Group Members Roll No’s

Nidhi Jain 17

Nipul Jain 18

Sonal Jain 19

Vishaka Jain 20

Sujata Jena 21
 Acknowledgement

We are pleased to submit this project on “Demand Forecasting and its methods”
and would like to thank everyone who has been involved in the success of this
research work; more specifically we would like to acknowledge the following
people:

We would like to particularly like to thank our Professor Ms. Jyoti Mam for
granting us the opportunity to work on this project. The brainstorming sessions
with her gave us enormous information on the Adverse effects of reality shows
and her constant support also helped us a lot to acquire necessary equipments
from time to time.

We would like to express our gratitude towards Kishinchand Chellaram College

for approving our project and providing us with various facilities in the institute.

We would also like to thank the entire Teaching and Non-Teaching Staff for being
a strong backbone to us in time of need and providing us all the information
needed for the project.
Contents:

1. Introduction
2. Types of Demand forecasting
3. Factors of Demand Forecasting
4. STEPS IN DEMAND FORECASTING
5. Characteristics of Forecasts
6. METHODS OF FORECASTING
7. Techniques of demand forecasting
8. EXPERTS OPINION METHOD
9. Forecast Management
10. Conclusion
11. Bibliography
Introduction
Demand forecasting the art

Forecasting is the art and science of predicting future events for business.
Estimate of expected demand over a specified future period is called forecast
demand. A demand forecast is the prediction of what will happen to your
company's existing product sales. It would be best to determine the demand
forecast using a multi-functional approach. The inputs from sales and marketing,
finance, and production should be considered. The final demand forecast is the
consensus of all participating managers. You may also want to put up a Sales and
Operations Planning group composed of representatives from the different
departments that will be tasked to prepare the demand forecast. It 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.

Determination of the demand forecasts is done through the following steps:

• Determine the use of the forecast

• Select the items to be forecast

• Determine the time horizon of the forecast

• Select the forecasting model(s)

• Gather the data

• Make the forecast

• Validate and implement results

The time horizon of the forecast is classified as follows:

Description Forecast Horizon

Short-range Medium-range Long-range
Duration Usually less than 3 3 months to 3 years More than 3 years
months, maximum of
1 year
Applicability Job scheduling, Sales and production New product
worker assignments planning, budgeting development, facilities
planning

Types of Demand forecasting…

1. Short Term
2. Medium Term
3. Long Term

Factors of Demand Forecasting

1. Time period
2. Levels of forecasting
-- International level
-- Macro level
-- Industry level
-- Firm level
3. Purpose - General or Specific
4. Methods Of Forecasting
5. Nature Of Commodity
6. Nature Of Competition
Necessity for forecasting demand

Often forecasting demand is confused with forecasting sales. But, failing to

forecast demand ignores two important phenomena.

1. Stock effects

The effects that inventory levels have on sales. In the extreme case of stock-outs,
demand coming into your store is not converted to sales due to a lack of
availability. Demand is also untapped when sales for an item are decreased due to
a poor display location, or because the desired sizes are no longer available. For
example, when a consumer electronics retailer does not display a particular flat-
screen TV, sales for that model are typically lower than the sales for models on
display. And in fashion retailing, once the stock level of a particular sweater falls
to the point where standard sizes are no longer available, sales of that item are
diminished.

2. Market response effects

The effect of market events that are within and beyond a retailer's control.
Demand for an item will likely rise if a competitor increases the price or if you
promote the item in your weekly circular. The resulting sales increase reflects a
change in demand as a result of consumers responding to stimuli that potentially
drive additional sales. Regardless of the stimuli, these forces need to be factored
into planning and managed within the demand forecast.

How is demand forecast determined?

There are two approaches to determine demand forecast –

(1) the qualitative approach,

(2) the quantitative approach.

The comparison of these two approaches is shown below:

 Description Qualitative Approach Quantitative Approach
Applicability Used when situation is vague Used when situation is stable
& little data exist (e.g., new & historical data exist
products and technologies)
(e.g. existing products,
current technology)
Considerations Involves intuition and Involves mathematical
experience techniques
Techniques Jury of executive opinion Time series models

Sales force composite Causal models

Delphi method

Consumer market survey

Qualitative Forecasting Methods

Your company may wish to try any of the qualitative forecasting methods below if
you do not have historical data on your products' sales.
 Qualitative Method Description
Jury of executive The opinions of a small group of high-level
opinion managers are pooled and together they estimate
demand. The group uses their managerial
experience, and in some cases, combines the
results of statistical models.
Sales force composite Each salesperson (for example for a territorial
coverage) is asked to project their sales. Since the
salesperson is the one closest to the marketplace,
he has the capacity to know what the customer
wants. These projections are then combined at the
municipal, provincial and regional levels.
Delphi method A panel of experts is identified where an expert
could be a decision maker, an ordinary employee,
or an industry expert. Each of them will be asked
individually for their estimate of the demand. An
iterative process is conducted until the experts
have reached a consensus.
Consumer market The customers are asked about their purchasing
survey plans and their projected buying behavior. A large
number of respondents is needed here to be able
to generalize certain results.
Quantitative Forecasting Methods

There are two forecasting models here – (1) the time series model and (2) the
causal model. A time series is a s et of evenly spaced numerical data and is o
btained by observing responses at regular time periods. In the time series model ,
the forecast is based only on past values and assumes that factors that influence
the past, the present and the future sales of your products will continue.

On the other hand, t he causal model uses a mathematical technique known as

the regression analysis that relates a dependent variable (for example, demand)
to an independent variable (for example, price, advertisement, etc.) in the form of
a linear equation. The time series forecasting methods are described below:

Time Series Forecasting Description

Method

Naïve Approach Assumes that demand in the next period is the same as demand in most recent period;
demand pattern may not always be that stable

For example:

If July sales were 50, then Augusts sales will also be 50

Time Series Forecasting Description
Method

Moving Averages (MA) MA is a series of arithmetic means and is used if little or no trend is present in the
data; provides an overall impression of data over time

A simple moving average uses average demand for a fixed sequence of periods and is
good for stable demand with no pronounced behavioral patterns.

Equation:

F 4 = [D 1 + D2 + D3] / 4

F – forecast, D – Demand, No. – Period

(see illustrative example – simple moving average)

A weighted moving average adjusts the moving average method to reflect fluctuations
 more closely by assigning weights to the most recent data, meaning, that the older
data is usually less important. The weights are based on intuition and lie between 0
and 1 for a total of 1.0

Equation:

WMA 4 = (W) (D3) + (W) (D2) + (W) (D1)

WMA – Weighted moving average, W – Weight, D – Demand, No. – Period

(see illustrative example – weighted moving average)

Exponential Smoothing The exponential smoothing is an averaging method that reacts more strongly to
recent changes in demand by assigning a smoothing constant to the most recent data
more strongly; useful if recent changes in data are the results of actual change (e.g.,
seasonal pattern) instead of just random fluctuations

F t + 1 = a D t + (1 - a ) F t

Where

F t + 1 = the forecast for the next period

D t = actual demand in the present period

F t = the previously determined forecast for the present period

•  = a weighting factor referred to as the smoothing constant

(see illustrative example – exponential smoothing)

Time Series The time series decomposition adjusts the seasonality by multiplying the normal
Decomposition forecast by a seasonal factor

(see illustrative example – time series decomposition)

STEPS IN DEMAND FORECASTING
Demand or sales forecasting is a scientific exercise. It has to go through a number
of steps. At each step, you have to make critical considerations. Such
considerations are categorically listed below:

1) Nature of forecast: To begin with, you should be clear about the uses of
forecast data- how it is related to forward planning and corporate planning by the
firm. Depending upon its use, you have to choose the type of forecasts: short-run
or long-run, active or passive, conditional or non-conditional etc.

2) Nature of product: The next important consideration is the nature of product

for which you are attempting a demand forecast. You have to examine carefully
whether the product is consumer goods or producer goods, perishable or durable,
final or intermediate demand, new demand or replacement demand type etc. A
couple of examples may illustrate the importance of this factor. The demand for
intermediate goods like basic chemicals is derived from the final demand for
finished goods like detergents. While forecasting the demand for basic chemicals,
it becomes essential to analyze the nature of demand for detergents. Promoting
sales through advertising or price competition is much less important in the case
of intermediate goods compared to final goods. The elasticity of demand for
intermediate goods depends on their relative importance in the price of the final
product.

Time factor is a crucial determinant in demand forecasting. Perishable

commodities such as fresh vegetables and fruits can be sold over a limited period
of time. Here skilful demand forecasting is needed to avoid waste. If there are
storage facilities, then buyers can adjust their demand according to availability,
price and income. The time taken for such adjustment varies from product to
product. Goods of daily necessities that are bought more frequently will lead to
quicker adjustments. Whereas in case of expensive equipment which is worn out
and replaced after a long period of time, adaptation of demand will be spread
over a longer duration of time.
3) Determinants of demand: Once you have identified the nature of product for
which you are to build a forecast, your next task is to locate clearly the
determinants of demand for the product. Depending on the nature of product
and nature of forecasts, different determinants will assume different degree of
importance in different demand functions.

In the preceding unit, you have been exposed to a number of price-income factors
or determinants-own price, related price, own income-disposable and
discretionary, related income, advertisement, price expectation etc. In addition, it
is important to consider socio-psychological determinants, specially demographic,
sociological and psychological factors affecting demand. Without considering
these factors, long-run demand forecasting is not possible.

Such factors are particularly important for long-run active forecasts. The size of
population, the age-composition, the location of household unit, the sex-
composition-all these exercise influence on demand in. varying degrees. If more
babies are born, more will be the demand for toys; if more youngsters marry,
more will be the demand for furniture; if more old people survive, more will be
the demand for sticks. In the same way buyers’ psychology-his need, social status,
ego, demonstration effect etc. –also effect demand. While forecasting you cannot
neglect these factors.

4) Analysis of  factors &determinants: Identifying the determinants alone would

not do, their analysis is also important for demand forecasting. In an analysis of
statistical demand function, it is customary to classify the explanatory factors into
(a) trend factors, which affect demand over long-run, (b) cyclical factors whose
effects on demand are periodic in nature, (c) seasonal factors, which are a little
more certain compared to cyclical factors, because there is some regularly with
regard to their occurrence, and (d) random factors which create disturbance
because they are erratic in nature; their operation and effects are not very
orderly.

An analysis of factors is specially important depending upon whether it is the

aggregate demand in the economy or the industry’s demand or the company’s
demand or the consumers; demand which is being predicted. Also, for a long-run
demand forecast, trend factors are important; but for a short-run demand
forecast, cyclical and seasonal factors are important.

5) Choice of techniques: This is a very important step. You have to choose a

particular technique from among various techniques of demand forecasting.
Subsequently, you will be exposed to all such techniques, statistical or otherwise.
You will find that different techniques may be appropriate for forecasting demand
for different products depending upon their nature. In some cases, it may be
possible to use more than one technique. However, the choice of technique has
to be logical and appropriate; for it is a very critical choice. Much of the accuracy
and relevance of the forecast data depends accuracy required, reference period
of the forecast, complexity of the relationship postulated in the demand function,
available time for forecasting exercise, size of cost budget for the forecast etc.

6) Testing accuracy: This is the final step in demand forecasting. There are various
methods for testing statistical accuracy in a given forecast. Some of them are
simple and inexpensive, others quite complex and difficult. This stating is needed
to avoid/reduce the margin of error and thereby improve its validity for practical
decision-making purpose. Subsequently you will be exposed briefly to some of
these methods and their uses.

Characteristics of Forecasts

Forecasts are always wrong. Should include expected value and measure of error.

Long-term forecasts are less accurate than short-term forecasts (forecast horizon
is important)

Aggregate forecasts are more accurate than disaggregate forecasts

Determinants for Demand Forecasting

1. Capital goods – goods required for further production of goods

Demand for capital goods is derived demand

- Replacement demand

- New demand

Durable consumer goods — goods used continuously for a period of time

- Replacement demand

- New demand

Non-durable consumer goods — commodities which are used in a single act of

consumption

Demand for these goods is influenced by

- Disposable income of people

- Price of the commodity

- Size and characteristics of population

CRITERIA FOR GOOD DEMAND FORECASTING

Accuracy

Plausibility

Durability

Availability

Economy
Techniques of demand forecasting
Broadly speaking, there are two approaches to demand forecasting- one is
to obtain information about the likely purchase behavior of the buyer through
collecting expert’s opinion or by conducting interviews with consumers, the other
is to use past experience as a guide through a set of statistical techniques. Both
these methods rely on varying degrees of judgment. The first method is usually
found suitable for short-term forecasting, the latter for long-term forecasting.
There are specific techniques which fall under each of these broad methods.

EXPERTS OPINION METHOD

In this method, the experts on the particular product whose demand is
under study are requested to give their ‘opinion’ or ‘feel’ about the product.
These experts, dealing in the same or similar product, are able to predict the likely
sales of a given product in future periods under different conditions based on
their experience. If the number of such experts is large and their experience-
based reactions are different, then an average-simple or weighted –is found to
lead to unique forecasts. Sometimes this method is also called the ‘hunch
method’ but it replaces analysis by opinions and it can thus turn out to be highly
subjective in nature
ADVANTAGES of This Method

 can be undertaken easily without the use of elaborate statistical tools

 incorporates a variety of extensive opinions from experts in the field

LIMITATIONS of this method

 judgmental biases for ex:-

a) Availability heuristic

 involves using vivid or accessible events as a basis for the judgement

b) Law of small numbers

 people expect information obtained from a small sample to be typical of the

larger population

 competitive 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
METHODS OF FORECASTING
1. Survey method
2. Collective opinion and Delphi method

SURVEY METHOD: survey of buyer’s intentions, expert opinion method or Delphi

method, controlled experiments, simulated market situations. The most direct
method of estimating demand in the short-run is to ask customers what they are
planning to buy for the forthcoming time period – usually a year. This is very
useful when bulk of the sales is to industrial producers. Here the burden of
forecasting is shifted to the consumer.

In this method customers may tend to exaggerate their requirements. Customers

are numerous, making the method too laborious, impracticable and costly. This
method does not expose and measure variables under the management’s control.

DELPHI METHOD: This is a variant of the opinion poll or survey method. In Delphi
method, an attempt is made to arrive at a consensus of opinion. The participants
are supplied with responses to previous questions from others in the group by a
leader. The leader provides each expert with opportunity to react to the
information given by others including reasons advanced.
Advantages of Delphi Technique.

Delphi Technique:

 Is conducted in writing and does not require face-to-face meetings:

- responses can be made at the convenience of the participant;
- individuals from diverse backgrounds or from remote locations to work
together on the same problems;
- is relatively free of social pressure, personality influence, and individual
dominance and is, therefore, conducive to independent thinking and
gradual formulation of reliable judgments or forecasting of results;
- helps generate consensus or identify divergence of opinions among groups
hostile to each other;
 Helps keep attention directly on the issue:
 Allows a number of experts to be called upon to provide a broad range of
views,on which to base analysis—“two heads are better than one”:
- allows sharing of information and reasoning among participants;
- iteration enables participants to review, re-evaluate and revise all their
previous statements in light of comments made by their peers;
 Is inexpensive.

Disadvantages of Delphi Technique:

 Information comes from a selected group of people and may not be

representative;
 Tendency to eliminate extreme positions and force a middle-of-the-road
consensus;
 More time-consuming than group process methods;
 Requires skill in written communication;
 Requires adequate time and participant commitment.
C. Collective opinion method or opinion survey method
This is a variant of the survey method. This method is also known as “Sales – force
polling” or “Opinion poll method”. Under this method, sales representatives,
professional experts and the market consultants and others are asked to
express their considered opinions about the volume of sales expected in the
future. The logic and reasoning behind the method is that these salesmen and
other people connected with the sales department are directly involved in the
marketing and selling of the products in different regions. Salesmen, being very
close to the customers, will be in a position to know and feel the customer’s
reactions towards the product. They can study the pulse of the people and
identify the specific views of the customers. These people are quite capable of
estimating the likely demand for the products with the help of their intimate and
friendly contact with the customers and their personal judgments based on the
past experience. Thus, they provide approximate, if not accurate estimates. Then,
the views of all salesmen are aggregated to get the overall probable demand for a
product. Further, these opinions or estimates collected from the various experts
are considered, consolidated and reviewed by the top executives to eliminate the
bias or optimism and pessimism of different salesmen. These revised estimates
are further examined in the light of factors like proposed change in selling prices,
product designs and advertisement programs, expected changes in the degree of
competition, income distribution, population etc. The final sales forecast would
emerge after these factors have been taken into account. This method heavily
depends on the collective wisdom of salesmen, departmental heads and the top
executives. It is simple, less expensive and useful for short run forecasting
particularly in case of new products. The main drawback is that it is subjective and
depends on the intelligence and awareness of the salesmen. It cannot be relied
upon for long term business planning.
Forecast Management
Forecast Management done right leads to Supply Chain Success. Just ask our
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Management opens up a whole new world for supply chain management - better
demand planning, improved inventory planning and, ultimately, increased
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rely on us for forecast management solutions based on logical, understandable
and highly effective formulas.

With improved inventory planning, you achieve that balance between inventory
investment and optimal customer service levels- leading to efficient supply chain
management and enhanced profitability.

A Structured Approach to Forecasting

Many companies still view quantitative forecasting methods as a "black box" or

unknown approach that adds little value to improving overall demand forecast
accuracy. Fortunately, there is a new awareness emerging across many industries
of the value of integrating demand data into the demand forecasting process.

Equipping you with solutions that can sense, shape, and predict demand using
highly sophisticated methods and tools, internationally renowned author and
thought leader Charles Chase provides you with a basic understanding of the
methods and processes required to implement a demand-driven forecasting
process in Demand-Driven Forecasting: A Structured Approach to Forecasting.

From a review of the most basic forecasting methods, to the most advanced time-
series methods, and innovative techniques in use today, this guide defines
demand-driven forecasting, uniquely offering a fundamental understanding of the
quantitative methods used to sense, shape, and predict demand within a
structured process.

A must-read for CEOs, CMOs, CFOs, supply chain managers, sales managers,
marketing brand managers, and demand forecasting analysts, Demand-Driven
Forecasting: A Structured Approach to Forecasting covers:

 Myths versus realities of forecasting

 Causes of forecast error
 Purposes for measuring forecasting performance
 Forecasting methods using causal data
 Sensing, shaping, and linking demand to supply
 Combining analytics and domain knowledge in a structured framework

As a forecast practitioner, it's up to you to demonstrate the value of analytics to

senior-level managers. Filled with real-life examples to build a business case for
the justification of demand-driven forecasting, Demand-Driven Forecasting: A
Structured Approach to Forecasting is your detailed blueprint to better
understand this new structured approach and add significant improvement to
demand forecast accuracy.

Importance of demand forecasting

Why demand forecasting is needed? To be able to understand this general

question you could first answer the following sub-question: Which purposes in
manufacturing company the demand forecast serves?

Use this figure of Porter value chain as a source for your ideas.
The other approach to this general question is to go to through the following
logistics activities list and to realize the relationships between different activities.
Especially, pay attention to the role of demand forecasting.

Activities included in logistics management:

1. customer service

2. order processing

3. distribution communications

4. inventory control

5. demand forecasting

6. traffic and transport

7. warehousing

8. plant and warehouse site selection

9. material handling

10. purchasing

11. parts and service support

12. packaging
13. salvage and scrap disposal

14. return goods handling

Trend Analysis

This method falls under the category of the non-causal models of demand
forecasting that do not explain how the values of the variable being projected and
determined. Here, we express the variable to be predicted purely as a function of
time, rather than by relating it to other economic, demographic, policy and
technology variables. This function of time is obtained as the function that best
explains the available data, and is observed to be most suitable for short term
projections.

Forecasting of demand using this method is popular due to the ease of use and
simplicity of the method. Historical data for the variable under study is collected
and the same pattern is assumed to continue in future. The disadvantage of this
method is that economic and demographic, energy efficient technology factors
are not taken in to account.
Conclusion

The demand forecasting and its methods helps in Planning and scheduling
production , budgeting of costs and sales revenue , controlling inventories
making policies for long term investment , helps in achieving targets of the firm

Bibliography

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