REPORT ON

DEMAND FORECASTING
MD. SAKALIN ZAMAN
ID- 3-18-38-053
SUBMITTED TO: PROF. DR. MD. MOSHARRAF HOSSAIN
SUBMISSION DATE: 27-07-19
27th July, 2019

Prof. Dr. Mosharraf Hossain

Professor,

Department of Management,

Faculty of Business Studies,

University of Dhaka

Subject: Submission of assignment on “Demand Forecasting”

Dear Sir,

Here is the assignment that I was assigned on the topic as per your request. The assignment
has been completed by the knowledge that I have gathered from the course “Project Appraisal
and Management”.

I have tried my level best to complete this assignment meaningfully and correctly, as much as
possible. I do believe that this tiresome effort will help you to get ahead with this sort of
venture. In this case it will be meaningful to me.

Thanking you.

Yours obediently,

Md. Sakalin Zaman

Id- 3-18-38-053

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Index
Name of the content Page no.

Introduction ……………………………………………………………... 1-1

Significance of demand forecasting…………………………………….. 1-2

The various factors that involved in Demand Forecasting…………… 3-3

Objectives of demand forecasting……………………………………… 4-4

Determinants of demand forecasting…………………………………... 4-4

Criteria of a good demand forecasting method……………………….. 4-5

Demand forecasting methods…………………………………………… 5-15

Approaches to demand forecasting…………………………………….. 15-16

Conclusion………………………………………………………………… 16-16

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Introduction:

Accurate demand forecasting is essential for a firm to enable it to produce the required
quantities at the right time and arrange well in advance for the various factors of production
like raw materials, equipment, machine accessories, labor, buildings, etc. Forecasting helps a
firm to assess the probable demand for its products and plan its production accordingly. In
fact, forecasting is an important aid in effective and efficient planning. It can also help
management in reducing its dependence on chance.

Demand forecasting is very popular in industrially advanced countries where demand

conditions are always more uncertain than the supply conditions. In developing countries,
however, instead of the demand, supply is often the limiting factor. High prices and black
markets point to supply bottlenecks.

Naturally, in a country like Bangladesh supply forecasting seems to be more important than
demand forecasting. However, with the relaxation of industrial licensing regulations and
economic liberalization in general in recent years, increasing competition has spread to most
areas except those where massive investment is required.

In such areas, supply is far in excess of demand and the producers have begun to battle for
the market place. Thus, demand forecasting is bound to become important in India also.

Some of the popular definitions of demand forecasting are as follows:

According to Evan J. Douglas, “Demand estimation (forecasting) may be defined as a process

of finding values for demand in future time periods.”

In the words of Cundiff and Still, “Demand forecasting is an estimate of sales during a
specified future period based on proposed marketing plan and a set of particular
uncontrollable and competitive forces.”

Demand forecasting enables an organization to take various business decisions, such as

planning the production process, purchasing raw materials, managing funds, and deciding the
price of the product. An organization can forecast demand by making own estimates called
guess estimate or taking the help of specialized consultants or market research agencies. Let
us discuss the significance of demand forecasting in the next section.

The significance of demand forecasting is shown in the following points:

1. Fulfilling objectives:
It Implies that every business unit starts with certain pre-decided objectives. Demand
forecasting helps in fulfilling these objectives. An organization estimates the current
demand for its products and services in the market and move forward to achieve the
set goals.
For example, an organization has set a target of selling 50, 000 units of its products.
In such a case, the organization would perform demand forecasting for its products. If
the demand for the organization’s products is low, the organization would take
corrective actions, so that the set objective can be achieved.

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2. Preparing the budget:

Plays a crucial role in making budget by estimating costs and expected revenues. For
instance, an organization has forecasted that the demand for its product, which is
priced at Tk. 10, would be 10, 00, 00 units. In such a case, the total expected revenue
would be 10* 100000 = Tk. 10, 00, 000. In this way, demand forecasting enables
organizations to prepare their budget.

3. Stabilizing employment and production:

Helps an organization to control its production and recruitment activities. Producing

according to the forecasted demand of products helps in avoiding the wastage of the
resources of an organization. This further helps an organization to hire human
resource according to requirement. For example, if an organization expects a rise in
the demand for its products, it may opt for extra labor to fulfill the increased demand.

4. Expanding organizations:

Implies that demand forecasting helps in deciding about the expansion of the business
of the organization. If the expected demand for products is higher, then the
organization may plan to expand further. On the other hand, if the demand for
products is expected to fall, the organization may cut down the investment in the
business.

5. Taking Management Decisions:

Helps in making critical decisions, such as deciding the plant capacity, determining
the requirement of raw material, and ensuring the availability of labor and capital.

6. Evaluating Performance:

Helps in making corrections. For example, if the demand for an organization’s

products is less, it may take corrective actions and improve the level of demand by
enhancing the quality of its products or spending more on advertisements.

7. Helping Government:

Enables the government to coordinate import and export activities and plan
international trade.

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The various factors that involved in demand forecasting

1. Types of Goods:

Affect the demand forecasting process to a larger extent. Goods can be producer’s
goods, consumer goods, or services. Apart from this, goods can be established and
new goods. Established goods are those goods which already exist in the market,
whereas new goods are those which are yet to be introduced in the market.
Information regarding the demand, substitutes and level of competition of goods is
known only in case of established goods. On the other hand, it is difficult to forecast
demand for the new goods. Therefore, forecasting is different for different types of
goods.

2. Competition Level:

Influence the process of demand forecasting. In a highly competitive market, demand

for products also depend on the number of competitors existing in the market.
Moreover, in a highly competitive market, there is always a risk of new entrants. In
such a case, demand forecasting becomes difficult and challenging.

3. Price of Goods:

Acts as a major factor that influences the demand forecasting process. The demand
forecasts of organizations are highly affected by change in their pricing policies. In
such a scenario, it is difficult to estimate the exact demand of products.

4. Level of Technology:

Constitutes an important factor in obtaining reliable demand forecasts. If there is a

rapid change in technology, the existing technology or products may become
obsolete. For example, there is a high decline in the demand of floppy disks with the
introduction of compact disks (CDs) and pen drives for saving data in computer. In
such a case, it is difficult to forecast demand for existing products in future.

5. Economic Viewpoint:

Play a crucial role in obtaining demand forecasts. For example, if there is a positive
development in an economy, such as globalization and high level of investment, the
demand forecasts of organizations would also be positive.

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Objectives of Demand Forecasting:

There are mainly two types of Demand Forecasting

(1) Short term demand forecasting
(2) Long term demand forecasting

Short Term Demand Forecasting

Key characteristics are:
• Formulating production policy
• Formulating price policy
• Controlling sales
• Arranging finance

Long Term Demand Forecasting

Key characteristics:
• Deciding production capacity
• Planning for long term activities

Determinants of demand:

(1) Income
(2) Consumer preference
(3) Number of buyers
(4) Price of goods
(5) Expectation of future

Criteria of a Good Demand Forecasting Method:

1. Accuracy:

It is necessary to check the accuracy of past forecasts against present performance and
of present forecasts against future performance. Some comparisons of the model with
what actually happens and of the assumptions with what is borne out in practice are
more desirable.
The accuracy of the forecast is measured by – (a) the degree of deviations between
forecasts and actual and (b) the extent of success in forecasting directional changes.

2. Simplicity and Ease of Comprehension:

Management must be able to understand and have confidence in the techniques used.
Understanding is also needed for a proper interpretation of the results. Elaborate
mathematical and econometric procedures may be judged less desirable if
management does not really understand what the forecaster is doing and fails to
understand the procedure.

3. Economy:
Costs must be weighed against the importance of the forecast to the operations of the
business. A question may arise – How much money and managerial effort should be

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 allocated to obtain a high level of forecasting accuracy? The criterion here is the
economic consideration of balancing the benefits from increased accuracy against the
extra cost of providing the improved forecasting.

4. Availability:

The techniques employed should be able to produce meaningful results quickly;

techniques which take a long time to work out may produce useful information too
late for effective management decisions.

5. Maintenance of Timeliness:

The forecast should be capable of being maintained on an up-to-date basis.

Methods of Demand Forecasting:

After gathering information about various aspects of the market and demand from primary
and secondary sources, an attempt may be made to estimate future demand. A wide range of
forecasting.

Qualitative assessment
Forecasting demand based on expert opinion. Some of the types in this method are,

• Unaided judgment
• Prediction market
• Delphi technique
• Game theory
• Judgmental bootstrapping
• Simulated interaction
• Intentions and expectations survey
• jury of executive method

Quantitative assessment

• Discrete event simulation

• Extrapolation
• Group method of data handling (GMDH)
• Reference class forecasting
• Quantitative analogies
• Rule-based forecasting
• Neural networks
• Data mining
• Conjoint analysis
• Causal models
• Segmentation
• Exponential smoothing models

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• Box–Jenkins models
• Hybrid models

Others are as follows

a) time series projection methods this includes:

• Moving average method

• Exponential smoothing method
• Trend projection methods
b) causal methods this includes:

• Chain-ratio method
• Consumption level method
• End use method
• Leading indicator method

The important ones are discussed below:

Delphi Method

The Delphi method is a structured communication technique or method, originally

developed as a systematic, interactive forecasting method which relies on a panel of experts.
The experts answer questionnaires in two or more rounds. After each round, a facilitator or
change agent provides an anonymous summary of the experts’ forecasts from the previous
round as well as the reasons they provided for their judgments. Thus, experts are encouraged
to revise their earlier answers in light of the replies of other members of their panel. It is
believed that during this process the range of the answers will decrease and the group will
converge towards the "correct" answer. Finally, the process is stopped after a predefined stop
criterion (e.g. number of rounds, achievement of consensus, and stability of results and the
mean or median scores of the final rounds determine the results. Delphi is based on the
principle that forecasts (or decisions) from a structured group of individuals are more
accurate than those from unstructured groups. The technique can also be adapted for use in
face-to-face meetings, and is then called mini-Delphi. Delphi has been widely used for
business forecasting and has certain advantages over another structured forecasting approach,
prediction markets.

Key characteristics

The following key characteristics of the Delphi method help the participants to focus on the
issues at hand and separate Delphi from other methodologies:

Structuring of information flow

The initial contributions from the experts are collected in the form of answers to
questionnaires and their comments to these answers. The panel director controls the
interactions among the participants by processing the information and filtering out irrelevant
content. This avoids the negative effects of face-to-face panel discussions and solves the
usual problems of group dynamics.

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Regular feedback

Participants comment on their own forecasts, the responses of others and on the progress of
the panel as a whole. At any moment they can revise their earlier statements. While in regular
group meetings participants tend to stick to previously stated opinions and often conform too
much to the group leader; the Delphi method prevents it.

Role of the facilitator

The person coordinating the Delphi method is usually known as a facilitator or Leader, and
facilitates the responses of their panel of experts, who are selected for a reason, usually that
they hold knowledge on an opinion or view. The facilitator sends out questionnaires, surveys
etc. and if the panel of experts accept, they follow instructions and present their views.
Responses are collected and analyzed, and then common and conflicting viewpoints are
identified. If consensus is not reached, the process continues through thesis and antithesis, to
gradually work towards synthesis, and building consensus.

Applications of Delphi Method

Use in forecasting

First applications of the Delphi method were in the field of science and technology
forecasting. The objective of the method was to combine expert opinions on likelihood and
expected development time, of the particular technology, in a single indicator. One of the first
such reports, prepared in 1964 by Gordon and Helmer, assessed the direction of long-term
trends in science and technology development, covering such topics as scientific
breakthroughs, population control, automation, space progress, war prevention and weapon
systems. Other forecasts of technology were dealing with vehicle-highway systems, industrial
robots, intelligent internet, broadband connections, and technology in education.
Later the Delphi method was applied in other places, especially those related to public policy
issues, such as economic trends, health and education. It was also applied successfully and
with high accuracy in business forecasting.
The Delphi method has also been used as a tool to implement multi-stakeholder approaches
for participative policy-making in developing countries. The governments of Latin America
and the Caribbean have successfully used the Delphi method as an open-ended public-private
sector approach to identify the most urgent challenges for their region ICT Action Plans. As a
result, governments have widely acknowledged the value of collective intelligence from civil
society, academic and private sector participants of the Delphi, especially in a field of rapid
change, such as technology policies.

Use in policy-making
From the 1970s, the use of the Delphi technique in public policy-making introduces a number
of methodological innovations. In particular: analysts can use to outline different scenarios:
the desired scenario (from desirability), the potential scenario (from feasibility) and the
expected scenario (from probability).

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Advantages of Delphi Method

➢Simple to conduct
➢Can be used where quantitative data is not available
➢The forecast is reliable as it is based on the opinion of people who know the product very
well
➢Takes less time
➢Avoids direct confrontation of experts with one another ( no peer pressure, or extrinsic
pressure)
➢Structured/organized group communication process ( condense experts opinions into a few
precise and clearly defined statements)
➢Cost effective and flexible/adaptable, fast, versatile.
➢Both long and short term forecasting possible
➢Useful for technology, new product and industry sales

Disadvantages of Delphi Method

➢Results are based on mere hunch of one or more persons and not on scientific analysis.
➢The experts may be biased
➢This method is subjective and the forecast could be unfavorably influenced by persons with
vested interests
➢Difficulty of getting expert panel.
➢Breakdown of forecast is not possible.
➢No guidelines for determining consensus, sample size and sampling techniques
➢Requires time/participant commitment
➢Time delays between rounds in data collection process (multiple data collection, analysis ,
processing)
➢Concerns about the reliability of the technique

Trend Projection

When numerical data are available, a trend can be plotted on graph paper to show changes
through time. If desired, the trend line can then be extended or "projected" into the future on
the basis of the recent rate of change. Such a projection shows where the trend should be at
some point in the future assuming there is no shift in the rate of change. Example: A
population with a steady 2 percent rate of annual growth will double in about thirty-five
years.
Trend forecasting is a complicated but useful way to look at past sales or market growth,
determine possible trends from that data and use the information to extrapolate (conclude)
what could happen in the future. Marketing experts typically utilize trend forecasting to help
determine potential future sales growth. Many areas of a business can use forecasting, and
examining the concept as it relates to sales can help you gain an understanding of this tool.

Applications of Trend analysis

➢Trend analysis is used to forecast market trends, sales growth, inventory levels and interest
rates.
➢Trend analysis offers a measurable and verifiable method for businesses to project future

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outcomes.
➢It can be used for failure analysis and as an early warning indicator of impending problems.
➢Where accurate historical information exists and valid relationships between variables can
be established, trend analysis is a precise tool for anticipating events.

Advantages of Trend Projection

➢Very simple method

➢Provides reasonably accurate forecasts
➢Quick and inexpensive
➢A trend analysis can be replicated, checked, updated and refined when necessary.

Disadvantages of Trend Projection

➢Can be used only if past data is available

➢It is not necessary that past trend may continue to hold good in future as well
➢Historical data may not give a true picture of an underlying trend. An obvious event like
hurricanes Katrina and Sandy will distort a normal business trend line, while others are more
subtle.
➢A major problem in forecasting trends involves identifying turning points.
➢Long-term projections need more data to support them, and that may not always be
available,
particularly for a new business or product line.

Moving Average

A moving average (rolling average or running average) is a calculation to analyze data

points by creating series of averages of different subsets of the full data set. It is also called a
moving mean (MM). Given a series of numbers and a fixed subset size, the first element of
the moving average is obtained by taking the average of the initial fixed subset of the number
series. Then the subset is modified by "shifting forward"; that is, excluding the first number
of the series and including the next number following the original subset in the series. This
creates a new subset of numbers, which is averaged. This process is repeated over the entire
data series. The plot line connecting all the (fixed) averages is the moving average. A moving
average is a set of numbers, each of which is the average of the corresponding subset of a
larger set of datum points. A moving average may also use unequal weights for each datum
value in the subset to emphasize particular values in the subset.

Types of Moving Averages:

There are a lot of different moving averages that can be used. Six (6) Main Types of Moving
Averages are as below:

1. Simple Moving Average (SMA)

2. Exponential Moving Average (EMA)

3. Weighted Moving Average (WMA)

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 4. Smoothed Moving Average (SMMA)

5. Triangular Moving Average (TMA)

Moving Average Envelopes

As a Simple Moving Average (SMA) example, consider a security with the following closing
prices over 15 days:
Week 1 (5 days) – 20, 22, 24, 25, 23
Week 2 (5 days) – 26, 28, 26, 29, 27
Week 3 (5 days) – 28, 30, 27, 29, 28
A 10-day MA would average out the closing prices for the first 10 days as the first data point.
The next data point would drop the earliest price, add the price on day 11 and take the
average, and so on as shown below.
As noted earlier, MAs lag current price action because they are based on past prices; the
longer the time period for the MA, the greater the lag. Thus a 200-day MA will have a much
greater degree of lag than a 20-day MA because it contains prices for the past 200 days. The
length of the MA to use depends on the trading objectives, with shorter MAs used for short-
term trading and longer-term Mas more suited for long-term investors. The 200-day MA is
widely followed by investors and traders, with breaks above and below this moving average
considered to be important trading signals.

Basic Features of Moving Averages:

(1)Easy-to-use technical analysis tool, easy to assess results

(2) Signal trades in any financial market or asset (check crossovers below)
(3) Can be used in any timeframe (intraday, daily, weekly, monthly)
(4) Can confirm (or not) the results of other technical analysis tools (ADX, RSI etc)
(5) A moving average can be the sub-components of another technical analysis tool (for
example RSI or MACD)
(6) Can draw beautiful charts or channels (check Moving Average Envelopes below)
(7) Eliminates the impact of Market Noise
(8) Can be used as components of automated trading systems (for example Forex Robots)

Uses of Moving Average Method

A moving average is commonly used with time series data to smooth out short-term
fluctuations and highlight longer-term trends or cycles. The threshold between short-term and
long-term depends on the application, and the parameters of the moving average will be set
accordingly. For example, it is often used in technical analysis of financial data, like stock
prices, returns or trading volumes. It is also used in economics to examine gross domestic
product, employment or other macroeconomic time series.

Advantages of Moving Average Method

• Easily understood

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 • Easily computed

• Provides stable forecasts

Disadvantages of Moving Average Method

• Requires saving lots of past data points: at least the N periods used in the moving
average computation

• Lags behind a trend

• Ignores complex relationships in data

Casual methods for forecasting

More analytical than the preceding methods, causal methods seek to develop forecasts on the
basis of cause – effect relationships specified in an explicit, quantitative manner. The
important methods under this category are as follows:

Chain ratio method:

A simple analytical approach, this method calls for applying a series of factors
for developing a demand forecast.

Consumption level method:

Useful for a product that is directly consumed; this method estimates consumption level on
the basis of elasticity coefficients, the important ones being the income elasticity of demand
and the price elasticity of demand.

End use method:

Suitable for intermediate products, the end use method develops demand forecasts
on the basis of the consumption’s coefficient of the product for various uses.

Chain Ratio Method

A simple analytical approach, this method calls for applying a series of factors for developing
a demand forecast. An estimation method used by multiplying a base number by a chain of
related percentages. It is frequently used in marketing to estimate the size of a target market.
Here is a step-by-step example of how one might use the Chain Ratio Method to estimate the
number of TVs in the United States (numbers for illustration only):

Question: How many TVs are in the US?

Method:
1. There are the roughly 300 million people in the US (This is the base number).

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2. There are roughly 4 people per household: 300,000,000/4 = 75,000,000 households.
3. There are roughly 2 TVs per household: 75,000,000 * 2 = 150,000,000 TVs.
Answer:
150 million TVs.

Chain Ratio Method for Calculating Market Potential

The chain ratio method kind of assumes that what happens for one market will happen
proportionally in another market. So, if we have information on sales or market share in one
market, we can extrapolate those results to another market. One common application of the
chain ratio method is where a local or regional company wants to calculate potential sales
nationally.

In this case, the chain ratio method would follow several steps.

First, identify the demographic characteristics of the customer groups to whom the analysis
applies. Because the chain ratio method relies heavily on secondary data, often population
data from the Census Bureau, it’s best to describe markets in terms of sex, age, and income.
Although we may use more complex demographic descriptions for other purposes, data for
the chain ratio method will be more available, timely, and accurate if the demographic
description is kept simple. Sometimes data giving estimates of population size by occupation
and some psychographic variables are available. If the data are available and reliable, then
they can be used. If not, keep the market description simple.
For example suppose a brand of expensive upscale cookware produced in California sells
primarily to women between the ages of thirty-five and sixty-four with household incomes
above $75,000 annually. This demographic group is simply defined and does not include
extra variables such as marital status, family size, education, or occupation. Suppose the
company sells through retailers up and down the West Coast.

Second, estimate how many current customers your brand has in the target demographic
group. If the group is relatively new, the estimate may be more tenuous. If your company is
seeking to sell to the same demographic group but in another area, then the information ought
to be easy find internally.

For example, suppose the upscale cookware company had ten thousand purchases by people
in that demographic group. How does the company get access to that kind of information?
Well, it could survey its dealers or distributors if it uses traditional retail channels. If it uses
primarily online distribution, it could survey purchasers as they buy. Or it could rely on
syndicated survey or panel data provided by a commercial marketing research provider. No
matter what the source, every company with even a modestly sophisticated understanding of
its customers ought to have access to information that describes its customers.

Third, divide total sales of your brand to members of the target demographic and then divide
by the number of customers in the target demographic to obtain the sales per customer.
For example, suppose the company estimated that it sold five million dollars’ worth of
cookware to the target demographic group. Assuming that the ten thousand purchases were
made by separate individuals, the company would estimate the average purchase per
customer to be $500 (5,000,000 ÷10,000).

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Fourth, estimate the number of people in the target group that live in the area to which your
brand plans to expand and then multiply that number of people by the average sales per
customer in that group calculated in the previous step.

For example, suppose the cookware company wants to expand into Arizona, Utah, and
Colorado. Using Census Bureau data, the company learns that in these three states there are
approximately 406,000 women between thirty-five and sixty-four living in households with
annual incomes above $75,000. The market potential calculation is very straightforward.
Multiply the population of the target audience in the new location by the amount spent per
year by current customers of the same demographic description. Thus, 406,000 × 500
=$203,000,000. To emphasize again, this figure is not the sales forecast; it is not a prediction
of what they will sell. The market potential estimate is the amount that could possibly be sold
if all members of the target audience decided to buy.

Advantage of the chain ratio method

➢The main advantage of the chain ratio method is its simplicity.

➢The data are usually readily available and the mathematics is not complicated at all.

Disadvantage of the chain ratio method

➢The biggest drawback to using the chain ratio method is its main underlying assumptions,
which is that the same average purchase rate will hold from one area to another. Of course,
companies have little way of knowing that. However, having an empirically based estimate as
a starting point for market expansion planning is better than simply making those decisions
from intuition alone.

Consumption Level Method

Consumption level method: Useful for a product that is directly consumed; this method
estimates consumption level on the basis of elasticity coefficients, the important ones being
the income elasticity of demand and the price elasticity of demand.

Income Elasticity:
This reflects the responsiveness of demand to variations in income. It is
calculated as:
E1 = [Q2 - Q1/ I2- I1] * [I1+I2/ Q2 +Q1]
Where
E1 = Income elasticity of demand
Q1 = quantity demanded in the base year
Q2 = quantity demanded in the following year
I1 = income level in the base year

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I2 = income level in the following year

Price Elasticity:
This reflects the responsiveness of demand to variations in price.
It is calculated as:
EP = [Q2 - Q1/ P2- P1] * [P1+P2/ Q2 +Q1]
Where EP = Price elasticity of demand Q1 = quantity demanded in the base year
Q2 = quantity demanded in the following year
P1 = price level in the base year
P2 = price level in the following year

End-use Method:
Suitable for intermediate products, the end use method develops demand forecasts
on the basis of the consumption’s coefficient of the product for various uses. Example: Milk
is a commodity which can be used as an intermediary good for the production of ice cream
and other dairy products. Cement may be used for constructing houses, hotels, bridges, roads,
etc.
End use method involves following steps –

1. Identifying the possible uses of product

2. Defying the consumption co-efficient of the product for various uses.
3. Projecting the output level for consuming industries
4. Deriving the demand for the product.

This method may be illustrated with an example, A certain industrial chemical, Indchem, is
used by four industries, Alpha, Beta, Kappa, and Gamma. The consumption coefficients for
those industries, the projected output levels for these industries for the year X, and the
projected demand for Indchem are shown in exhibition 1.2

As is clear from the foregoing discussion, the key inputs required for the application of end-
use method are:

1. Projected output levels of consuming industries (units) and

2. Consumption coefficients.

It may be difficult to estimate the projected output levels of consuming (units). More
important, the consumption coefficients may vary from one period to another in wake of
technological changes and improvements in the methods of manufacturing. Hence the end-
use method should be used judiciously.

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 Advantages of Consumers End Use method:

➢Yields accurate predictions

➢Provides sector wise demand forecast for different industries
➢Especially useful for producer goods.

Disadvantages of Consumers End Use method:

➢Requires complex and diverse calculations

➢Costlier
➢Time consuming
➢Industry data may not be readily available

Approaches to forecasting:
All firms forecast demand, but it would be difficult to find any two firms that forecast
demand in exactly the same way. Over the last few decades, many different forecasting
techniques have been developed in a number of different application areas, including
engineering and economics. Many such procedures have been applied to the practical
problem of forecasting demand in a business system, with varying degrees of success. Most
commercial software packages that support demand forecasting in a business system include
dozens of different forecasting algorithms that the analyst can use to generate alternative
demand forecasts.

1. Judgmental Approaches.

The essence of the judgmental approach is to address the forecasting issue by assuming that
someone else knows and can tell you the right answer. That is, in a judgment-based technique
we gather the knowledge and opinions of people who are in a position to know what demand
will be. For example, we might conduct a survey of the customer base to estimate what our
sales will be next month.

2. Experimental Approaches.

Another approach to demand forecasting, which is appealing when an item is “new” and when
there is no other information upon which to base a forecast, is to conduct a demand experiment
on a small group of customers and to extrapolate the results to a larger population. For example,
firms will often test a new consumer product in a geographically isolated “test market” to
establish its probable market share. This experience is then extrapolated to the national market
to plan the new product launch. Experimental approaches are very useful and necessary for

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 new products, but for existing products that have an accumulated historical demand record it
seems intuitive that demand forecasts should somehow be based on this demand experience.
For most firms (with some very notable exceptions) the large majority of SKUs in the product
line have long demand histories.

3. Relational/Causal Approaches.

The assumption behind a causal or relational forecast is that, simply put, there is a reason why
people buy our product. If we can understand what that reason (or set of reasons) is, we can
use that understanding to develop a demand forecast. For example, if we sell umbrellas at a
sidewalk stand, we would probably notice that daily demand is strongly correlated to the
weather – we sell more umbrellas when it rains. Once we have established this relationship, a
good weather forecast will help us order enough umbrellas to meet the expected demand.

4. “Time Series” Approaches.

A time series procedure is fundamentally different than the first three approaches we have
discussed. In a pure time series technique, no judgment or expertise or opinion is sought. We
do not look for “causes” or relationships or factors which somehow “drive” demand. We do
not test items or experiment with customers. By their nature, time series procedures are applied
to demand data that are longitudinal rather than cross-sectional. That is, the demand data
represent experience that is repeated over time rather than across items or locations. The
essence of the approach is to recognize (or assume) that demand occurs over time in patterns
that repeat themselves, at least approximately. If we can describe these general patterns or
tendencies, without regard to their “causes”, we can use this description to form the basis of a
forecast.

Conclusion:
All supply chain decisions made before demand has materialized are made to a forecast. In
this report, it was explained how historical demand information can be used to forecast future
demand and how these forecasts affect the supply chain. Several methods were discussed to
forecast demand and estimate a forecast’s accuracy. The scope of demand forecasting should
be decided considering the time and cost involved in relation to the benefit of the information
acquired through the study of demand. Cost of forecasting and benefit flows from such
forecasting should be in a balanced manner.

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References:

1. Dalkey, Norman; Helmer, Olaf (1963). "An Experimental Application of the Delphi
Method to the use of
experts". Management Science 9 (3): 458–467. doi:10.1287/mnsc.9.3.458.
2. Bernice B. Brown (1968). "Delphi Process: A Methodology Used for the Elicitation of
Opinions of
Experts.": An earlier paper published by RAND (Document No: P-3925, 1968, 15 pages)
3. Sackman, H. (1974), "Delphi Assessment: Expert Opinion, Forecasting and Group
Process", R-1283-PR,
April 1974. Brown, Thomas, "An Experiment in Probabilistic Forecasting", R-944-ARPA,
1972
4. Prasanna Chandra, “Projects: Planning, analysis, selection, financing implementation and
review”
5. Francis, Abey (2010): Approches to demand forecasting in managerial economics
6. Chopra,Sunil; Meindl, Peter; Supply Chain Management: Strategy, Planning and Operation

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