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demand_forecasting_final

demand_forecasting_final

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DEMAND FORECASTING

DEMAND FORECASTING
Demand forecasting refers to the prediction or estimation of a future situation under given constraints. TYPES OF FORECASTING: 1. Short Term 2. Medium Term 3. Long Term

2. Helping for continuous production Regular supply of commodities Formulation of price policy Arrangement of finance Labor requirement . 3. 5. 4.OBJECTIVES OF DEMAND FORECASTING 1.

Industry level -.International level -. Nature Of Competition . Purpose .FACTORS INVOLVED IN DEMAND FORECASTING 1. Methods Of Forecasting 5.Macro level -. Nature Of Commodity 6.Firm level 3. Time period 2.General or Specific 4. Levels of forecasting -.

Price of the commodity . Capital goods goods required for further production of goods Demand for capital goods is derived demand .Size and characteristics of population .Disposable income of people . Non-durable consumer goods commodities which are used in a single act of consumption Demand for these goods is influenced by .Replacement demand .New demand goods used continuously for a period of time 2.Replacement demand .New demand Durable consumer goods .DETERMINANTS FOR DEMAND FORECASTING 1. 3.

5.CRITERIA FOR GOOD DEMAND FORECASTING 1. 3. 4. 2. Accuracy Plausibility Durability Availability Economy .

Moving averages method 3.Expert opinion method or Delphi Method 3.Survey of buyer s intentions STATISTICAL METHOD 1.Controlled Experiments 4.METHODS OF FORECASTING SURVEY METHOD 1.Regression analysis 4.Barometric method .Trend projection method 2.Simulated market situations 2.

SURVEY OF BUYER S INTENTIONS ‡ Least sophisticated method ‡ Customers are directly contacted to find out their intentions to buy commodities in the near future ‡ Intentions recorded through personal interviews. ‡ Two types of Consumer Survey ± Complete enumeration Method ± Sample survey Method . mail or post service.telephone interviews and questionnaires.

. and a final report is compiled with the combined consensus of the experts.DELPHI METHOD ‡ The forecasters are given the forecasts and assumptions of other experts.

. Only one determinant varied .MARKET SURVEY METHOD ‡ CONTROLLED EXPERIMENTS Different determinants of demand are varied and price quantity relationships are established at different points of time in the same market or different markets. ‡ SIMULATED MARKET SITUATION An artificial market situation is created and consumer clinics selected. Consumers are asked to spend time in an artificial departmental store and different prices are set for different buyer groups. others kept constant. The responses to the price changes are observed and necessary decisions taken.

TREND PROJECTION METHOD ‡ Based on analysis of past sales patterns ‡ Shows effective demand for the product for a specified time period ‡ The trend can be estimated by using the Least Square Method .

The data for the last five years is as follows: YEARS 1996 1997 1998 1999 2000 SALES IN Rs.LAKHS 45 52 48 55 60 .A producer of soaps decides to forecast the next years sales of his product.

The data is plotted on a graph: .

‡ The equation for the straight line trend is Y = a + bx a-intercept b-shows impact of independent variable The Y intercept and the slope of the line are found by making substitutions in the following normal equations: Y = na + b x XY = a x + b x2 .

1 .YEARS 1996 1997 1998 1999 2000 N=5 SALES Rs. b = 3.3 .3) 813=15a + 55b (Eq.4) solving the two equations. a = 42. LAKHS (Y) 45 52 48 55 60 Y=260 X 1 2 3 4 5 X=15 X2 1 4 9 16 25 X2=55 XY 45 104 144 220 300 XY=813 Substituting the above values in the normal equations: 260=5a +15b (Eq.

4 48.9 lakhs.1+3.3X Using this equation we can find the trend values for the previous years and estimate the sales for the year 2001 as follows: Y 1996 Y 1997 Y 1998 Y 1999 Y 2000 Y 2001 = = = = = = 42.1+3.1 + 3.3(5) 42.3(2) 42.1+3.1+3. the forecast sales for year 2001 is Rs.3(1) 42.7 52.3(3) 42.9 Thus.61.Therefore.3(6) = = = = = = 45.0 55.3 58.1+3.6 61.3(4) 42.1+3. the equation for the straight line trend is Y=42. .

MOVING AVERAGES METHOD Moving averages method can be used when the forecast period is either odd or even. YEAR SALES IN Rs. We have to find out the trend of the sales using (1) 3 yearly moving averages and (2) 4 yearly moving averages and forecast the value for 2005.LAKHS 1993 12 15 14 16 18 17 19 20 22 25 24 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 These are the annual sales of goods during the period of 1993-2003. .

3 71/3 = 23.7 - 1993 94 95 96 97 98 99 2000 01 02 03 . LAKHS) 12 15 14 16 18 17 19 20 22 25 24 3 YEARLY 3 YEARLY MOVING TOTAL MOVING AVG. TREND VALUES 41 45 48 51 54 56 61 67 71 41/3= 13.7 61/3 = 20.3 yearly period: The value of 1993 + 1994 +1995 12 +15+14 = 41 written at the capital period 1994 of the years 1993.7 45/3= 15 48/3 =16 51/3 =17 54/3 = 18 56/3 = 18.2 67/3 = 22. 1994 and 1995 YEAR SALES (Rs.

9 144/8 = 18 152/8 = 19 164/8 = 20.5 177/8 = 22. TREND VALUES 93 94 95 96 97 98 99 00 01 02 03 12 15 14 16 18 17 19 20 22 25 24 57 63 65 70 74 78 86 91 - 120 128 135 144 152 164 177 - 120/8 = 15 128/8 = 16 135/8 = 16. 128 = 16 +65 and so on.1 - 57 = 93 + 94 + 95 + 96 = 12 + 15 + 14 + 16 120= 57 +63. SALES (Rs.4 YEARLY MOVING AVERAGES YEAR. 120 is total of 8 years and so the avg. LAKHS) 4 YEARLY MOVING TOTAL MOVING TOTAL OF PAIRS OF YEARLY TOTAL 4 YEARLY MOVING AVG. is calculated by dividing 120 by 8 .

The trend values from the previous tables can be plotted on a graph as follows: .

(iii) Product of time deviation and sales. CRORE) (y) TIME DEVIATION FROM MIDDLE YEAR 2000 (x) TD SQUARED (x2) PRODUCT OF TIME DEVIATION & SALES(xy) 98 99 00 01 02 X=5 240 280 240 300 340 y = 1400 -2 -1 0 +1 +2 x=0 4 1 0 1 4 x2 = 10 -480 -280 0 +300 +680 xy = 220 . 05.REGRESSION METHOD Method of Least Squares YEAR 1998 1999 2000 2001 2002 SALES (Rs. In crores) 240 280 240 300 340 From the above data we can project the sales for 03. First we calculate the required values which are (i) Time Deviation. YEAR (n) SALES (RS. 04. (ii) Deviation Squares.

sales projection from 2003-2005 can be ascertained. applying values to the regression equation.368 crores 2005 = 280 + 22 (5) = Rs. Y = 280 + 22x Hence. 2003 = 280 + 22(3) = Rs.346 crores 2004 = 280 + 22(4) = Rs.The equation is Y = a + bx a independent variable b exhibits rate of growth a & b can be found out as follows: a = y / n = 1400 / 5 = 280 b = xy / x2 = 220/10 = 22 Now.390 crores .

Method of Simple linear Regression The linear trend can be fitted in the equation Sales = a + b (Price) i. S = a + bP where in.e. b = n Si Pi. a and b are constants.b n Pi .( Si)( Pi) n Pi2 ( Pi) 2 a = Si .

30 YEAR PRICE (Pi) SALES (Si) in 1000 units 81 15 52 82 15 46 83 12 38 84 26 37 85 18 37 86 12 37 87 8 34 88 38 25 89 26 22 90 19 22 91 29 20 92 22 14 .g. fit a linear regression line to the following data & estimate the demand at price Rs.e.

To find the values of a and b the following table is constituted: Pi 15 15 12 26 18 12 8 38 26 19 29 22 Pi = 240 Si 52 46 38 37 37 37 34 25 22 22 20 14 Si = 384 Pi2 225 225 144 676 324 144 64 1444 676 361 841 484 Pi2 = 5708 Si2 2704 2116 1444 1369 1369 1369 1156 625 484 484 400 196 Si2 = 13716 Si Pi 780 690 456 962 666 444 272 950 572 418 580 308 Si Pi = 7098 .

82 .( Si)( Pi) = 12(7098)-(240)(384) = 0. The corresponding sales level is S = 44.82 0.641)] = 44.641P By assigning value 30 to P.b Pi = [384-(240)(-0.0.641 (30) = 25.82 n 12 Thus the regression line is S= 44.29 thousand units .641 2 n Pi2 ( Pi) 2 12 (5708)-(240) a = Si .b = n Si Pi.

BAROMETRIC METHOD ‡ Improvement over trend projection method ‡ Events of the present are used to predict future demand ‡ Basic approach.constructing an index of relevant economic indicators  Leading indicators  Coincident indicators  Diffusion indices .

IMPORTANCE OF DEMAND FORECASTING ‡ ‡ ‡ ‡ ‡ 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 .

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