTING:
4.Short Term
5.Medium Term
6.Long Term
 OBJECTIVES OF DEMAND
FORECASTING
1. Helping for continuous production
2. Regular supply of commodities
3. Formulation of price policy
4. Arrangement of finance
5. Labor requirement
 FACTORS INVOLVED IN
DEMAND FORECASTING
1. Time period
2. Levels of forecasting
-- International level
-- Macro level
-- Industry level
-- Firm level
3. Purpose - General or Specific
4. Methods Of Forecasting
5. Nature Of Commodity
6. Nature Of Competition
 DETERMINANTS FOR DEMAND
FORECASTING
1. Capital goods – goods required for further production of
goods
Demand for capital goods is derived demand
- Replacement demand
- New demand

• Durable consumer goods— goods used continuously for a

period of time
- Replacement demand
- New demand

• Non-durable consumer goods— commodities which are used

in a single act of consumption
Demand for these goods is influenced by
- Disposable income of people
- Price of the commodity
- Size and characteristics of population
CRITERIA FOR GOOD DEMAND
FORECASTING

2. Accuracy
3. Plausibility
4. Durability
5. Availability
6. Economy
METHODS OF FORECASTING
SURVEY METHOD STATISTICAL METHOD
1.Survey of buyer’s intentions 1.Trend projection method

2.Expert opinion method or 2.Moving averages method

Delphi Method

3.Controlled Experiments 3.Regression analysis

4.Simulated market situations 4.Barometric method

 SURVEY OF BUYER’S
INTENTIONS
• Least sophisticated method
• Customers are directly contacted to
find out their intentions to buy
commodities in the near future
• Intentions recorded through personal
interviews, mail or post
service,telephone interviews and
questionnaires.
• Two types of Consumer Survey
– Complete enumeration Method
– Sample survey Method
 DELPHI METHOD
• The forecasters are given the
forecasts and assumptions of other
experts, and a final report is
compiled with the combined
consensus of the experts.
 MARKET SURVEY METHOD
• CONTROLLED EXPERIMENTS
Different determinants of demand are varied
and price quantity relationships are established at
different points of time in the same market or
different markets.
Only one determinant varied ; others kept
constant.
• SIMULATED MARKET SITUATION
An artificial market situation is created and
“consumer clinics” selected. Consumers are
asked to spend time in an artificial departmental
store and different prices are set for different
buyer groups.
 TREND PROJECTION
METHOD
• Based on analysis of past sales
patterns
• Shows effective demand for the
product for a specified time period
• The trend can be estimated by using
the Least Square Method
A producer of soaps decides to
forecast the next years sales of his
product.
The data for the last five years is
as follows:
YEARS SALES IN Rs.LAKHS
1996 45
1997 52
1998 48
1999 55
2000 60
The data is plotted on a
graph:
• The equation for the straight line
trend is
Y = a + bx
a-intercept
b-shows impact of independent
variable
The Y intercept and the slope of the
line are found by making
substitutions in the following normal
equations:
∑Y = na + b ∑ x
 YEARS SALES Rs. X X2 XY
LAKHS (Y)
1996 45 1 1 45
1997 52 2 4 104
1998 48 3 9 144
1999 55 4 16 220
2000 60 5 25 300
N=5 ∑Y=260 ∑X=15 ∑X2=55 ∑XY=813

Substituting the above values in the normal

equations:
260=5a +15b (Eq.3)
813=15a + 55b (Eq.4)
solving the two equations,
a = 42.1 , b = 3.3
Therefore, the equation for the
straight line trend is
Y=42.1 + 3.3X
Using this equation we can find the trend
values for the previous years and
estimate the sales for the year 2001 as
follows:
Y 1996 42.1+3.3(1) 45.4
=
Y 1997 =
42.1+3.3(2) 48.7
=Y 1998 =
42.1+3.3(3) 52.0
=
Y 1999 =
42.1+3.3(4) 55.3
=
Y 2000 =
42.1+3.3(5) 58.6
=
Y 2001 =
42.1+3.3(6) 61.9
= =

Thus, the forecast sales for year 2001 is

Rs.61.9 lakhs.
 MOVING AVERAGES
METHOD
Moving averages method can be used when the
forecast period is either oddYEAR
or even. SALES IN
Rs.LAKHS
1993 12
1994 15
These are the annual sales of goods
1995 14
during the period of 1993-2003.
1996 16
We have to find out the trend of the
1997 18
sales using (1) 3 yearly moving averages
1998 17
and (2) 4 yearly moving averages
1999 19
and forecast the value for 2005.
2000 20
2001 22
2002 25
2003 24
3 yearly period:
The value of 1993 + 1994 +1995
12 +15+14 = 41 written at the capital period 1994
of the years 1993, 1994 and 1995
YEAR SALES (Rs. 3 YEARLY 3 YEARLY
LAKHS) MOVING MOVING
TOTAL AVG.
1993 12 - TREND
-
VALUES
’94 15 41 41/3= 13.7
’95 14 45 45/3= 15
’96 16 48 48/3 =16
’97 18 51 51/3 =17
’98 17 54 54/3 = 18
’99 19 56 56/3 = 18.7
2000 20 61 61/3 = 20.2
’01 22 67 67/3 = 22.3
’02 25 71 71/3 = 23.7
’03 24 - -
4 YEARLY MOVING AVERAGES
YEAR. SALES (Rs. 4 YEARLY MOVING 4 YEARLY
LAKHS) MOVING TOTAL OF MOVING AVG.
TOTAL PAIRS OF TREND
YEARLY VALUES
’93 12 - -TOTAL -
’94 15 - - -
57
’95 14 120 120/8 = 15
63
’96 16 128 128/8 = 16
65
’97 18 135 135/8 =
70 16.9
’98 17 144 144/8 = 18
74
’99 19 152 152/8 = 19
78
’00 20 164 164/8 =
86
’01 22 177 20.5
177/8 =
91
’02 25 - 22.1
-
’03 24 - - -
57 = ‘93 + ‘94 +’95 + ‘96 = 12 + 15 + 14 + 16

120= 57 +63, 128 = 16 +65 and so on.

120 is total of 8 years and so the avg. is calculated by dividing 120
The trend values from the previous tables
can be plotted on a graph as follows:
 REGRESSION METHOD
“Method of Least Squares”
YEAR 1998 1999 2000 2001 2002
SALES 240 280 240 300 340
(Rs. In
crores)
From the above data we can project the sales for ‘03, ‘04, ‘05.
First we calculate the required values which are (i) Time
Deviation,
(ii)YEAR
Deviation
(n)
Squares, (iii) Product
SALES (RS. TIME
of time deviation and
TD SQUARED
sales.
PRODUCT OF
CRORE) (y) DEVIATION (x2) TIME
FROM MIDDLE DEVIATION &
YEAR 2000 (x) SALES(xy)
’98 240 -2 4 -480
’99 280 -1 1 -280
’00 240 0 0 0
’01 300 +1 1 +300
’02 340 +2 4 +680
X=5 ∑y = 1400 ∑x = 0 ∑x2 = 10 ∑xy = 220
The equation is
Y = a + bx
‘a’ – independent variable
‘b’ – exhibits rate of growth
a & b can be found out as follows:
a = ∑y / n = 1400 / 5 = 280
b = ∑xy / ∑ x2 = 220/10 = 22
Now, applying values to the regression equation,
Y = 280 + 22x
Hence, sales projection from 2003-2005 can be
ascertained.
2003 = 280 + 22(3) = Rs.346 crores
2004 = 280 + 22(4) = Rs.368 crores
2005 = 280 + 22 (5) = Rs.390 crores
“Method of Simple linear Regression”

The linear trend can be fitted in the equation

Sales = a + b (Price)
i.e. S = a + bP
where in, a and b are constants.
b = n∑Si Pi- (∑Si)(∑Pi)
n∑Pi2 – (∑Pi) 2

a = ∑Si - b ∑ Pi
n
 e.g. fit a linear regression line to the
following data & estimate the demand at
price Rs.30

YEAR ’8 ’82 ’83 ’84 ’85 ’86 ’87 ’88 ’89 ’90 ’91 ‘92
PRICE 1
15 15 12 26 18 12 8 38 26 19 29 22
(Pi)
SALES 52 46 38 37 37 37 34 25 22 22 20 14
(Si) in
1000
units
To find the values of a and b the following table is
constituted:
Pi Si 2
Pi 2
Si Si Pi
15 52 225 2704 780
15 46 225 2116 690
12 38 144 1444 456
26 37 676 1369 962
18 37 324 1369 666
12 37 144 1369 444
8 34 64 1156 272
38 25 1444 625 950
26 22 676 484 572
19 22 361 484 418
29 20 841 400 580
22 14 484 196 308
∑Pi = 240 ∑Si = 384 ∑Pi2 = ∑Si2 = ∑Si Pi =
5708 13716 7098
b = n∑Si Pi- (∑Si)(∑Pi) = 12(7098)-(240)(384)
= 0.641
2
n∑Pi2 – (∑Pi) 2 12 (5708)-(240)

a = ∑Si - b ∑ Pi = [384-(240)(-0.641)] = 44.82

n 12
Thus the regression line is S= 44.82 - 0.641P
By assigning value 30 to P,
The corresponding sales level is
S = 44.82 – 0.641 (30) = 25.29 thousand units
 BAROMETRIC METHOD
• Improvement over trend projection
method
• Events of the present are used to predict
future demand
• Basic approach- constructing an index of
relevant economic indicators
 Leading indicators
 Coincident indicators
 Diffusion indices
 IMPORTANCE OF DEMAND
FORECASTING
• Planning and scheduling production
• Budgeting of costs and sales revenue
• Controlling inventories
• Making policies for long term
investment
• Helps in achieving targets of the firm