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What is Forecasting

What is Forecasting

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08/15/2011

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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 ³ 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

End use

Sample survey

delphi

Least square

Time series

Exponential 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 predetermined period in weeks, months & years etc.

SIMPLE MOVING AVERAGE
‡ Forecast Ft is average of n previous observations or actuals Dt :

Ft 1 Ft 1

1 ( Dt  Dt 1  . ! n t 1 D ! §n i n i !t 1 

Dt 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

weight

EXPONENTIAL SMOOTHING ‡ Include all past observations ‡ .‡ Weight recent observations much more heavily than very old observations:
Decreasing weight given to older observations

today

EXPONENTIAL SMOOTHING
‡ Include all past observations ‡ .‡ Weight recent observations much more heavily than very old 0 E 1 weight observations:
Decreasing weight given to older observations

E

today

EXPONENTIAL SMOOTHING: CONCEPT
‡ Include all past observations ‡ Weight recent observations much more heavily than very old 0 E 1 observations:
Decreasing weight given to older observations

weight

E E(1 E) E(1 E) 2 E(1 E)
today
3

/

EXPONENTIAL SMOOTHING: MATH
µ ‡ .

Ft ! aDt  a (1  a ) Dt 1  a (1  a ) Dt 2  . Ft ! aDt  (1  a ) Ft 1

2

‡ 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: E < 0.5 ± Typically, E = 0.2 or E = 0.3 work well ‡ Forecast for k periods into future is:

Ft  k ! Ft

THANK YOU

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