Demand Forecasting

SO
WHAT

“IS”

DEMAND

FORECASTING?
Forecasting customer demand for products
and services is a proactive process of
determining what products are needed
where, when, and in what quantities.
Consequently, demand forecasting is a
customer–focused activity.
Demand forecasting is also the foundation
of a company’s entire logistics process. It
supports other planning activities such as
capacity planning, inventory planning, and
even overall business planning.
 Characteristics of demand
5 main characters of demand are-
Average
Demand tends to cluster around a specific level.
Trend
Demand consistently increases or decreases over time.
Seasonality
Demand shows peaks and valleys at consistent intervals. These
intervals can be hours, days, weeks, months, years, or seasons.
Cyclicity
Demand gradually increases and decreases over an extended period
of time, such as years. Business cycles (recession/expansion)
product life cycles influence this component of demand.
Elasticity
Degree of responsiveness of demand to a corresponding
proportionate change in factors effecting it.
 TYPES OF FORECASTS
PASSIVE FORECASTS
Where the factors being forecasted
are assumed to be constant over a
period of time and changes are
ignored.
ACTIVE FORECASTS
Where factors being forecasted are
taken as flexible and are subject
to changes.
 Why Study forecasting?
Reduces future uncertainties, helps study markets

that are dynamic, volatile and competitive

Allows operating levels to be set to respond to

Allows
demand managers to
variations plan personnel, operations of
purchasing & finance for better control over wastes
inefficiency and conflicts.
Inventory Control-reduces reserves of slack resources

to meet uncertain demand

Effective forecasting builds stability in operations.
Setting Sales Targets, Pricing policies, establishing
controls and incentives
How?
THE FORECAST

Step 6 Monitor the

forecast

Step 5 Prepare the

forecast

Step 4 Gather and analyze

data

Step 3 Select a forecasting

technique
 LEVELS OF
FORECASTING
AT FIRMS LEVEL

AT INDUSTRY LEVEL

AT TOTAL MARKET LEVEL

KEY FACTORS FOR SELECTING A RIGHT METHOD
TIME PERIOD
SHORT TERM
3-6 Months, Operating Decisions,
E.g- Production planning
MEDIUM TERM
6 months-2 years, Tactical Decision
E.g.- Employment changes
LONG TERM
Above 2 years, Strategic Decision
E.g.- Research and Development
 DATA REQUIREMENTS
Techniques differ by virtue of how
much data is required to successfully
employ the technique.
Judgmental techniques require little or
no data whereas methods such as
Time series analysis or Regression
models require a large amount of past
or historical data.
 PURPOSE OF STUDY

It means the extent of explanation

required from the study. Some
techniques are based purely on
the pattern of past data and may
do quite well at forecasting,
whereas many a times these are
not useful by themselves since it
is difficult to explain the causal
factors underlying the forecast.
 PATTERN OF DATA STUDIED
The pattern of historical data is
an important factor to consider.
Though most of the times, the
major pattern is that of a trend,
there are also cyclic and seasonal
patterns in the data. Certain
techniques are best suited for
capturing the different patterns in
the data. Regression methods
incorporates all these variations
in data whereas trend analysis
SO ,WE KNOW WHAT IT’S ALL
ABOUT!!!
NOW LETS ANALYSE THE
METHODS OF
DEMAND
FORECASTING.
 2 MAIN CATEGORIES
MICROECONOMIC METHODS
(QUANTITATIVE)
- involves the prediction of activity of particular firms,
branded products, commodities, markets, and industries.
- are much more reliable than macroeconomic methods
because the dimensionality of factors is lower and often can
easily be incorporated into a model.
MACROECONOMIC METHODS
(QUALITATIVE)
- involves the prediction of economic aggregates such as
inflation, unemployment, GDP growth, short-term interest
rates, and trade flows.
- is very difficult because of the complex interdependencies in
the overall economic factors
QUALITATIVE METHODS
- SURVEY OF BUYERS INTENSIONS
- EXPERTS OPINION METHOD
- DELPHI METHOD
- MARKET EXPERIMENTATION METHOD
- COLLECTIVE OPINIONS METHOD
QUANTITATIVE METHODS
- TIME SERIES MODELS
- TREND ANALYSIS
- MOVING AVERAGES METHODS
- EXPONENTIAL SMOOTHING
- CAUSAL MODELS
- REGRESSION MODELS
 BUYERS INTENSION SURVEY
FEATURES

EMPLOYS SAMPLE SURVEY TECHNIQUES

FOR GATHERING DATA.
DATA IS COLLECTED FROM END USERS OF
GOODS - CONSUMER, PRODUCER,MIXED.
DATA PORTRAYS BIASES AND PREFERENCES
OF CUSTOMERS.
IDEAL FOR SHORT AND MEDIUM TERM
DEMAND FORECASTING, IS COST EFFECTIVE
AND RELIABLE.
ADVANTAGES
HELPS IN APPROXIMATING FUTURE
REQUIREMENTS EVEN WITHOUT
PAST DATA.
ACCURATE METHOD AS BUYERS
NEEDS AND WANTS ARE CLEARLY
IDENTIFIED & CATERED TO.
MOST EFFECTIVE WAY OF
ASSESSING DEMAND FOR NEW
FIRMS
LIMITATIONS
People may not know what
they are going to purchase
They may report what they
want to buy, but not what
they are capable of buying
Customers may not want to
disclose real information
Effects of derived demand
may make forecasting difficult
 EXPERTS OPINION METHOD
FEATURES

PANEL OF EXPERTS IN SAME FIELD WITH

EXPERIENCE & WORKING KNOWLEDGE.
COMBINES INPUT FROM KEY
INFORMATION SOURCES.
EXCHANGE OF IDEAS AND CLAIMS.
FINAL DECISION IS BASED ON MAJORITY
OR CONSENSUS, REACHED FROM
EXPERT’S FORECASTS
ADVANTAGES
CAN BE UNDERTAKEN EASILY
WITHOUT THE USE OF ELABORATE
STATISTICAL TOOLS.

INCORPORATES A VARIETY OF
EXTENSIVE OPINIONS FROM EXPERT
IN THE FIELD.
LIMITATIONS
JUDGEMENTAL BIASES
FOR EXAMPLE
Availability heuristic
Involves using vivid or accessible events
as a basis for the judgment.
Law of small numbers
People expect information obtained
from a small sample to be typical of
the larger population
COMPETATIVE BIASES
Over reliance on personal
opinions.
Possibility of undue influence in
certain cases.

STATISTICAL INADEQUACY
Lack of statistical and quantifiable
data or figures to substantiate the
forecasts made.
 DELPHI METHOD
PANEL OF EXPERTS IS SELECTED.
ONE CO-ORDINATOR IS CHOSEN BY
MEMBERS OF THE JURY
ANONYMOUS FORECASTS ARE MADE
BY EXPERTS BASED ON A COMMON
QUESTIONNAIRE.
CO-ORDINATOR RENDERS AN
AVERAGE OF ALL FORECASTS MADE
TO EACH OF THE MEMBERS.
3 CONSEQUENCES- DIVERSION,
CONSENSUS OR NO AGREEMENT.

2 TO 3 CYCLES ARE UNDERTAKEN.

CONVERGENCE AND DIVERSION IS

ACCEPTABLE.

FORECASTS ARE REVISED UNTIL

A CONSENSUS IS REACHED BY ALL.
ADVANTAGES
ELIMINATES NEED FOR GROUP
MEETINGS.

ELIMINATES BIASES IN GROUP

MEETINGS

PARTICIPANTS CAN CHANGE

THEIR OPINIONS ANONYMOUSLY.
LIMITATIONS

TIME CONSUMING
-REACHING
A CONSENSUS TAKES A LOT
OF TIME.

PARTICIPANTS MAY DROP

OUT.
MARKET EXPERIMENTATION
INVOLVES ACTUAL EXPERIMENTS &
SIMULATIONS.
COUPONS ARE ISSUED TO FEW SELECT
CUSTOMERS.
SELECTED CUSTOMERS PURCHASE THE
PRODUCTS.
PROXIMITY WITH CONSUMERS MAKES
INFORMATION COLLECTED RELIABLE.
INFORMATION FROM INTERACTIONS BETWEEN
SALES PERSONNEL & CUSTOMERS IS USED
FOR FORECASTING.
BEST USED IF SALES PERSONNEL ARE HIGHLY
SPECIALISED AND WELL TRAINED.
ADVANTAGES
USES KNOWLEDGE OF THOSE
CLOSEST TO THE MARKET.

HELPS ESTIMATING ACTUAL

POTENTIAL
FOR FUTURE SALES.

PROVIDES FEEDBACK FOR

IMPROVING CUSTOMIZING &
OFFERING MADE TO
COLLECTIVE OPINIONS METHOD
OPINIONS FROM MARKETING &
SALES SPECIALISTS ARE COMPILED.
2 TYPES OF TARGETS ESTIMATED-
AMBITIOUS TARGETS.
CONSERVATIVE TARGETS.
COMBINES EXPERTISE OF HIGHER
LEVEL MANAGEMENT & SALES
EXECUTIVES.
LIMITATIONS
POWER STRUGGLES MAY OCCUR
BETWEEN SPECIALISTS.
CONSENSUS MAY NOT BE
REACHED IN GOOD TIME.
DIFFERENCES AND PREJUDICES
IN OPINIONS MAY ALSO EXIST.
BENEFITS OF EFFECTIVE DEMAND
FORECASTING
HIGHER REVENUES
SALES MAXIMIZATION
REDUCED INVESTMENTS FOR SAFETY
STOCKS
IMPROVED PRODUCTION PLANNING
EARLY RECOGNITION OF MARKET TRENDS
BETTER MARKET POSITIONING
IMPROVED CUSTOMER SERVICE LEVELS