DEMAND FORECASTING

Shobhit Kumar
 WHAT IS
FORECASTING?
FORECASTING consists of a variety of processes for identifying
what possible futures could happen.

Acc. To Henry Fayol “ Both to assess the future and make

provision for it, that is forecasting it self action already”.

 In terms of Marketing : it is concerned with the sales forecast is

an estimate of the amount of unit sales for a specified future
period under the proposed marketing plan or program.
DEMAND FORECASTING
 Forecasting of demand is
the art of predicting demand
for a product or service at
some future date on the basis
of certain present and past
behaviour patterns of some
related events.
 OBJECTIVE
Of
Forecasting

1.Short Term Objectives 2.Long Term Objectives

 Periods of Forecasting

Depending upon the period the forecast can

be termed as:
 Short Range Forecasting
 Medium Range Forecasting
 Long range Forecasting
 Periods Of Forecasting
1.Long Range Planning
 Normal Period used is Generally 5 Years.
 It may Extents from 10 to 15 Years.
 Here much importance is given to Long-range growth factors.

Purpose of Long Range Planning

 To work out expected capital expenditure for future development.
 To determine the expected cash flow from sales.
 Plan for future manpower requirements.
 To plan for the raw material.
 Plan for Research & Development.
 Periods Of Forecasting
2.Medium Range Planning
 In Medium Range Forecasting the period may extent over 1 or 2
years.

Purpose of Medium Range Planning

 To determine budgetary control over expenses.
 To determine the dividend policy.
 To find and control maintenance expenses.
 To determine the schedule operations.
 To plan for the capacity adjustments.
 Periods Of Forecasting
3.Short Range Planning
In case of Short Term Forecasting extents from few weeks to three or
six months.

Purpose of Medium Range Planning

Estimate inventory requirements
To provide transport facilities for finished goods.
To decide work load for man and machines.
To find the working capital needed
Finding the required overtime to meet the delivery promises.
Setting up the production run for the products.
 SHORT TERM OBJECTIVES

1.FORMULATION OF PRODUCTION POLICY : Demand forecasts help

in formulating suitable production policy.

(a) Regular supply of material : Determination of desired volume of

production on the basis of demand forecasts, evaluate raw material
requirement in future so as to ensure regular and continuous supply of
material as well as controlling the size of inventory at economic level.

(b) Maximum utilization of machine : The operations can be so planned

that the machines are utilized to its maximum capacity.

(c) Regular availability of labor : Skilled and unskilled workers can be

properly arranged to meet the production schedule requirement.
 SHORT TERM OBJECTIVES (Contd.)

2 .PRICE POLICY FORMATION: Sales forecast enables the

management to formulate some appropriate pricing mechanism, so
that the level of price does not fluctuate too much in the periods of
inflation.
3.PROPER CONTROL OF SALES: Sale forecast are calculated
region wise and then the sales targets for various territories are
fixed.
4.ARRANGEMENT OF FINANCE: determine the financial
requirements of the enterprise for the production of desired output .
This can lead to minimize the cost of procuring finance.
 LONG TERM OBJECTIVE

1.To decide about the production capacity.

- Plant size should be such that conforms to sale requirement.
- Too small or too large plant size may not be in the economic interest of the enterprise.
-Analyze demand pattern of the product & the forecast for future the enterprise can plan for
the plant or output of the desired capacity.
2.Labor Requirements.
-Expenditure on labor is one of the most important component in the cost of production
-Reliable and accurate demand forecasts can ensure the best labor facility and no hindrances
in production process.
3.Long term production planning can help the management to arrange for long
term finances.
- Long term production planning can help the management to arrange the long term finances.
-Long term forecasting helps management to take policy decisions and if any error committed
in this may be difficult and expensive to rectify.

Thus the overall success of an enterprise mainly depends on the quality and reliability of
demand forecasting.
 FORECASTING:
NEEDS AND USES
• Scheduling existing resources
– How many employees do we need and when?
– How much product should we make in anticipation
of demand?
• Acquiring additional resources
– When are we going to run out of capacity?
– How many more people will we need?
– How large will our back-orders be?
• Determining what resources are needed
– What kind of machines will we require?
– Which services are growing in demand? declining?
– What kind of people should we be hiring?
 BENEFITS:
– Aids decision making.
– Informs planning and resource allocation
decisions.
– Evaluating the performance of sales
department.
– Have finished goods of right quality & quantity
at right time with minimum cost.
 BEFORE YOU FORECAST
Key questions which must be answered
before making a forecast:
 what is the purpose of the forecast?
 what specifically do we wish to forecast?
 how important is the past in predicting the
future?
 what method or methods will be used to
make the forecast?
 What could change the forecast?
 techniques of demand forecasting

Survey methods Statistical method

Consumer survey Expert opinion Trend

projection
Regression method

econometric
Sample
End use delphi
survey

Least square Exponential

Time series
smoothing
Moving average
 FORESIGHT
 FORECASTING
1. A method for translating past experience
into estimates of the future.
2. A method for analyzing future possibilities to
develop strategies to plan for more desirable
futures.

• The future is malleable.

• It is not preordained.
• Many possibilities exist for any future time period.
• The future can be changed.
 DELPHI METHOD
Under the Delphi method the experts are provided information on estimates of forecasts of other experts along with the underlying assumptions. The experts may revise their own estimates in the light of forecasts made by other experts. The consensus of experts about the
forecasts constitutes the final forecast.
This method is used to consolidate the divergent expert opinions and to arrive at a compromise estimate of future demand.
 ADVANTAGE
• It is simple to conduct .
• Used where quantitative data is not
possible.
• Forecast is reliable.
• It is inexpensive.
• It takes little time.
 DISADVANTAGES
• The expert may be biased.
• The result are based on mere hunch of one or
more persons and not on scientific analysis.
• The method is subjective and the forecast could
be unfavorably influenced by persons with vested
interest.
 CONSUMER SURVEY
METHOD
• Surveys are conducted to collect
information about future purchase
plans of the probable buyers of the
product.
(a) COMPLETE ENUMERATION
SURVEY- The firm has to go for a door to
door survey for the forecast period by
contacting all the households in the area.
 ADVANTAGES
• It is simple to use.
• It is not affected by personal biases.
• Based on collected data.
 DISADVANTAGES

• It is costly.
• It is time consuming.
• Difficult and practically impossible to
survey all the consumers.
• Useful only for products with limited
consumers.
MOVING AVERAGE METHOD
A moving average is an average of some fixed or
pre-determined number of observations which
moves through the series by dropping the top
item of the previous averaged group and adding
the next item. This method can be used to
determine the trend values for given data without
going into complex mathematical calculations.
Calculations are based on pre-determined
period in weeks, months & years etc.
 SIMPLE MOVING AVERAGE
• Forecast Ft is average of n previous observations or
actuals Dt :
1
Ft 1  ( Dt  Dt 1    Dt 1 n )
n
t
1
Ft 1   Di
n i t 1 n
• Note that the n past observations are equally weighted.
• Issues with moving average forecasts:
– All n past observations treated equally;
– Observations older than n are not included at all;
– Requires that n past observations be retained;
– Problem when 1000's of items are being forecast.
 SIMPLE MOVING
AVERAGE
• Include n most recent observations
• Weight equally
• Ignore older observations

weight

1/n

n ... 3 2 1
today
 EXPONENTIAL SMOOTHING
• Include all past observations
• .• Weight recent observations much more
heavily than very old observations:

weight

Decreasing weight given

to older observations

today
 EXPONENTIAL
SMOOTHING
• Include all past observations
• .• Weight recent observations much more
heavily than very old observations:
0  1
weight
Decreasing weight given 
to older observations

today
 EXPONENTIAL
SMOOTHING: CONCEPT
• Include all past observations
• Weight recent observations much more heavily than very old observations:

0  1
weight
Decreasing weight given 
to older observations
 (1   )
 (1   ) 2

 (1   ) 3

today 
 EXPONENTIAL ‘

SMOOTHING: MATH
• .
Ft  aDt  a (1  a ) Dt 1  a (1  a ) 2 Dt 2  
Ft  aDt  (1  a ) Ft 1
• Thus, new forecast is weighted sum of old forecast and actual demand

• Notes:
– Only 2 values (Dt and Ft-1 ) are required, compared with n for moving
average
– Parameter a determined empirically (whatever works best)
– Rule of thumb:  < 0.5
– Typically,  = 0.2 or  = 0.3 work well
• Forecast for k periods into future is:
Ft  k  Ft