54 Logistics and S C M (TYBMS Sem – V)

Chapter 4 Demand Forecasting

SYNOPSIS

4.1 Meaning of Demand Forecasting

4.2 Objectives of Demand Forecasting
4.3 Approaches to Forecasting
4.4 Forecasting Methods / Forecasting Techniques
4.5 Numericals on Moving Average
 Review Questions

4.1 MEANING OF DEMAND FORECASTING

“Pemand Forecasting is a projection/prediction made, on the basis of

relevant logical assumptions, of the volume likely to be produced,
transported and sold”.

4.2 OBJECTIVES OF DEMAND FORECASTING

1. Sales Planning: Demand Forecasting will help to create an estimation

of future sales. Thus, on the basis of this estimation, all other sales
related activities can be carried out effectively and efficiently. All
promotional efforts will be based on sales forecasts made.
2. Production Planning: Demand forecasting will help to create an
estimation of future sales. On the basis of this estimation, all production
related activities and resources can be planned. This helps to overcome
the problem of underproduction or overproduction.
3. Adequate Purchasing of Materials: Buying too much or too little
inventory can be a serious disaster. By forecasting your sales, you will
have a better idea of how much to buy and whether it will be advisable
to add additional investments.
4. Framing Proper Policies: Effective demand forecasting will help in
framing proper policies with respect to various fields such as
production, sales, purchasing, warehousing, inventory, distribution, etc.
5. Enables to make Sound Plans: Demand forecasting provides
relevant and reliable information about the past and present events.
This helps in designing sound plans for future.
Demand Forecasting 55

6. Reducing Inventory Costs: Forecasting helps to predict how much

inventory should be on hand at any given point of time. By having the
right amount of inventory, your company will be able to save on
inventory costs.
7. Reducing Warehousing Costs: Proper inventory management will
helps to ensure proper warehouse management and thereby reduce
warehousing costs.
8. Tracking overall Performance: Every business firm needs to assess
its performance. This involves identification of areas where it performs
well and where it missed the mark. Demand forecasting helps to
compare actual demand with firm’s expectations and helps to keep a
check.
9. Effective Labour Management: Demand Forecasting also helps in
labour management. It estimates number of workers required and plans
its training program.

4.3 APPROACHES TO FORECASTING

1. Top-Down Approach:
The top-down approach develops a national level forecast and then
spreads the volume across locations on the basis of historical sales
pattern. For example, suppose the aggregate monthly forecast for the
entire country is 10000 units. Assume that the firm uses four
distribution centers to serve the demand with the historical split of 40,
30, 20 and 10 percent, respectively. In this case, forecasts for individual
distribution centers are projected to be 4000, 3000, 2000 and 1000
units respectively.
56 Logistics and S C M (TYBMS Sem – V)

2. Bottom-Up Approach:
On the other hand the bottom-up approach is decentralized since each
distribution center forecast is developed independently. As a result,
each forecast can more accurately track and consider demand
fluctuations within specific markets. However, the bottom up approach
requires more detailed record keeping.
Example: In bottom-up approach, each distribution centre will forecast
its demand individually. Addition of this individual demands will give
overall corporate demand.

4.4 FORECASTING METHODS / FORECASTING TECHNIQUES

Forecasting techniques can be divided into two categories:

A. Qualitative Forecasting Methods: Qualitative methods are
judgmental methods where expert opinion is used to make the forecast.
This method is useful when past data is unavailable. It is ideal for
situations where no historical data is available. However, qualitative
methods are time consuming.
Qualitative techniques involves following methods:
1. Jury of executive methods:- Under this method, opinions of
small groups of high level executives are taken in relation to the
future demand. The opinions provided by such executives are
then used to estimate the demand in future.
2. Consumer Survey Method:- Under this method, efforts are
being made to collect information from consumer about their
purchasing plans in the near future. This is one of the most direct
approach to demand forecasting.
3. Assessment by Sales Personnel:- Under this method, the sales
representative gives the estimate of expected sales of his or her
territory/area. A thorough review is done of this estimate so as to
Demand Forecasting 57

ensure whether they are realistic or not and later they are
combined to arrive at a forecast.
4. Naive Approach:- Naive Approach to demand forecasting is
based on the assumption that demand in the next period is similar
to the demand in most recent period without major changes in
demand patterns.
5. Delphi Method:- In Delphi method, an attempt is made to
develop forecasts through “group consensus”. This technique
relies on a panel of experts. Each expert is asked to answer
questionnaires in two or more rounds.
After each round, a facilitator provides a small summary of each
experts forecasts from the previous round as well as the reasons
they provided for their judgment. Each expert is asked to revise
and to reconsider their earlier answers. It is believed that during
this process the range of answers will decrease and group will
arrive at a consensus. The process is stopped after a pre-defined
stop criterion. The criteria may be number of rounds, achievement
of consensus, etc.
B. Quantitative Methods of Forecasting
Quantitative methods are based on analysis of historical data. It is objective
in nature. Quantitative techniques include the following methods:
1. Time Series Method:
  Time Series Method is based on basic assumption that the future
will be similar to the past. This implies that existing demand
patterns will continue in the future.
  This assumption is often reasonably correct in the short term.
Thus, these techniques are most appropriate for short-range
forecasting.
  When the rate of growth or the trend changes significantly, the
demand pattern experiences a turning point. Since time-series
techniques use historical demand patterns, they are typically not
sensitive to turning points.
Time Series method includes:
1. Moving Average: Moving average forecasting uses an average of the
most recent period’s sales. The average may contain any number of
previous time periods. Three, four and five period averages are
commonly used.
The moving averages are easy to calculate but there are some
limitations. They do not respond to sudden market changes. Moreover,
a large amount of historical data must be maintained and updated to
calculate forecasts.
58 Logistics and S C M (TYBMS Sem – V)

Examples of Moving Average

Three-Period Moving Average
Months Actual Demand Forecast
January 100
February 250
March 310
April 220
100 + 250 + 310
Forecast (April) = 3 = 220

Four-Period Moving Average

Months Actual Demand Forecast
January 100
February 250
March 300
April 350
May 250
100 + 250 + 300 + 350
Forecast (May) = 4 = 250

ii. Exponential Smoothing:

Exponential smoothing states that future sales can be estimated
(forecasted)on the basis of weighted average of the actual demand for the
previous year and forecasts for previous year.
Ft = α  dt – 1+ (1- α) Ft–1
Where,
Ft = Forecasted sales for time period t
Ft – 1 = Forecast for time period t-1
dt-1 = Actual demand for time period t-1
α = Smoothing constant/ alpha factor
Example
Forecast for the year 2009-10 was 600000 units and actual sales were
500000 units. Calculate forecast for the year 2010-11 using exponential
smoothing, α=0.80
Ft = α  dt – 1+ (1- α) Ft–1
= (0.8)(500000)+(1-0.8)(600000)
= 400000 + 120000
Ft = 520000 units
Forecast for the year 2010-11 is 520000 units
Demand Forecasting 59

iii. Extended Smoothing:

The basic model can be extended to include trend and seasonality
considerations. These techniques are known as exponential smoothing with
trend and exponential smoothing with seasonality, respectively.
The extended smoothing calculation is similar to that of the basic
smoothing model except that there are three components and three
smoothing constants to represent base, trend and seasonal components.
Extended smoothing = Basic Model + Trend + Seasonality
2. Causal Technique
a. They are based on the hypothesis that future demand of a product
depends on the past or current values of some variables.
b. They try to develop correlations between the future demand of some
products and past (or current) value of some causal variables.
Example: Coffee sales at a football match usually depend on
prevailing temperature. Lower temperature will increase the sales. If it is
possible to establish good relationship between the two variable i.e.
coffee sales & temperature, the information can be used for predicting
requirements.

4.5 NUMERICALS ON MOVING AVERAGE

Q.1 Determine the trend for the following data using:

1. 2 yearly moving averages 2. 3 yearly moving averages
Years 1995 1996 1997 1998 1999 2000 2001
Sales (in 000’s) 45 52 83 92 98 115 125

Solution:
Years Sales 2 Yearly Moving 3 Yearly Moving
(in 000’s) Averages Averages
(in ‘000 Rs.) (in ‘000 Rs.)
1995 45 - -
1996 52 - -
1997 83 48.5
1998 92 67.5 60
1999 98 87.5 75.67
2000 115 95 91
2001 125 106.5 101.67
120 112.67
60 Logistics and S C M (TYBMS Sem – V)

Q.2 From the following information, calculate 4 period moving

averages. Also calculate forecast for 2016.
Years Sales (in 000’s)
2009 125
2010 140
2011 188
2012 195
2013 205
2014 212
2015 235

Solution:

Years Sales (in 000’s) 4 period moving average (in 000’s)

2009 125 -
2010 140 -
2011 188 -
2012 195 -
2013 205 162
2014 212 182
2015 235 200
2016 211.75
Q.3 From the following information, calculate
1. 2 – period moving average. 2. 5 – period moving average.
Years Sales (in 000’s)
2000 180
2001 195
2002 200
2003 211
2004 222
2005 240
2006 269
2007 284
2008 300
2009 305
2010 315
2011 322
2012 330
2013 335
2014 340
2015 350
Demand Forecasting 61

Solution:
Years Sales 2 Period Moving Averages 5 Period Moving Averages
(in 000’s) (in ‘ 000 Rs.) (in ‘000 Rs.)
2000 180 - -
2001 195 - -
2002 200 187.5 -
2003 211 197.5 -
2004 222 205.5 -
2005 240 216.5 201.6
2006 269 231 213.6
2007 284 254.5 228.4
2008 300 276.5 245.2
2009 305 292 263
2010 315 302.5 279.5
2011 322 310 294.6
2012 330 318.5 305.2
2013 335 326 314.4
2014 340 332.5 321.4
2015 350 337.5 328.4
2016 345 335.4
Q.4. You are given the following information about demand of an
item.
Months Demand
1 100
2 150
3 225
4 240
5 170
6 280
7 300
8 300
9 320
10 330
11 350

Calculate:
i. 3 – monthly moving averages
ii. 4 - monthly moving averages
iii. Also calculate 4 - monthly weighted moving averages with weights as
4:3:2:1. the largest weight being for the most recent value.
iv. What will be the forecast for 12th month.
62 Logistics and S C M (TYBMS Sem – V)

Solution:

Months Demand 3 – Monthly 4 – Monthly 4 – Monthly

Moving Moving Weighted
Average Average Moving
Average
1 100 - - -
2 150 - - -
3 225 - - -
4 240 158.33 - -
5 170 205 178.75 203.5
6 280 211.66 196.25 200
7 300 230 228.75 233.5
8 300 250 247.5 262
9 320 293.33 262.5 283
10 330 306.66 300 306
11 350 316.66 312.5 318
12 333.33 325 333

4 x 240 + 3 x 225 + 2 x 150 + 1 x 100

Weighted Moving Average = 4+3+2+1
960 + 675 + 300+ 100
= 10
2035
= 10
4 – Monthly Weighted Moving Average = 203.5 (for 5th Month)
Similarly, for 6 th Month
4 x 170 + 3 x 240 + 2 x 225 + 1 x 150
Weighted Moving Average = 4+3+2+1
680 + 720 + 450+ 150
= 10
2000
= 10
4 – Monthly Weighted Moving Average = 200 (for 6th Month)

Forecast for the 12 th Month:

i. Under 3 monthly moving average is around 333 units.
ii. Under 4 monthly moving average is around 325 units
iii. Under 4 monthly weighted moving average is 333 units.
Demand Forecasting 63

Q.5. The demand for an item in the past few years is as follows:
Years Demand
2006 1100
2007 1200
2008 1400
2009 1500
2010 1800
2011 2000
2012 2100
2013 2200
2014 2300
2015 2400
Calculate:
i. Calculate 3 - yearly moving average.
ii. Calculate 4 - yearly moving average.
iii. Calculate 3 yearly weighted moving average with weights as 3:2:1, the
largest weight being for the most recent value.
iiv. Also calculate forecast for the year 2016.

Solution:

Years Demand 3 – Yearly 4 – Yearly 3 –Yearly

Moving Average Moving Average Weighted
Moving Average
2006 1100 - - -
2007 1200 - - -
2008 1400 - - -
2009 1500 1233.33 1283.33
2010 1800 1366.66 1300 1456.66
2011 2000 1566.66 1475 1633.33
2012 2100 1766.66 1675 1850
2013 2200 1966.66 1850 2016.66
2014 2300 2100 2025 2133.33
2015 2400 2200 2150 2233.33
2016 2300 2250 2333.33
3 x 1400 + 2 x 1200 + 1 x 1100
Weighted Moving Average = 3+2+1
4200 + 2400 + 1100
= 6
3 – Yearly Weighted Moving Average = 128.33 (for 4th Month)
Similarly , for 5th Month
64 Logistics and S C M (TYBMS Sem – V)

3 x 1500 + 2 x 1400 + 1 x 1200

3 – Yearly Weighted Moving Average = 3+2+1
4500 + 2800 + 1200
= 6
8500
= 6
= 1416.66 (for 5th Month)
Forecast for the year 2016:
i. Under 3 – yearly moving average is 2300 units.
ii. Under 4 – yearly moving average is 2250 units.
iii. Under 3 – yearly weighted moving average is 2333 units.

Q.6. For the following data calculate a 3 period and 5 period

moving average? Forecast demand for the 11th Month.
Period 1 2 3 4 5 6 7 8 9 10 11
Demand in 110 120 135 142 154 160 173 180 190 210 ?
Units
(M.U Oct-2016)
Solution:
Period Demand in Units 3 Months 5 Months
Moving Average Moving Average
1 110 - -
2 120 - -
3 135 - -
4 142 121.67 -
5 154 132.33 -
6 160 143.67 132.2
7 173 152 142.2
8 180 162.33 152.8
9 190 171 161.8
10 210 181 171.4
11 193.33 182.6
Q.7 From the following data calculate a 3 period and 5 period
moving average, also forecast demand for the 11 th period.
Period 1 2 3 4 5 6 7 8 9 10 11
Demand 100 110 125 132 145 151 164 170 188 197 ?
in Units
(M.U. May 2017)
Demand Forecasting 65

Period Demand in Units 3 Period Moving 5 Period Moving

Average Average
1 100 - -
2 110 - -
3 125 - -
4 132 111.67 -
5 145 122.33 -
6 151 134 122.4
7 164 142.67 132.6
8 170 153.33 143.4
9 188 161.67 152.4
10 197 174 163.6
11 ? 185 174
Q.8 From the following data, calculate a 3 period weighted
moving average from 4 th Month to 8 th Month, with weights as
3, 2 and 1. The largest weight is being assigned to Most
recent period and current Demand Value.
Period (Month ) 1 2 3 4 5 6 7 8
Demand in Units 160 180 190 210 230 240 250 ?
(April 2019)

Solution:

Period Demand Working 3 period

(Month) in Units WMA

1 160 - -
2 180 - -
3 190 - -
4 210 (190 x 3) + (180 x 2) + (160 x 1) 1090 182
=
3+2+1 6
5 230 (210 x 3) + (190 x 2) + (180 x 1) 1190 198
=
3+2+1 6
6 240 (230 x 3) + (210 x 2) + (190 x 1) 1300 217
=
3+2+1 6
7 250 (240 x 3) + (230 x 2) + (210 x 1) 1390 232
=
3+2+1 6
8 (250 x 3) + (240 x 2) + (230 x 1) 1460 243
=
3+2+1 6

Q.9. From the following data calculate a 3 period and 5 period

moving average. Also forecast demand for 11 th month.
Period 1 2 3 4 5 6 7 8 9 10 11
Demand 120 125 130 135 140 145 150 165 180 200 ?
in Units
66 Logistics and S C M (TYBMS Sem – V)

Solution:

Period Demand in 3 Period Moving Average 5 Period Moving Average

Units
1 120 - -
2 125 - -
3 130 - -
4 135 130 + 125 + 120 -
= 125
3

5 140 135 + 130 + 125 -

= 130
3
6 145 140 + 135 + 130 140 + 135 + 130 + 125 + 120
= 135 = 130
3 5
7 150 145 + 140 + 135 145 + 140 + 135 + 130 + 125
= 140 = 135
3 5
8 165 150 + 145 + 140 975 150 + 145 + 140 + 135 + 130
= = 140
3 6 5
9 180 165 + 150 + 145 165 + 150 + 145 + 140 + 135
= 153 =147
3 5
10 200 180 + 165 + 150 180 + 165 + 150 + 145 + 140
=165 =156
3 5
11 - 200 + 180 + 165 200 + 180 + 165 + 150 + 145
= 182 =187
3 5

REVIEW QUESTIONS

Q.1. Objective Type questions

(A) Fill in the Blanks
1. ______________ is a projection/ prediction made on the basis of relevant
logical assumptions, of the volume likely to be produced, transported and
sold.
2. In Delphi method, an attempt is made to develop forecast through
_________________.
3. _____________ are based on analysis of historical data.
4. Under ____________, efforts are being made to collect information from
consumers about their purchasing plans in the near future.
5. Demand forecasting is ___________ made for volume to be produced,
transported and sold.
6. ___________ approach to demand forecasting is based on the assumption
that demand in the next period is similar to last year.
7. ___________ technique is used to estimate demand for correlated products.
Ans. 1. Forecasting, 2. “Group consensus”, 3. Quantitative methods, 4.
Consumer Survey, 5. Projection/prediction, 6. Naïve 7. Causal.
Demand Forecasting 67

(B) Multiple choice questions

1. The following is not qualitative method of demand forecasting
___________.
a. Jury of executive method b. Naïve approach
c. Delphi method d. Time series
2. __________ is a quantitative technique of forecasting.
a. Delphi Method b. Naïve Method
c. Consumer survey d. Moving average
Ans. 1. – d, 2. – d.
(C) Answer in one sentence
1. Explain Delphi Technique.
Ans. In Delphi method, an attempt is made to develop forecasts
through “group consensus”. This technique relies on a panel of experts.
Each expert is asked to answer questionnaires in two or more rounds. After
each round, a facilitator provides a small summary of each expert’s forecasts
from the previous round as well as the reasons they provided for their
judgement. Each expert is asked to revise and to reconsider their earlier
answers. It is believed that during this process the range of answers will
decrease and group will arrive at a consensus.
(D) Match the following.
A B
1. Delphi Approach A. Correlated product demand
2. Qualitative Methods B Group consensus
3. Time series method C. Expert opinion
4. Top down approach D. Future similar to past
5. Bottoms up Approach E. National level forecast
6. Extended Smoothing F. Developed independently
7. Causal Technique G. Includes trend & seasonality
consideration
Ans. (1- B)(2- C)(3- D)(4- E)(5- F),(6-G)(7-A)
Q.2. Answer the following questions.
1. What is Demand forecasting? Explain any three methods of demand
forecasting?
2. Write short note on methods of forecasting.
