ESTIMATING CURRENT DEMAND: TOTAL MARKET POTENTIAL: max amount of sales that might be available to all the firms

s in an industry during a given period.

Q=nxqxp
Where, Q = total market demand n = number of buyers in the market q = quantity purchased by an average buyer per year p = price of an average unit.

FORECASTING:
Forecasting implies predicting the future after studying and analyzing the past and present data. Forecasting is of special importance in industries, where important strategic decisions need to be taken to optimize the eciency of the resources and hence maximize the prots.

DEMAND FORECASTING TECHNIQUES

QUALITATIVE TECHNIQUES

QUANTITATIVE TECHNIQUES

FIELD SALES FORCE

CAUSAL TECHNIQUES

TIME SERIES

JURY OF EXECUTIVES

LEADING INDICATORS BASS DIFFUSION METHOD

TREND PROJECTION EXPONENTIAL SMOOTHING METHOD MOVING AVERAGE METHOD

DELPHI METHOD

Methods of Demand Forecasting

I Qualitative Methods : These methods rely essentially on the judgment of experts to translate qualitative information into quantitative estimates. The important qualitative methods are : Jury of executive method Delphi method II Time Series Projection Methods : These methods generate forecasts on the basis of an analysis of the historical time series . The important time series projection methods are : Trend projection method Exponential smoothing method Moving average method III Causal Methods : 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 causal methods are : Leading indicator method Bass Diffusion method

Jury of Executive Opinion Method

This method involves soliciting the opinion of a group of managers on expected future sales and combining them into a sales estimate.

Pros
It is an expeditious method It permits a wide range of factors to be considered

It appeals to managers

Cons
The biases cannot be unearthed easily Its reliability is questionable

Delphi Method
This method is used for obtaining the opinions of a group of experts with the help of a mail survey. The steps involved in this method are :

1.
2.

A group of experts is sent a questionnaire by mail and asked to express their views.
The responses received from the experts are summarized without disclosing the identity of the experts, and sent back to the experts, along with a questionnaire meant to probe further the reasons for extreme views expressed in the first round. The process may be continued for one or more rounds till a reasonable agreement emerges in the view of the experts.

3.

Pros
It is intelligible to users
It seems to be more accurate and less expensive than the traditional face-to-face group meetings

Cons
There are some question marks: What is the value of the expert opinion?

What is the contribution of additional rounds and feedback to accuracy?

Trend Projection Method

The trend projection method involves (a) determining the trend of consumption by analyzing past consumption statistics and (b) projecting future consumption by extrapolating the trend. The most commonly applied is the linear relationship: Linear relationship : Yt = a + bt

To estimate a and b least squares method is used.

Exponential Smoothing Method

In exponential smoothing, forecasts are modified in the light of observed errors in the actual and forecasted sales. If the forecast value for year t, Ft , is less than the actual value for year t, St, the forecast for the year t+1, Ft+1, is set higher than Ft. If Ft> St , Ft+1 is set lower than Ft. In general Ft+1 = Ft + a et
Where

e t = St - Ft

where Ft + 1 = forecast for year t + 1 = smoothing parameter (which lies between 0 and 1) et = error in the forecast for year t = St - Ft St= actual sales for year t

Moving Average Method

As per the moving average method of sales forecasting, the forecast for the next period is equal to the average of the sales for several preceding periods. In symbols, St + St-1 + + St-n+1 Ft+1 = n Where, Ft+1 = forecast for the next period St = sales for the current period n = period over which averaging is done

Leading Indicator Method

Leading indicators are variables which change ahead of other variables, the lagging variables. Hence, observed changes in leading indicators may be used to predict the changes in lagging variables. For example, the change in the level of urbanization ( a leading indicator) may be used to predict the change in the demand for air conditioners (a lagging variable) Two basic steps are involved in using the leading indicator method: (i) First, identify the appropriate leading indicator(s).(ii) Second, establish the relationship between the leading indicator(s) and the variable to be forecast. The principal merit of this method is that it does not require a forecast of an explanatory variable. Its limitations are that it may be difficult to find appropriate leading indicator(s) and the lead-lag relationship may not be stable over time.

Bass Diffusion Model

Developed by Frank Bass, the Bass diffusion model seeks to estimate the pattern of sales growth for new products, in terms of two factors: p : The coefficient of innovation. It reflects the likelihood that a potential customer

would adopt the product because of its innovative features.

q : The coefficient of imitation. It reflects the tendency of a potential customer to buy the product because many others have bought it. It can be regarded as a network effect. According to a linear approximation of the model: nt = pN + ( q p ) nt-1 + ( q / N ) x ( nt-1 )2 where nt, is the sales in period t, p is the coefficient of innovation, N is the potential size of the market, q is the coefficient of imitation, and nt is the accumulative sales made until period.

Bass Diffusion Model

A new product has a potential market size of 1,000,000. There is an older product that is similar to the new product. p = 0.030 and q = 0.080 describe the industry sales of this older product. The sales trend of the new product is expected to be similar to the older product. Applying the Bass diffusion model, we get the following estimates of sales in year 2.

let, n1 = 30,000

n2 = 0.03 x 1,000,000 + (0.08 0.03) x 30,000 + (0.08 / 1,000,000) x (30,000)2

= 31,572