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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. 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 Short-range Duration Forecast Horizon Medium-range Long-range More than 3 years Usually less than 3 3 months to 3 years months, maximum of 1 year Job scheduling, worker assignments
Sales and production New product planning, budgeting development, facilities planning
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:
The group uses their managerial experience. A large number of respondents is needed here to be able to generalize certain results.Description Applicability Qualitative Approach Quantitative Approach Used when situation is vague & Used when situation is stable & little data exist (e. These projections are then combined at the municipal. An iterative process is conducted until the experts have reached a consensus. Qualitative Method Jury of executive opinion Description The opinions of a small group of high-level managers are pooled and together they estimate demand. an ordinary employee. Since the salesperson is the one closest to the marketplace. Each salesperson (for example for a territorial coverage) is asked to project their sales.g. combines the results of statistical models. he has the capacity to know what the customer wants. current technology) Involves intuition and experience Jury of executive opinion Sales force composite Delphi method Consumer market survey Involves mathematical techniques Time series models Causal models Considerations Techniques 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.. provincial and regional levels. Sales force composite Delphi method Consumer market survey . A panel of experts is identified where an expert could be a decision maker. new products historical data exist and technologies) (e. The customers are asked about their purchasing plans and their projected buying behavior. Each of them will be asked individually for their estimate of the demand. or an industry expert.g. existing products. and in some cases.
Quantitative Forecasting Methods There are two forecasting models here ± (1) the time series model and (2) the causal model. then Augusts sales will also be 50 Description Time Series Forecasting Method Moving Averages MA is a series of arithmetic means and is used if little or no trend is present in the data. demand pattern may not always be that stable For example: If July sales were 50. A time series is a s et of evenly spaced numerical data and is o btained by observing responses at regular time periods. The time series forecasting methods are described below: Description Time Series Forecasting Method Naïve Approach Assumes that demand in the next period is the same as demand in most recent period. the forecast is based only on past values and assumes that factors that influence the past. demand) to an independent variable (for example. the present and the future sales of your products will continue. advertisement. On the other hand. In the time series model . price. t he causal model uses a mathematical technique known as the regression analysis that relates a dependent variable (for example. provides an overall impression of data over time (MA) 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 . etc.) in the form of a linear equation.
useful if recent changes in data are the results of actual change (e. D ± Demand. No. meaning. W ± Weight. D ± Demand.0 Equation: WMA 4 = (W) (D3) + (W) (D2) + (W) (D1) WMA ± Weighted moving average. seasonal pattern) instead of just random fluctuations F t + 1 = a D t + (1 . ± 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. ± 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. that the older data is usually less important.F ± forecast.g.. No. The weights are based on intuition and lie between 0 and 1 for a total of 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 Decomposition The time series decomposition adjusts the seasonality by multiplying the normal forecast by a seasonal factor .
price expectation etc. your next task is to locate clearly the determinants of demand for the product.how it is related to forward planning and corporate planning by the firm. specially demographic. related income. If there are storage facilities. the location of household unit. price and income. conditional or nonconditional etc. you should be clear about the uses of forecast data. final or intermediate demand. the sex-composition-all these exercise influence on demand in. Goods of daily necessities that are bought more frequently will lead to quicker adjustments. more will be the demand for toys. sociological and psychological factors affecting demand. 2) Nature of product: The next important consideration is the nature of product for which you are attempting a demand forecast.Steps in Demand Forecasting Demand or sales forecasting is a scientific exercise. In the preceding unit. While forecasting the demand for basic chemicals. Such factors are particularly important for long-run active forecasts. the age-composition. adaptation of demand will be spread over a longer duration of time. perishable or durable. Depending upon its use. advertisement. Here skilful demand forecasting is needed to avoid waste. new demand or replacement demand type etc. Promoting sales through advertising or price competition is much less important in the case of intermediate goods compared to final goods. In the same way buyers¶ psychology-his need. Time factor is a crucial determinant in demand forecasting. The demand for intermediate goods like basic chemicals is derived from the final demand for finished goods like detergents. you have been exposed to a number of price-income factors or determinants-own price. The elasticity of demand for intermediate goods depends on their relative importance in the price of the final product. Perishable commodities such as fresh vegetables and fruits can be sold over a limited period of time. In addition. Depending on the nature of product and nature of forecasts. ego. it is important to consider socio-psychological determinants. long-run demand forecasting is not possible. active or passive. it becomes essential to analyze the nature of demand for detergents. The size of population. more will be the demand for sticks. Such considerations are categorically listed below: 1) Nature of forecast: To begin with. if more old people survive. You have to examine carefully whether the product is consumer goods or producer goods. you have to choose the type of forecasts: short-run or long-run. if more youngsters marry. 3) Determinants of demand: Once you have identified the nature of product for which you are to build a forecast. social status. Whereas in case of expensive equipment which is worn out and replaced after a long period of time. own income-disposable and discretionary. It has to go through a number of steps. At each step. . A couple of examples may illustrate the importance of this factor. varying degrees. more will be the demand for furniture. related price. The time taken for such adjustment varies from product to product. you have to make critical considerations. different determinants will assume different degree of importance in different demand functions. If more babies are born. then buyers can adjust their demand according to availability. Without considering these factors.
because there is some regularly with regard to their occurrence. You will find that different techniques may be appropriate for forecasting demand for different products depending upon their nature. it may be possible to use more than one technique. reference period of the forecast. 5) Choice of techniques: This is a very important step. In an analysis of statistical demand function. Both these methods rely on varying degrees of judgment. size of cost budget for the forecast etc. 4) Analysis of factors &determinants: Identifying the determinants alone would not do. You have to choose a particular technique from among various techniques of demand forecasting. statistical or otherwise. While forecasting you cannot neglect these factors. This stating is needed to avoid/reduce the margin of error and thereby improve its validity for practical decision-making purpose. Subsequently. Some of them are simple and inexpensive. Techniques of Demand Forecasting Broadly speaking. available time for forecasting exercise.one is to obtain information about the likely purchase behavior of the buyer through collecting expert¶s opinion or by conducting interviews with consumers. and (d) random factors which create disturbance because they are erratic in nature. There are specific techniques which fall under each of these broad methods. complexity of the relationship postulated in the demand function.demonstration effect etc. their operation and effects are not very orderly. it is customary to classify the explanatory factors into (a) trend factors. the other is to use past experience as a guide through a set of statistical techniques. but for a short-run demand forecast. (c) seasonal factors. cyclical and seasonal factors are important. Much of the accuracy and relevance of the forecast data depends accuracy required. 6) Testing accuracy: This is the final step in demand forecasting. ±also effect demand. Simple Survey Method: . the latter for long-term forecasting. which are a little more certain compared to cyclical factors. for a long-run demand forecast. In some cases. for it is a very critical choice. the choice of technique has to be logical and appropriate. others quite complex and difficult. you will be exposed to all such techniques. The first method is usually found suitable for short-term forecasting. trend factors are important. 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. (b) cyclical factors whose effects on demand are periodic in nature. which affect demand over long-run. There are various methods for testing statistical accuracy in a given forecast. However. their analysis is also important for demand forecasting. there are two approaches to demand forecasting. demand which is being predicted. Subsequently you will be exposed briefly to some of these methods and their uses. Also.
But it is a very tedious and cumbersome process. The demands for final consumption and exports net of imports are estimated through some other forecasting method. thus generates ³reasoned opinion´ in place of ³unstructured opinion´. Once this information is collected. but the choice of sample is very critical. this method will be totally useless. Compared to the former survey. If the sample is properly chosen. the sales forecasts are obtained by simply adding the probable demands of all consumers. followed by the Greeks earlier. In this set of methods. Moreover if the data are wrongly recorded. the experts on the particular product whose demand is under study are requested to give their µopinion¶ or µfeel¶ about the product. it is not feasible where a large number of consumers are involved. The participants are supplied with responses to previous questions (including seasonings from others in the group by a coordinator or a leader or operator of some sort). Here is an attempt to arrive at a consensus in an uncertain area by questioning a group of experts repeatedly until the responses appear to converge along a single line. 3) Consumers Survey. A product is used for final consumption or as an intermediate product in the production of other goods in the domestic market. we may undertake the following exercise. The total demand of sample units is finally blown up to generate the total demand forecast. and its demand for intermediate use is estimated through a survey of its user industries. and subject to less data error.For forecasting the demand for existing product. this method is less tedious and less costly. If the number of such experts is large and their experience-based reactions are different. This may lead to a narrowing down of the divergent views (of the experts) expressed earlier. 1) Experts Opinion Poll: In this method. otherwise there may be sampling error. Complex Statistical Methods: . the sales of a product are projected through a survey of its end-users. dealing in the same or similar product. then it will yield dependable results. The Delphi Techniques. such survey methods are often employed. 2) Reasoned Opinion-Delphi Technique: This is a variant of the opinion poll method. or it may be exported as well as imported. The principle merit of this method is that the forecaster does not introduce any bias or value judgment of his own.Complete Enumeration Method: Under this. the forecaster selects a few consuming units out of the relevant population and then collects data on their probable demands for the product during the forecast period. The sampling error can decrease with every increase in sample size 5) End-user Method of Consumers Survey: Under this method. the forecaster undertakes a complete survey of all consumers whose demand he intends to forecast. are able to predict the likely sales of a given product in future periods under different conditions based on their experience. He simply records the data and aggregates. Such feedback may result in an expert revising his earlier opinion. then an average-simple or weighted ± is found to lead to unique forecasts. Sometimes this method is also called the µhunch method¶ but it replaces analysis by opinions and it can thus turn out to be highly subjective in nature. 4) Consumer Survey-Sample Survey Method: Under this method. These experts. but this is still a poor proxy for market behavior of economic variables.
). The analysis can be carried with varying degrees of complexity. Generally. The leading indicator method does not tell you anything about the magnitude of the change that can be expected in the lagging series. it only needs the time series data. statistical analysis and mathematical functions to determine the relationship between a dependent variable (say. but inappropriate for short-run forecasts. sales) and one or more independent variables (like price. the lead period itself may change overtime. The relationship may be expressed in the form of a demand function. Some of the limitations of this method may be noted however. As such.We shall now move from simple to complex set of methods of demand forecasting. it is an appropriate method for long-run forecasts. For example. as a part of quantitative methods for business decisions. you must . one can predict the direction of movement of tractors¶ sale (ST) for the next year. income. the moving average method or exponentially weighted moving average method is used to smoothen the series. but the same may not be true for the future. is the use of economic theory. Through our estimation we may find out the best-fitted lag period on the past data. For this purpose. lagging or coincident indicators of the variable for which a demand forecast is being attempted. Sometimes the time series analysis may not reveal a significant trend of any kind. Also. The trend method outlined above often yields a dependable forecast. The trend equation could take either a linear or any kind of nonlinear form. Thus if one knows the direction of the movement in agriculture income (AY). it may not be always possible to find out the leading. advertisement etc. The only limitation in this method is that it assumes that the past is repeated in future. but the movement in ST takes place after a year¶s time lag compared to the movement in AY. (2) Barometric Techniques or Lead-Lag indicators method: This consists in discovering a set of series of some variables which exhibit a close association in their movement over a period or time. The trend line is worked out by fitting a trend equation to time series data with the aid of an estimation method. you may recall. Such methods are taken usually from statistics. (1) Time series analysis or trend method: Under this method. 3) Correlation and Regression: These involve the use of econometric methods to determine the nature and degree of association between/among a set of variables. but only the direction of change. as we have seen earlier. The movement of AY is similar to that of ST. Also. Econometrics. based on past data can be used for forecasting. it shows the movement of agricultural income (AY series) and the sale of tractors (ST series). this barometric method has been used in some of the developed countries for predicting business cycles situation. Finally. Here we shall not get into the methods of finding out µcorrelation coefficient¶ or µregression equation¶. you may be quite familiar with some the statistical tools and techniques. The advantage in this method is that it does not require the formal knowledge of economic theory and the market. some countries construct what are known as µdiffusion indices¶ by combining the movement of a number of leading series in the economy so that turning points in business activity could be discovered well in advance. the time series data on the under forecast are used to fit a trend line or curve either graphically or through statistical method of Least Squares. Such relationships. In that case. Thus agricultural income (AY) may be used as a barometer (a leading indicator) to help the short-term forecast for the sale of tractors.
b3 and b4 are the components of relevant elasticity of demand. We are on the realm of multiple regression and multiple correlation. Of course. this method can be used easily to derive meaningful forecasts. we shall not go into the question of economic theory. Given the estimated value of and bi. as corporate managers. b2< 0 suggest that DX and PX are inversely related. The principle advantage of this method is that it is prescriptive as well descriptive. similar to that of regression method. if you know the future values of explanatory variables like own price (PX). besides generating demand forecast. It is also known as the µcomplete system approach¶ or µeconometric model building¶. the better is the fit. when package programmes are available. Presently we do not intend to get into the details of this method because it is a subject by itself. In other words. (4) Simultaneous Equations Method: Here is a very sophisticated method of forecasting. b4 > 0 suggest that x and y are substitutes. you may use not only time-series data but also cross section data. The reflect the direction as well as proportion of change in demand for x as a result of a change in any of its explanatory variables. . you may also recall that the statistics R2 (Co-efficient of determination) gives the measure of goodness of fit. The only precaution you need to take is that data analysis should be based on the logic of economic theory. The closer it is to unity. in this course. However. you. should know the basic elements in such an approach. For example. we have made reference to such econometric models. such econometric models have limitations. We shall concentrate simply on the use of these econometric techniques in forecasting. For example. The principle advantage in this method is that the forecaster needs to estimate the future values of only the exogenous variables unlike the regression method where he has to predict the future values of all. b3 > 0 suggest that x is a normal commodity with commodity with positive income-effect. income (B) and advertisement (A). That is. The values of exogenous variables are easier to predict than those of the endogenous variables. b1 is a component of price elasticity of demand. In your earlier units. in the days of computer. this technique has got both explanatory and predictive value. you may forecast the expected sales (DX). Similarly. The method is indeed very complicated. In this method of forecasting. related price (Py). our focus is limited to micro elements only. However. it explains why the demand is what it is. b2.have covered those statistical techniques as a part of quantitative methods. this method is normally used in macro-level forecasting for the economy as a whole. Lastly. The regression method is neither mechanistic like the trend method nor subjective like the opinion poll method. Moreover. endogenous and exogenous variables affecting the variable under forecast. and that way you get a more reliable forecast. The form of the equation may be: DX = a + b1 A + b2PX + b3Py You know that the regression coefficients b1.
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