The

Demand
organization
1000.00
‘diamond paints 950.00
900.00
ltd’ does not use 850.00
800.00
the traditional 750.00
700.00
bookish forecast 650.00
600.00
methods that we 550.00
500.00
0 2 4 6 8 10 12
have studied
Demand
rather it uses a
growth approach. Instead of forecasting the demand, they set a targeted demand mark using a
growth rate of 15% which is decided by the sales team and upper management. The growth
figure is added to historical data. Forecast is made on monthly basis which means that a seasonal
aspect is observed in the data. This is because different demand trends are observed in different
seasons. A seasonal variation follows throughout the year. February to June is the peak season
for decorative paints while industrial paints is stable throughout the year. Forecast is made in the
following way: last year’s quarter’s average is taken and growth percentage is added on the
figure. For example if previous year’s first month demand was 100, this years forecast will be
115 for the first month.

However, this approach has been proved to be a poor judgement tool for their forecasted
demand as there have been huge errors in the forecasted figures and actual figures. The data that
we got from the company states that in the first period, projection for the year was 2716 based on
the previous year but actual sales were 4203 so an error of 1487 was observed. In the following
months, errors went as high as 2950 in April which means that during peak season, the
forecasting technique provides an even poorer judgement. This clearly indicates how there is a
cyclical trend *infer* in the market and data is not able to account for that variation. As demand
is growing every year, and peak season demand is growing at a higher rate, a better technique
than simple growth average is needed to capture the variation. The entire year error according to
MAD was 1188.56 and according to MAPE was 29.44%.

Suggest any alternative forecasting technique that may increase the accuracy and reduce the
forecasting error.
Since no trend was observed in the initial data and the paint industry is affected by seasonality,
we tried to use seasonal relatives to calculate our forecast data, but MAD 1287.30
that technique did not work well, as can be seen in Table 1. MSE
3327.41
(000's)
We then tried the Moving Average technique which allowed MAPE 30.63%
us to successfully forecast the data accurately and decrease the
Table 1: Error For Seasonal Index
forecast error by a huge number. We are confident that if we keep
on using this technique in the future, the forecasting error would
further decrease. Table 2 and Figure 2 allows to support our technique.

Actual Vs Moving Average

6500.00

5500.00

4500.00
Demand

3500.00

2500.00

1500.00

500.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Demand Forecast

Figure 2: Moving Average in comparison to Actual Data

The forecasting technique employed by Diamond paints presents them with some key problems.
Deciding on a single growth rate and integrating it into historical MAD 60.23
data to draw out figures for the next period results in MSE
891.78
miscalculations and inaccurate projections. Applying a similar (000's)
MAPE 6.67%
growth rate to all of the products without analyzing their
independent demands and usage patterns causes an
Table 2: Error for Moving Average
imbalance of supply and demand. Some products might not
have enough growth potential and they may be
overproduced. Similarly, products that possess the ability to draw in more sales may be under
produced which translates into lost profits. The recurring pattern of forecasted figure being less
than the actual demand can be observed in the data available. Based on their forecasted figures,
the organizations places orders with their suppliers beforehand. However, the demand exceeds
the supply. Inability to capture the demand means lost sales and revenue which could also result
in customer dissatisfaction, and increased difficulty in customer retention. In addition to this,
procuring materials from supplier on a very short notice to meet the demand poses difficulties.
The forecasting technique used inhibits the firm from getting a clearer picture of their capacities
and potential. Underestimating the demand through forecasting means underutilization of the
available resources and hence lost potential profits.