DEMAND

FORECASTING
 DEMAND FORECASTING MEANS
PREDICTING OR ESTIMATING THE FUTURE
DEMAND FOR A PRODUCT .
 IT IS UNDERTAKEN FOR THE PURPOSE OF
PLANNING AND MAKING LONGTERM
DECISIONS
Business Decision Making –Use of Demand Forecasting

 Forward Planning and Scheduling

 Acquiring Inputs
 Making provision for finance
 Formulating pricing strategy
 Planning advertisement
Demand Forecasting
 General considerations:
1. Factors involved in demand forecasting
2. Purposes of forecasting
3. Determinants of demand
4. Length of forecasts
5. Forecasting demand for new products
6. Criteria of a good forecasting method
7. Presentation of a forecast to the management
 Methods of demand forecasting
 Approach to forecasting
Steps in Demand Forecasting

 Specifying the Objective

 Determining the time Perspective and
type of good
 Selecting a proper method of forecasting
 Collection of data
 Interpretation of results
Forecasting Horizons.
 Short Term (0 to 3 months): for inventory
management and scheduling.
 Medium Term (3 months to 2 years): for
production planning, purchasing, and
distribution.
 Long Term (2 years and more): for capacity
planning, facility location, and strategic
planning.
Presentation of a forecast to the
Management
 In presenting a forecast to the management, a managerial
economist should:
1. Make the forecast as easy for the management to understand as
possible.
2. Avoid using vague generalities.
3. Always pin-point the major assumptions and sources.
4. Give the possible margin of error.
5. Avoid making undue qualifications.
6. Omit details about methodology and calculations.
7. Make use of charts and graphs as much as possible for easy
comprehension.
Factors involved in Demand Forecasting

2. Undertaken at three levels:

a. Macro-level
b. Industry level eg., trade associations
c. Firm level
3. Should the forecast be general or specific (product-
wise)?
4. Problems or methods of forecasting for “new” vis-à-vis
“well established” products.
5. Classification of products – producer goods, consumer
durables, consumer goods, services.
6. Special factors peculiar to the product and the market –
risk and uncertainty. (eg., ladies’ dresses)
Criteria of a good forecasting method

1 . Simplicity and ease of

comprehension.
2. Accuracy – measured by
(a) degree of deviations
between forecasts and
actuals, and (b) the extent
of success in forecasting
directional changes.
3. Economy.
4. Availability.
5. Maintenance of
timeliness.
METHODS OF DEMAND
FORECASTING
SURVEY METHODS
SURVEY METHOS

CONSUMER OPINION METHODS

SURVEY METHODS

COMPLETE
SAMPLE END USE EXPERTS OPINION TEST MARKETING
ENUMERATION
SURVEY METHOD METHOD METHOD METHOD
METHOD

DELPHI METHOD
 STATISTICAL
METHODS

BAROMETRIC
REGRESSION METHOD
RENDPROJECTION
METHODS
Techniques of Demand Forecasting-Survey Methods

Though statistical techniques are essential

in clarifying relationships and providing
techniques of analysis, they are not
substitutes for judgement. What is needed
is some common sense mean between pure
guessing and too much mathematics.
Consumer Survey
Delphi Method
 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 respondent’s
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 .
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.
Statistical Methods
 Statistical methods are considered to be
superior due to the following reasons :
 The element of subjectivity is minimum
 Method of estimation is Scientific.
 Estimates are more reliable.
 It is very economical method.
TREND ANALYSIS
METHOD
 THISMETHOD IS USED WHEN A
DETAILED ESTIMATE HAS TO
BE MADE
 TIME PLAYS AN IMPORTANT
ROLE IN THIS METHOD
TIME SERIES PREDICTS
 This method uses historical and cross –
sectional data for estimating demand
 Finding a Trend value for a specific year

 FINDING SEASONAL FLUCTUATIONS IN

THE VARIABLE
 PREDICTING TURNING POINTS IN
FUTURE MOVEMENTS OF THE VARIABLE
Analysis of time series and trend
projections

Four sets of factors: secular trend (T), seasonal

variation (S), cyclical fluctuations (C ),
irregular or random forces (I).
O (observations) = TSCI
Assumptions:
1. The analysis of movements would be in the
order of trend, seasonal variations and cyclical
changes.
2. Effects of each component are independent of
each other.
There are three techniques of trend
projection
 Graphical
 Fitting Trend Equation
 Box-Jenkins method
 The above method can be used by long
standing firms by using the data from sales
department and books of account .
 New firms can use older firms data belonging to
the same industry .
Linear Trend
It is represented: Y= a + b x (I)
 Y=Demand
 X= Time Period
 a & b are constants .
 For calculation of Y for any value of X
requires the values of a & b These are :

∑Y=na+b∑X

∑XY=a∑X+b∑X²
Problem & Solution
 The data relate to the sale of generator sets
of a company over the last five years

 Year : 2003 2004 2005 2006 2007

sets : 120 130 150 140 160

Estimate the demand for generator sets in the

year 2012 if the present trend continues
 Year X Y x² Y² XY

2003 1 120 1 14400 120

2004 2 130 4 16900 260

2005 3 150 9 22500 450
2006 4 140 16 19600 560
2007 5 160 25 25600 800
Total 15 700 55 99000 2190

Substituting table values in equation ii & iii we get

∑Y=na+b∑X
700 = 5a +15b
∑XY=a∑X+b∑X²
2190 = 15a +55b
By multiplying equation iv by 3 and subtracting it from equation v we get
10b =90
b =9
Solution
 Substitute this value in equation iv we have
 700 =5a +15 b
 700 = 5a +15 (9)
 5a =565
 a = 113
 Trend equation Y=113 + 9x
 For 2012 ,x will be 10
 Y2012 = 113+9 x 10 =203 sets