Professional Documents
Culture Documents
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
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
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.
“QUANTITATIVE
METHODS”
TIME SERIES MODELS
TREND ANALYSIS
Past data is used to make future
predictions .
Known or Independent variables are
used for predicting Unknown or
dependent variables, using the trend
equation- “ Predictive analysis”
Based on trend equation, we find
‘Line of Best Fit’ and then it is
projected in a scatter diagram,
dividing points equally on both sides
TREND EQUATION
Y^ = a + bX + E
Y^ = Estimated value of Y
a = Constant or Intercept
b = slope of trend line
X = independent variable
E = Error term
= EXPLAINED VARIATION
= UNEXPLAINED VARIATION
1-
Explained variation - means the
extent to which the independent
variable explains the relative
change in the dependent variable.
Higher the explained variation,
lower the error value leading to
accurate forecast
MOVING AVERAGE METHOD
Data from a number of consecutive
past periods is combined to provide
forecast for coming periods.Higher
the amount of previous data, better
is the forecast.
Since the averages are calculated
on a moving basis, the seasonal and
cyclical variations are smoothened
out.
EXPONENTIAL SMOOTHING
Used in cases where the variable
under forecast doesn’t follow a
trend.
2 Types- Simple and Weighted
Simple smoothing- simple average of
specific observation called order.
Weighted smoothing- weights
assigned in decreasing order as
one moves from current period
observations to previous
observations.
The equation for exponential
smoothing follows a Geometric
Progression.Values may be written as-
to the observation
a(1-a) = weight assigned to 1 period
previous observation
a(1-a)^2 = weight assigned to 2
periods previous observation
Sum of all weights always equals Unity.
CASUAL MODELS
REGRESSION MODEL
Y = α x
Where
Y= value being forecasted
xx
= constant value
= coefficients of regression
x = independent variable
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