1.

The Importance of Demand Forecasting

a. A forecast is an estimate of future demand & provides the basis for planning decisions

b. The goal is to minimize deviation between actual demand and forecast

c. The factors that influence demand must be considered when forecasting

d. Buyers and sellers should share all relevant information to generate a single consensus
forecast
e. Good forecasting provides reduced inventories, costs, & stockouts, & improved
production plans & customer service
2. Forecasting Techniques
a. Qualitative forecasting : based on opinion & intuition
 Used when data are limited, unavailable, or not currently relevant
 Forecast depends on skill & experience of forecaste& available information
Four qualitative models used are Jury of executive opinion, Delphi method, Sales
force composite,Consumer survey
b. Quantitative forecasting : uses mathematical models & historical data to make
forecasts
 Time series forecasting : assumes the future is an extension of the past
Historical data is used to predict future demand
 Cause & Effect forecasting : assumes one or more factors (independent
variables) predict future demand
All quantitative methods become less accurate as forecast’s time horizon
increases
 For long-time horizon forecasts, use a combination of quantitative & qualitative
techniques
c. Time series models : most frequently used among all the forecasting models
Data should be plotted to detect for the following components –
 Trend variations: increasing or decreasing over many years
 Cyclical variations: wavelike movements that are longer than a year (e.g., business
cycle)
 Seasonal variations: show peaks & valleys that repeat over consistent interval (ie.
hours, days, weeks, months, seasons)
  Random variations: due to unexpected or unpredictable events such as natural
disasters
 Time Series Forecasting Models
 Simple Moving Average Forecast : uses historical data to generate a forecast.
Works well when demand is stable over time.
 Weighted Moving Average Forecast : based on an n-period weighted moving
average
 Exponential Smoothing Forecast : type of weighted moving average -only two
data points are needed
 Linear Trend Forecast–trend can be estimated using simple linear regression to
fit a line to a time series

3. Break Even Point

Break-even analysis entails the calculation and examination of the margin of safety for an
entity based on the revenues collected and associated costs. Analyzing different price
levels relating to various levels of demand a business uses break-even analysis to
determine what level of sales are necessary to cover the company's total fixed costs.