DEMAND FORECASTING

Demand forecasting is the activity of estimating the quantity of a product or service that consumers will purchase. Demand forecasting involves techniques including both informal methods, such as educated guesses, and quantitative methods, such as the use of historical sales data or current data from test markets. Demand forecasting may be used in making pricing decisions, in assessing future capacity requirements, or in making decisions on whether to enter a new market.

Why is forecasting important?

Demand for products and services is usually uncertain.
Forecasting can be used for

Strategic planning (long range planning) Finance and accounting (budgets and cost controls) Marketing (future sales, new products)
Production and operations

What is forecasting all about?

Demand for Mercedes E Class

We try to predict the future by looking back at the past

Ja n

Fe Mar Apr May Jun Jul Aug b

Time

Predicted demand looking back six months

Objectives of Demand Forecasting

Short term Objectives

Long term Objectives

Short term Objectives

Drafting of Production Policy: Demand forecasts facilitate in drafting appropriateproduction policy so that there may not be any space between future demand andsupply of a product. Routine Supply of Materials: Demand forecasting assists in figuring out thepreferred volume of production. The essential prerequisite of raw materials infuture can be calculated on the basis of such forecasts. This guarantees regularand continuous supply of the materials in addition to managing the amount of supply at the economic level

 Best Possible Use of Machines:Demand forecasting in addition expedites cuttingdown inactive capacity because only the necessary amount of machines and equipments are set up to meet future demand Drafting of Price Policy: Demand forecasts facilitate the management to prepare a few suitable pricing systems, so that the level of price does not rise and fall to a great extent during depression or inflation

Long Term Objectives

Labour Requirements:Spending on labour is one of the most vital elements of costof production. Dependable and correct demand forecasts can facilitate themanagement to evaluate suitable labour requirements. This can ensure finest laboursupply and uninterrupted production procedures Organising Funds On the basis of demand forecast, an individual can find out themonetary requirements of the organisation in order to bring about the desiredoutput. This can make it possible to cut down on the expenditure of acquiring funds

Need & Significance of Demand Forecasting

Business managers, depending upon their functional area, need various forecasts. They need toforecast demand, supply, price, profit, costs, investment, and what have you. Allocation of resources can be made effectively only when demand estimates for future period is available.

Steps in demand forecasting

1. Determination of objectives :

2. Selection of Products : 3. Selection of Methods :

4.Interpreting the Results :

Forecasting Approaches
Statistical analysis
Market research

Expert judgment

Methods & Techniques Of Demand Forecasting

Consumer Surveys Expert Opinion Method Business Barometers

Consumer Surveys:
It involves gathering of information about consumer behavior from a sample of consumers which is analyzed and then further projected onto the population. Surveys are conducted to assess consumers perception of various aspects, such as new variations in products, variations in prices of the product and related products, new variations in services provided etc. The drawback of this method is that the consumer has to respond to hypothetical situations.

Expert Opinion Method

This technique of forecasting demand seeks the views of experts on the likely level of demand in the future. They have a rich experience of the behaviour of demand. If the forecasting is based on the opinion of several experts, then it is known as panel consensus

Business Barometers
A very economical method for demand forecasting is the business barometers or indicators Some important indicators in demand forecasting Gross national profit Employment Wholesale prices Consumer Credit Stock Prices

Quantitative or statistical Techniques

Trend Projection Method
This technique assumes that whatever has been the pattern of demand in the past, will continue to hold good in the future as well. In this method, historical data is collected and fitted into some kind of trend, i.e. repetitive behaviour pattern . This trend is then extrapolated into the future to get the demand for the forecast period. The trend could be linear or curvilinear or have any other complex shape.

Graphical method
Year wise sales of cars

Year 96-97 97-98

Sales ( in 000 ) 28 38

98-99 99-00 00-01 01-02 02-03

46 40 56 49 58

car sales
70 60 50 40 30 20 10 0 96 -97 97-98 98 -99 99- 2000- 2001- 20022000 01 02 03 years

sales (000)

Series1

Least square method

Used to 1. To wipe out fluctuations in actual data 2. To project demand in the future for this a new trend line is derived the equation for such a trend lineis given in a general form Y = a + b X. Where , y = estimated value of variable a = intercept / constant b = estimate of the trend factor X = unit of time

For determining the values of b & a following formulae's are used

N * XY ( X ) * ( Y ) b = ------------------------N * X2 ( X )2
Y X a = -------- - b * (--------) N N

Year wise sales of cars

Year

Sales-Y (000) 96-97 28 97-98 38

X 1 2

XY 28 76 1 4

X2

98-99 46 99-00 40 00-01 56 N= 5 Y =208

3 4 5

138 160 280

9 16 25

X = 15 XY=682 X2 =55

N * XY ( X ) * ( Y ) b = ------------------------N * X2 ( X )2

5 * 682 (15 ) * (208 ) b = ------------------------5 * 55 (15 )2

3410 3 120 b = ----------------

290 ------

= 5.8

275 225

50

Y X a = -------- - b * (--------) N N 208 15 a = -------- - 5.8 * (--------) 5 5

a = 41.6 5.8 * (3) a = 41.6 17.4 a = 24.2

X 1 2 3 4 5 6

Year 96-97 97-98 98-99 99-00 00-01 01-02

Sales 28 38 46 40 56

a + b * x 24.2 + 5.8 * 1 2 3 4 5 6 7 8 9

Trend value 30.0 35.8 41.6 47.4 53.2 59.0 64.8 70.0 76.4

7 02-03 8 03-04 9 04-05

trend value
100

96
20 40 60 80 0

-9 7 -9 9

98

new trend line

year

20 00 -0 1 20 02 -0 3 20 04 -0 5

trend value