Micro Economics Midterm assessment.

Demand Forecasting.

Submitted by:
Name: Krutik Mehta
Roll no: B018
SAP ID: 80012200608
 Demand forecasting

1) If making accurate forecasts is so difficult and forecasts are often far

off the market, why bother making them?

Demand forecasting is the art of using historic information, such as past sales or stock
market data, to help get a good idea of what the future will look like. This task is
fundamental, crucially important to running a business smoothly and making sound
operational decisions, and is notoriously difficult to perform accurately. Demand
forecasting is so pivotal because it allows a business to set correct inventory levels,
price their products correctly, and understand how to expand or contract their future
operations. Poor forecasting can lead to lost sales, depleted inventory, unhappy
customers, and millions in lost revenue.

Managers and decision-makers utilize demand forecasts in their daily activities. These
predictions can also be used as inputs for the sales and marketing teams to create
insights into demand generation and organize their actions. Businesses, in general,
need to make forecasts about their products to prepare an effective plan in both the
short and long term. With that in mind, demand forecasts are crucial for companies, as
they affect inventory planning, logistical planning, production planning, cash flow
planning, hiring decisions, and purchasing decisions, among others. Poor or absent
forecasting can lead to bad decisions. So, without good demand forecasting,
businesses would be poorly preparing themselves for future events.

Better forecasts can result in better service levels, customer retention, cost savings,
waste reduction (excess inventory and unsold products). In addition, the need for
emergency production to meet unexpected demand is relieved, because, with
predictions, companies can plan and make decisions that allow a better response.
Not being prepared for the demand can cause incalculable losses, such as the
reduction in market share. For example, when a customer needs a product, but can not
find the desired brand, he can often find a replacement with a competing brand. Due
to this, companies can no longer be reactive to meet demands for their products.
Furthermore, the exponential growth of supply chains belonging to certain companies
was only possible due to demand forecasting improvements. They invest so that they
can plan better, because they know that it generates a financial return. It is important
to know what is happening at points of sales to obtain a more assertive demand
forecast.
 2) How can the firm prepare for unexpected events that can badly affect
the firm (such as an earthquake, a tsunami, or another natural
calamity that, for the most part, cannot be predicted?

No matter what kind of business we are running, be it drop-shipping or a website builder

platform, planning for the “what if” moments is critical. In legal terms, these ‘Acts of God,’
also called ‘Force Majeure’ include natural disasters such as floods, earthquakes and fires -
many of which are beyond our control. For example, in 2011, Thailand experienced extreme
flooding during its monsoon season. As a result, big name companies such as Toyota and
Canon suspended production, reduced operating profits and experienced a decrease in sales.
Therefore, it is crucial to think about the consequences before they even happen. Bottom line:
we may not be able to prevent it, but we can prepare for it.

I. Doing risk assessment:

Firstly, “identify the assets we need to protect and then determine the threats and
hazards that could impact those assets. Assets could include servers, computer hard
drives, filing cabinets, mobile devices, books, and photos. Different industries and
regions have a wide range of requirements for document backups, including the
length of time and scope of archiving. Considering the type of disaster that will likely
impact our business. Certain disasters, like earthquakes, are specific to geography.
Other disasters could happen anywhere, for example, a fire. Creating a preparation
plan that addresses likely threats based on the location of our business.

II. Employees communications:

It is important to have a plan in place to ensure that we can communicate with
employees, especially database gatekeepers or key decision makers. Communicating
this plan before disaster strikes will help in the immediate aftermath. Ensuring that
emergency preparation is explained to current employees and incorporated into new
employee training. Damage to a physical space, a power outage at our business,
stranded employees — we should have a plan B in any of these scenarios. It’s helpful
to have a manual workaround in place in case your computer systems are damaged.

III. Clients/customers communication:

If you work with clients and other partners, create a roadmap for contacting them in
the event of a disaster. Although other businesses will be most concerned about
employee wellbeing, we’ll demonstrate professionalism by being as communicative
as possible during a crisis.

“A communication plan should be developed so we know when and how to contact

clients and regulators.” Having a solid plan in place means that employees can focus their
energy on execution, rather than getting bogged down in decision-making during a
 stressful time. If possible, make arrangements for a temporary headquarters in the event
of a shutdown so that operations can resume in a timely manner.

IV. Data backup:

Physical backups, like paper files or hard drives, are susceptible to damage during a
natural disaster. Back up and encrypt your data digitally, hosting it in a location that’s
far from your business headquarters. Use the same level of security for backup files as
you do for original files, ensuring that encryption, password protection, and other
security is mirrored.
Using a cloud backup is the most reliable way to ensure data safety. Virtual backups,
like cloud storage, will remain safe through a disaster because they are stored
remotely. These virtual backups can be accessed from anywhere that has an internet
connection.

V. Meet with an insurance advisor:

Having the right insurance is an important way to ensure we have coverage for your
business in the event of a natural disaster. When researching insurers, we should look
for those that offer an in-depth explanation of insurance premiums (the amount a
business pays for an insurance policy), coverage (amount of risk or liability that is
covered for an individual or entity by way of insurance services) and deductibles (the
set amount that you must pay, in addition to your premium, towards a loss or liability
before your insurance company will start paying on your behalf). For most people,
managing natural calamities is synonymous with having adequate insurance cover,
and while that is important, it certainly isn't enough. Having a clear evacuation plan,
and linkages with hospitals and the local administration are all important aspects that
need to be planned well in advance, and not after disaster strikes.

3) What evidence is out there to indicate that the recent global financial
crisis could have been forecast? (The trigger for the global financial
crisis was the U.S Subprime mortgage market.)

In 1996, the dot.com boom was going on in the US and the technology companies’ stocks
were running high at that time. But further, between 2000 to 2002, this dot.com bubble burst
because of which people started withdrawing money from the stock market. In 2001, Interest
rates in the US had fallen to just 1%. Now that time stock market was running low and
interest rates where low people didn’t want to invest in either of them. Investors were looking
for a good investment opportunity and at that time real estate rates were increasing as interest
rates were very low. People took loans at very small interest rates and because of that, the
demand for houses was increasing. Investment banks also wanted to gain out of this hike in
real estate. Morgan Stanley, Goldman Sachs, Lehman Brothers etc are all investment banks.
So now all the investment banks started taking loans from the bank and designed a complex
derivative product and named the product as Collateral Debt Obligator or CDO. The
investment bank got AAA (Safest bet) ratings from the rating agency. In this process, the
background check process was eliminated as Investment bankers were directly selling
products to the investors. As demand grew enormously for CDO, the bank started giving
more loans to those people where there was no such guarantee for them to repay the loans.
Such low-quality loans are known as sub-prime loans. This was the trigger for the global
financial crisis. Almost 70% of CDOs were given AAA rating by the credit rating agency.
Countrywide financial corporation and Amerequest Mortgage company, both these
companies gave subprime loans worth 177 million dollars. Banks, investment bank and credit
rating agencies, the honeymoon period continued till the start of 2008. AIG which is the
biggest insurance company in the world, started giving away insurance on these CDO’s and
named it as Credit default swap (CDS). As the interest rates were adjustable all those who
had taken subprime loans find it difficult to pay over the period of time and started defaulting
on the loans. Most of the borrowers didn't even have a regular income source, yet they got
loans from the bank.

Dr. Raghuram Rajan was the chief economist at the World Bank in 2005. He presented a
paper entitled, "Has Financial Development Made the World Riskier?" at the annual
Economic Policy Symposium of central bankers in Jackson Hole, Wyoming. Rajan’s research
found that many big banks were holding derivatives to boost their own profit margins. He
warned, "The inter-bank market could freeze up, and one could well have a full-blown
financial crisis,"

Similarly global financial crisis could have been prevented if looked at How the demand for
subprime loans were increasing and there was no check before giving the loans. Same as
subprime loans, even credit rating agency data could have forecasted the global financial
crisis.

4) India witnessed the closure of several engineering colleges during the

2012-14 period. Similarly, many business schools either closed down
or aborted plans of expansions.

The rapid expansion of tier-2 and tier-3 management education institutes without adequate
quality controls was the primary reason behind the closures, said ASSOCHAM Secretary
General DS Rawat.

“While students paid exorbitant fees, they did not get a return on their investment.

“While hundreds of engineering and management colleges were opened, they were looking at
just campus placement and jobs. There were no quality controls in terms of infrastructure,
qualified faculty or industry interface for students,” he said.
The ASSOCHAM study revealed: “The need to update and retrain faculty in emerging global
business perspectives is practically absent in many B-schools, often making the course
content redundant.”

A growing gap between the demands of industry and the education and skills that many
universities offer has resulted in a generation of overqualified but underemployed – and
dissatisfied – graduates.
Lack of quality teaching, absence of industry collaborations, a slowing economic growth rate
and excess supply have forced the closure of hundreds of management and engineering
institutions in India over the past few years, an industry study has revealed.

In face of decreased demand, the government’s decision to open more IITs is more logically
consistent. IITs and IIMs are backed by the government and carry a status on their own
because of their brand value. People any day trust these institutions more than any private
institutions. Cost is also the biggest factor when it comes to decision-making in selecting
colleges. Private colleges charge very hefty fees and most of the time ROI (Return on
investment is very minimal or up to the status of government colleges like IIM/IIT.

This could have been forecasted as the demand for seats was growing but placements
reported didn’t shoot up as compared to the demand for these seats. This evidence was
enough to forecast demand for private colleges in future.

5) How can the firm minimize its own forecasting errors?

Forecast error is the difference between the forecast demand and the actual demand. A lot of
calculations go into forecast error, but the bottom line is that the greater the difference
between actual demand and forecast demand, the greater the impact on a distributor’s bottom
line.
Accurately account for stock levels
While some may use the terms “demand” and “sales” interchangeably, it’s important to note
that the two are not identical. While demand reflects the customer or market appetite for a
business or product, sales reflect what is or could be actually sold. A key component
separating the two is the amount of inventory actually available.
For this reason, it’s important to accurately account for a stock level at any given time. When
reviewing historical data, ensure we are not misled on performance based on inadequate stock
levels to support full demand. The same holds true when looking ahead.
Quantify receipt delays
Stock levels should be accounted for both as inventory that is owned and saleable as well as
that which is coming in. when faced with stockouts, the timing of replenishment becomes
more urgent. Quantifying delays in receipts will help quantify the loss in sales. This loss in
sales should be applied to your forecast estimates either as a loss, or an amount you will
capture in other products or at a later time.

Understand seasonality
The change in demand that occurs at specific regular intervals within a period of time is
known as seasonality. This could refer to weeks, months, quarters, or simply, seasons.
The most obvious example is the sale of products to keep cool in the summer and warm in the
winter. But for some industries, it can also refer to the halo effect of major holidays like
Valentine’s Day, Mother’s Day, Christmas, and many more.

Dive into industry insights

Remember, an industry exists to serve a market, so it’s important to know the trends in both.
Regularly review the industry landscape and note any new entrants to the territory. This will
help inform who is worth keeping a competitive eye on. Assess both the winners and the
losers of your industry, what their plans are for the future, and what this means for your
business.

Taking a large sample of data:

In a Forecast, it is very essential to take a large number of sample data. By doing this we get
the standard deviation minimized and chances of error are reduced. One of the reasons Big
data is successful because of its large sample size.

6) What can the firm do to minimize the economic impact or damage

resulting from its inevitable, remaining forecasting error?
 Unfortunately, every business during its lifetime will face a crisis. It may be a crisis related to
the company’s products, or a natural disaster that is a totally random act. Thus, the question
becomes not if it happens, but when.

I. Plotting the company’s potential risk.

For a company to minimize economic impact, it is necessary to carry out a complete
mapping of all the company's risks. Raising the entire history of the organization and
analysing the main issues that could affect it. It is important to simulate these possible
scenarios to have a better understanding of what could happen and, based on that, devise
the best strategies for each situation.

II. Creating an emergency aid team.

Once all the risks that could affect our business are mapped and understood, the second
step is to establish who will be responsible for this crisis management. The leaders and
managers should be in front of this command-line process and also who will also be
responsible for dealing with problems that reach their respective areas.
III. Contingency fund.
It is based on risks that have already been identified and decided upon as situations that
can critically impact the company, to maintain or restore the organization's critical
operations. Creating a separate fund for any kind of emergency situation so that day-to-
day operations are not affected. In addition, the organization's response must be as quick
as possible, as the longer it takes, the more difficulties can arise in solving the problem.

IV. Communications
In times of crisis, a small flaw, miscommunication or rumours can disrupt this entire
process, and even bring serious consequences. Therefore, the first item that should not be
dispensed with is internal communication. Maintaining good internal communication will
bring greater security to those involved, ensuring that employees are always aware of the
organization's position at these times, feel at ease, and know what is being done to fight
the crisis. The Ebola crisis and other recent major news events have all confirmed that
social media is one of the most important channels of communication. It is very essential
to establish a social media team to monitor, post and react to social media activity
throughout the crisis.
As the question, itself mentions that there are some inevitable errors which can’t be
forecasted, a company’s preparedness is what will help in the time of its crisis. Proper
planning and with calculated risk company can lessen the economic burden of its
unavoidable, ongoing forecasting mistake.

References:
https://www.aquare.la/en/demand-forecasting-all-you-need-to-know-about-this-subject/
https://www.wixanswers.com/post/recover-from-unexpected-events-business
https://www.laserfiche.com/ecmblog/how-to-prepare-your-business-for-a-natural-disaster-4-
tips/
https://ec.europa.eu/eurostat/documents/1797566/4300283/3-5-Bragoli_final_paper.pdf
https://www.thebalance.com/subprime-mortgage-crisis-effect-and-timeline-3305745
https://www.universityworldnews.com/post.php?story=20130221160706547