Demand Forecasting

Demand forecasting
is the activity of
estimating the
quantity of a product
or service that
consumers will
purchase. It involves
techniques, guesses, and quantitative
methods.
2

Demand forecasting
Demand forecasting is predicting or
anticipating the future demand for a
product.

Length of forecasts

Short-term forecasts upto 12 months, eg., sales

quotas, inventory control, production schedules,
planning cash flows, budgeting.

Medium-term 1-2 years, eg., rate of maintenance,

schedule of operations, budgetary control over
expenses.

Long-term 3-10 years, eg., capital expenditures,

personnel requirements, financial requirements, raw
material requirements.
(Most uncertain in nature)

THE FORECAST

Step 6 Monitor the

forecast
Step 5 Prepare the
forecast
Step 4 Gather and analyze
data
Step 3 Select a forecasting
technique

OBJECTIVES OF SHORT TERM DEMAND

FORECASTING
Production planning
Evolving sales policy
Fixing sales targets
Determining price policy
Inventory control
Determining short-term

financial planning

OBJECTIVES OF LONG-TERM DEMAND

FORECASTING
BUSINESS PLANNING
MANPOWER PLANNING
LONG-TERM FINANCIAL PLANNING

Methods of Demand
Forecasting

Qualitativ
e Method
Statistical
Method
Opinion
Polling
Method

Expert
Opinion
Method

Sales
Force
opinion
survey
method

Consumer
s Survey
Methods

Trend
Projectio
n

Barometri
c
Technique
s

Regressio
n Method
Complete
Enumerati
on Survey
method

Sample
Survey
method

End Use
Survey
Method

Economet
ric
Technique
s

Simultane
ous
equation
method

Opinion Polling Method

Expert Opinion Method

Also known as Delphi Method.

Experts are requested to give their opinion or feel
about the product.

2. Delphi method: it consists of an effort to

arrive at a consensus in an uncertain area by
questioning a group of experts repeatedly
until the results appear to converge along a
single line of the issues causing disagreement
are clearly defined.
Developed by Rand Corporation of the U.S.A
in 1940s by Olaf Helmer, Dalkey and
Gordon. Useful in technological forecasting
(non-economic variables).

Delphi method
Advantages
1.
Facilitates the maintenance of anonymity of the respondents
identity throughout the course.
2.
Saves time and other resources in approaching a large number
of experts for their views.
Limitations/presumptions:
1.
Panelists must be rich in their expertise, possess wide knowledge
and experience of the subject and have an aptitude and earnest
disposition towards the participants.
2.
Presupposes that its conductors are objective in their job,
possess ample abilities to conceptualize the problems for
discussion, generate considerable thinking, stimulate dialogue
among panelists and make inferential analysis of the
multitudinal views of the participants.

Sales Force Opinion Survey

Method
Also known as collective
opinion method.
Instead of consumers,
the opinion of the
salesmen is considered.
It is easy and cheap.
Useful in forecasting sales
of new product.

Advantages:
1. Simple no statistical techniques.
2. Based on first hand knowledge.
3. Quite useful in forecasting sales of new products.
Disadvantages:
1. Almost completely subjective.
2. Usefulness restricted to short-term forecasting.
3. Salesmen may be unaware of broader economic
change

Survey of buyers intentions: also known as Opinion surveys.

Useful when customers are industrial producers. Not very useful
for household consumers. The burden of forecasting is shifted to the
buyer.
Direct method of estimating the demand in short run.
EXAMPLE 1 Economic times very often publishes
survey of Private Sector Investment Intention
2 The Centre of monitoring Indian Economy
(CMIE) makes an annual survey of INDUSTRIAL
INVESTMENT INTENTION OF the Industry

Complete Enumeration
Survey
Door-to-door survey for forecast
period.
Limitation is that it requires lots of
resources, manpower and time.

Sample Survey
Some representative
households are selected
on random basis as
sample and their opinion
is taken.
This sample truly
represents the
population.
This method is less
costly.

End Use Survey Method

The demand of the final product is

the end user demand of the
intermediate product used in the
production of this final product .

Statistical Method

Viewing the problem with an

external point of view.

Trend Projection
Past data is used to make future
predictions .

Graphical Method
A

trend line can be fitted through a

series graphically.
Old values of sales for different areas
are plotted on a graph and a free
hand curve is drawn passing through
as many points as possible. The
direction of this free hand curve
shows the curve.

MOVING AVERAGE METHOD

Data from a number of consecutive
past periods is combined to provide
forecast for coming periods. Higher
the amount of previous data, better
is the forecast.
Since the averages are calculated
on a moving basis, the seasonal and
cyclical variations are smoothened
out.

To predict trend by the Method of Moving Averages

Under this method, either 3-year, 4-year or 5-year moving average is
calculated. First moving total of the values in the group of years is
calculated, each time giving up the first preceding year from the group. Then
it is divided by the number of years in the group.

Illustration:

Analysis of time series and

trend projections
The time series relating to sales represent the past pattern of
effective demand for a particular product. Such data can be
presented either in a tabular form or graphically for further
analysis. The most popular method of analysis of the time series is
to project the trend of the time series.a trend line can be fitted
through a series either visually or by means of statistical
techniques. The analyst chooses a plausible algebraic relation
(linear, quadratic, logarithmic, etc.) between sales and the
independent variable, time. The trend line is then projected into
the future by extrapolation.
Popular because: simple, inexpensive, time series data often
exhibit a persistent growth trend.
Disadvantage: this technique yields acceptable results so long as
the time series shows a persistent tendency to move in the same
direction. Whenever a turning point occurs, however, the trend
projection breaks down.
The real challenge of forecasting is in the prediction of turning points
rather than in the projection of trends.

TIME SERIES MODELS

TREND ANALYSIS
Past data is used to make future
predictions .
Known or Independent variables are
used for predicting Unknown or
dependent variables, using the trend
equation- Predictive analysis
Based on trend equation, we find
Line of Best Fit and then it is
projected in a scatter diagram,
dividing points equally on both sides

Estimation of Trend by the Method of Least Squares

Q. The annual sales of a company are as follows:
Year
1991
1992
1993
1994
1995
Sales 000
45
56
58
46
75
Using the method of least squares, fit a st. line trend and estimate the annual
sales of 1997.

n=5

y = 300

x = 15

x2 = 55

xy = 950

n=5
y = 300
xy = 950

x = 15

x2 = 55

Econometric Models
Econometrics

refers to the
application of mathematical
economic theory and statistical
procedures to economic data in order
to verify economic theorems and to
establish quantitative results.

1.Regression Method

REGRESSION MODEL
It is a statistical technique for
quantifying the relationship between
variables. In simple regression analysis,
there is one dependent variable (e.g.
sales) to be forecast and one independent
variable. The values of the independent
variable are typically those assumed to
"cause" or determine the values of the
dependent variable.

REGRESSION EQUATION

Y=

Where
Y= value being forecasted
xx

= constant value

= coefficients of regression
= independent variable

Illustration: Suppose a company manufacturing tractors

finds that a relationship exists between sale of tractors
and Farm Income Index published by CSO. Table below
shows the number of tractors sold and
the corresponding farm income index 1988 through
1992. Regression equation is calculated as follows:

The equations to be solved simultaneously are:

y1 = n.a. + b x1 .(1)

x1y1 = a x1 + b x12(2)
Substituting the various values, we get,

2.Barometric Techniques
It is a instrument
measuring changes.
the future can be
predicted from certain
happenings in present
Commonly Used indicators:(1) Gross National Income.
(2) Employment
(3) Agriculture Income
(4) Bank Deposits etc.
(5) Industrial Production
(6) Construction contracts awarded for building materials.
(7) Personal Income.

3.Simultaneous Equation
Method
a set of two or more equations, each
containing two or more variables
whose values can simultaneously
satisfy both or all the equations in the
set, the number of variables being
equal to or less than the number of
equations in the set.

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