Demand

Management
Market and Technology
Forecasting

Factors to be forecast
Marketing:
Demand (future sales): price and volume
Competitor actions/reactions: product/service
improvements, price changes
Operations:
New processes: output, efficiency, labor
requirements, material efficiency
Existing processes: output, efficiency, labor
requirements, material efficiency

Human Resource Management:

Labor requirements: quality, characteristics
(managerial, supervisory, operational), volumes
Wage rates
Finance:
Interest rates
Turnover
Profits
Cash flow

Typical Factors to be Forecast

Related to Time
Forecast
type (time
base)

Decision and forecast factor

Long term
(strategic)

Product portfolio: focus and range

Operating system design: facility location,
process design, capacity requirements

Medium term

Product volumes: operating mix, volumes

created/purchased

Short term

Scheduling: products made, services

delivered, inventory requirements,
workforce tasks allocated

Approaches to
Forecasting
1. Consultation (qualitative/judgmental)
Customers (market research)
Experts (internal personnel/external)

2. Statistical extrapolation (quantitative)

. Direct using historical data
. Indirect regression with causal factor

Approaches to Forecasting
According to Chambers, et. al
Qualitative techniques
Time-series analysis
Causal models

Qualitative Techniques
Also termed as judgemental forecasting
Basically consist of seeking opinion and

analyzing it systematically, should be

subdivided depending on the source of
information
Asking customers (market research)
Asking experts

Consultation: asking the customers

(market research)
Market research
Is a systematic approach to determine consumer
interest in a product or service by creating and testing
hypotheses through data gathering surveys.
Good for identifying product or service features that
are or may be attractive to the customer, but not
necessarily good for directly forecasting total demand.
Usually conducted by survey. Survey design is
important, the objective being to get as much
information that is relevant to decisions we have to
make, at as low a cost as possible.

Consultation: asking
experts
Known as judgement methods
These rely on the experience and knowledge

of experts assimilated from a combination of

specialist study and life experience.
Involve
asking experts about possible
occurrences or developments which may
lead to discontinuities or sudden changes in
trend of demand that will change the way
we do business.

Expert sources include:

The organizations sales force forecasts
compiled from estimates of future demands
made periodically by members of the
companys sales force.
Executives opinions, experience and
technical knowledge of one or more managers
are summarized to arrive at a single forecast.
External experts experts in for ex.
technology, finance (economics) or fashion,
who are external to the organization.

There is a need here to stimulate discussion

among the experts so that they can consider

each others viewpoints before arriving at
some form of consensus.
Problems, however, arise when the presence
of high status experts results in group
think.
The time of experts are also very expensive,
which makes it very costly to conduct what
would be a super focus group. However, the
Delphi method overcomes this problem.

Delphi Method
A process for gaining consensus from a group
of experts while maintaining their anonimity
It consists of using an initial questionnaire to
gather views, followed by iterative cycles of
preparing a report and seeking more views on
that report.
It is particularly useful when employing
external experts to predict environmental
changes.

Questionnaire
Experts
(unbiased/independent)
Use for
(examples):
Economic
changes
Legal
changes
Analysis
Feedback
Technological
changes,
product and
process
Fashion
changes
Consensus

(report)

Statistical Extrapolation: use of

causal relationships linear
regression
Linear regression
is a technique where one variable (the dependent
variable) is related to one or more independent
variables by a linear equation
Determines how the dependent variable behaves when
the independent variable changes, or in other words
the regression relationship (or line of best prediction).
The aim in defining this line is to minimize the forecast
errors which would have resulted from existing (known)
data, and to use this to convert known future data for
the independent variable into a forecast, which we
need for the dependent variable.

Statistical extrapolation: use of

historic behavior of data (timeseries analysis)
When using the time-series analysis, the

methods rely on past demand or performance

to predict what will happen in the future,
assuming there will be no discontinuities in
the business environment.
Methods are based on a fundamental
assumption that variability in demand comes
from four sources:
Underlying trend
Economic or trade cycle
Seasonality (this may coincide with the trade

cycle)

Principles of time-series methods

Techniques

strive to smooth out the effect of

randomness of the demand data.
At the same time, natural trends and patterns must be
factored into the forecast as much as possible.
As a result, there is trade-off between smoothing out
the randomness and incorporating trend and natural
cycles.
In time-series methods, the future is divided into useful
time periods-days, weeks, year quarters or years
depending on the planning horizon and stability of the
business, the degree of seasonality in the data to be
forecast and the accuracy of forecast needed.

Time-series analysis generates an ongoing

forecasting system for short-term forecasting.

Few organizations operate in an environment
stable enough for it to be used to generate
long-term predictions. Its main use is
therefore to inform short-term operating
decisions.
A time-series method is selected by testing it
on historical data which is already available,
first finding a method which would have given
reasonably good forecast figures and then
improving it iteratively.

Smoothing out
randomness
The simplest time-series method is the naive

forecast a forecast for the next time period

that equals the demand for the current period.

Incorporating trend
In dealing with the trend, we give a baseline

forecast, and in addition, we calculate an

element to adjust for the trend.

Incorporating business cycles

and/or seasonality
In order to compensate for the effects of

business cycles or seasonality on demand, we

need to identify where the effect takes place
and then separate the seasonal factor for
separate analysis.

Simulation methods
Describes the act of creating a complex model

to resemble a real process or system and

experimenting with this model in the hope of
learning something about the real system.

Expert systems
A computer program which contains human

knowledge or expertise that it can use to

generate reasoned advice or instructions.

Neural networks
Designed to offer the end-user the capability

to bypass the rigidity of expert systems and to

develop fuzzy logic decision-making tools.

Data Mining
Analyzing large databases.
Businesses hope it will allow them to boost

sales and profits by better understanding their

customers.

Conjoint analysis
Concerned with the joint effects of two or

more independent variables on the ordering of

a dependent variable.
Concerned
with
the
measurement
of
psychological judgments, such as consumer
preferences.

Rule-based forecasting
Draws upon features of both expert systems

and statistical extrapolation by using rules to

combine forecasts from simple extrapolation
outcomes.

Judgmental
bootstrapping
Is an extension of expert system methodology

that creates structured procedures from the

subjective judgments of experts.
Methodology and information that experts use
are studied by asking them to make
predictions and decisions in a number of
diverse real or hypothetical situations, in
effect in simulations.

Application Exercise
Case: Concept Generation in the Toy Industry
The toy industry has seen its ups and downs in recent

years. Industry analysts often say that it is one of the

most difficult to predict.
In some years, a given toy comes out of nowhere to
become the years blockbuster (Teenage Mutant Ninja
Turtles and Tickle Me Elmo).
In other years, there are no blockbusters anywhere.
While some building toys and board games (like
Monopoly) seem to have been around forever, many
others are quickly viewed by children only in passing.

One toy developer said she wanted to get into

a new dimension of creativity something that

would produce toys that were genuinely fun,
so much fun that kids would want to play with
them as such. Yet these toys would be almost
secretly educational. But how to do that,
she didnt know.
She did know that she couldnt survey kids and
ask them what problems they had. And she
had great faith in her own creative skills, if she
could just think of a new way to give them a
new boost of power.
Supposedly, creative
people could come up with new things,
including methods of creativity.

Question:

You have been called in as a creative

consultant to assist this toy developer. (1)
How (approach) could new product
concepts
that
would
satisfy
this
developers wishes be generated? (2) How
(approach) would you then forecast
demand for this product?

Choosing the forecasting system (3

principles)
The first principle is to match the methodology

with the situation. The degree of newness of the

product is crucial, as are product and market
characteristics, the forecasters ability, the cost, the
urgency, and the purpose for which the forecast is
needed.
The second principle is dont rely on the business
environment not to change. At least two forecasting
methods should be used, usually one assuming that
the environment will not change (regression or time
series and the other assuming that it will. One
technique will check on the other.

The forecaster must be able to override a

decision stemming from the application of a

formal technique when information coming
from outside the model clearly shows that the
techniques forecast may be at fault.