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GROUP 1
SHWETHA RAGHAVAN SWATI MEHTA DEEPTI MALLELA ABHISHEK BANSAL SANJEEV MOHIT NARULA
DEMAND FORECASTING
Demand forecasting refers to the prediction or estimation of a future situation under given constraints. TYPES OF FORECASTING: 4.Short Term 5.Medium Term 6.Long Term
OBJECTIVES OF DEMAND FORECASTING
1. 2. 3. 4. 5. Helping for continuous production Regular supply of commodities Formulation of price policy Arrangement of finance Labor requirement
FACTORS INVOLVED IN DEMAND FORECASTING
1. Time period 2. Levels of forecasting  International level  Macro level  Industry level  Firm level 3. Purpose  General or Specific 4. Methods Of Forecasting 5. Nature Of Commodity 6. Nature Of Competition
DETERMINANTS FOR DEMAND FORECASTING
1. Capital goods – goods required for further production of goods Demand for capital goods is derived demand  Replacement demand  New demand Durable consumer goods— goods used continuously for a period of time  Replacement demand  New demand Nondurable consumer goods— commodities which are used in a single act of consumption Demand for these goods is influenced by  Disposable income of people  Price of the commodity  Size and characteristics of population
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CRITERIA FOR GOOD DEMAND FORECASTING
2. 3. 4. 5. 6. Accuracy Plausibility Durability Availability Economy
METHODS OF FORECASTING
SURVEY METHOD 1.Survey of buyer’s intentions STATISTICAL METHOD 1.Trend projection method
2.Expert opinion method or Delphi Method 3.Controlled Experiments 4.Simulated market situations
2.Moving averages method
3.Regression analysis 4.Barometric method
• Least sophisticated method • Customers are directly contacted to find out their intentions to buy commodities in the near future • Intentions recorded through personal interviews, mail or post service,telephone interviews and questionnaires. • Two types of Consumer Survey
– Complete enumeration Method – Sample survey Method
SURVEY OF BUYER’S INTENTIONS
DELPHI METHOD
• The forecasters are given the forecasts and assumptions of other experts, and a final report is compiled with the combined consensus of the experts.
MARKET SURVEY METHOD
• CONTROLLED EXPERIMENTS
Different determinants of demand are varied and price quantity relationships are established at different points of time in the same market or different markets. Only one determinant varied ; others kept constant.
• SIMULATED MARKET SITUATION
An artificial market situation is created and “consumer clinics” selected. Consumers are asked to spend time in an artificial departmental store and different prices are set for different buyer groups.
TREND PROJECTION METHOD
• Based on analysis of past sales patterns • Shows effective demand for the product for a specified time period • The trend can be estimated by using the Least Square Method
A producer of soaps decides to forecast the next years sales of his product. The data for the last five years is as follows:
YEARS 1996 1997 1998 1999 2000 SALES IN Rs.LAKHS 45 52 48 55 60
The data is plotted on a graph:
• The equation for the straight line trend is
Y = a + bx
aintercept bshows impact of independent variable The Y intercept and the slope of the line are found by making substitutions in the following normal equations:
∑Y = na + b ∑ x
YEARS 1996 1997 1998 1999 2000 N=5
SALES Rs. LAKHS (Y) 45 52 48 55 60 ∑Y=260
X 1 2 3 4 5 ∑X=15
X2 1 4 9 16 25 ∑X2=55
XY 45 104 144 220 300 ∑XY=813
Substituting the above values in the normal equations: 260=5a +15b (Eq.3) 813=15a + 55b (Eq.4) solving the two equations, a = 42.1 , b = 3.3
Therefore, the equation for the straight line trend is Y=42.1 + 3.3X
Using this equation we can find the trend values for the previous years and estimate the sales for the year 2001 as Y 1996 42.1+3.3(1) 45.4 follows:
= 1997 Y = 1998 Y = 1999 Y = 2000 Y = 2001 Y = = 42.1+3.3(2) = 42.1+3.3(3) = 42.1+3.3(4) = 42.1+3.3(5) = 42.1+3.3(6) = 48.7 52.0 55.3 58.6 61.9
Thus, the forecast sales for year 2001 is Rs.61.9 lakhs.
MOVING AVERAGES METHOD Moving averages method can be used when the
forecast period is either oddYEAR or even.
1993 1994 SALES IN Rs.LAKHS 12 15 14 16 18 17 19 20 22 25 24
These are the annual sales of goods 1995 during the period of 19932003. 1996 We have to find out the trend of the 1997 sales using (1) 3 yearly moving averages 1998 and (2) 4 yearly moving averages 1999 and forecast the value for 2005.
2000 2001 2002 2003
3 yearly period:
The value of 1993 + 1994 +1995 12 +15+14 = 41 written at the capital period 1994 of the years 1993, 1994 and 1995
YEAR SALES (Rs. LAKHS) 12 15 14 16 18 17 19 20 22 25 24 3 YEARLY MOVING TOTAL 41 45 48 51 54 56 61 67 71 3 YEARLY MOVING AVG. TREND VALUES 41/3= 13.7 45/3= 15 48/3 =16 51/3 =17 54/3 = 18 56/3 = 18.7 61/3 = 20.2 67/3 = 22.3 71/3 = 23.7 
1993 ’94 ’95 ’96 ’97 ’98 ’99 2000 ’01 ’02 ’03
4 YEARLY MOVING AVERAGES
YEAR. SALES (Rs. LAKHS) 4 YEARLY MOVING TOTAL MOVING TOTAL OF PAIRS OF YEARLY TOTAL 4 YEARLY MOVING AVG. TREND VALUES
’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03
12 15 14 16 18 17 19 20 22 25 24
57 63 65 70 74 78 86 91 

120 128 135 144 152 164 177 
120/8 = 15 128/8 = 16 135/8 = 16.9 = 18 144/8 152/8 = 19 164/8 = 20.5 = 177/8 22.1 
57 = ‘93 + ‘94 +’95 + ‘96 = 12 + 15 + 14 + 16 120= 57 +63, 128 = 16 +65 and so on. 120 is total of 8 years and so the avg. is calculated by dividing 120
The trend values from the previous tables can be plotted on a graph as follows:
REGRESSION METHOD
“Method of Least Squares”
YEAR 1998 1999 2000 2001 2002
SALES
(Rs. In crores)
240
280
240
300
340
From the above data we can project the sales for ‘03, ‘04, ‘05. First we calculate the required values which are (i) Time Deviation, (ii) Deviation Squares, (iii) Product of time deviation and sales. YEAR (n) SALES (RS. TIME TD SQUARED PRODUCT OF
CRORE) (y)
’98 ’99 ’00 ’01 ’02 X=5
240 280 240 300 340 ∑y = 1400
2 1 0
DEVIATION FROM MIDDLE YEAR 2000 (x)
(x2)
4 1 0 1 4 ∑x2 = 10
480 280 0
TIME DEVIATION & SALES(xy)
+1 +2 ∑x = 0
+300 +680 ∑xy = 220
The equation is
Y = a + bx
‘a’ – independent variable ‘b’ – exhibits rate of growth a & b can be found out as follows:
a = ∑y / n = 1400 / 5 = 280 b = ∑xy / ∑ x2 = 220/10 = 22
Now, applying values to the regression equation, Y = 280 + 22x Hence, sales projection from 20032005 can be ascertained. 2003 = 280 + 22(3) = Rs.346 crores 2004 = 280 + 22(4) = Rs.368 crores 2005 = 280 + 22 (5) = Rs.390 crores
“Method of Simple linear Regression”
The linear trend can be fitted in the equation Sales = a + b (Price) i.e. S = a + bP where in, a and b are constants. b = n∑Si Pi (∑Si)(∑Pi) n∑Pi2 – (∑Pi) 2 a = ∑Si  b ∑ Pi n
e.g. fit a linear regression line to the following data & estimate the demand at price Rs.30
YEAR
PRICE (Pi) SALES (Si) in
1000 units
’8 ’82 1 15 15 52 46
’83 12 38
’84 26 37
’85 18 37
’86 12 37
’87 8 34
’88 38 25
’89 26 22
’90 19 22
’91 29 20
‘92 22 14
To find the values of a and b the following table is constituted: 2 2
Pi Si Pi Si Si Pi 780 690 456 962 666 444 272 950 572 418 580 308 ∑Si Pi = 7098 15 15 12 26 18 12 8 38 26 19 29 22 52 46 38 37 37 37 34 25 22 22 20 14 225 225 144 676 324 144 64 1444 676 361 841 484 ∑Pi2 = 5708 2704 2116 1444 1369 1369 1369 1156 625 484 484 400 196 ∑Si2 = 13716
∑Pi = 240 ∑Si = 384
b = n∑Si Pi (∑Si)(∑Pi) = 12(7098)(240)(384) = 0.641 n∑Pi2 – (∑Pi) 2
2 12 (5708)(240)
a = ∑Si  b ∑ Pi = [384(240)(0.641)] = 44.82 n 12 Thus the regression line is S= 44.82  0.641P By assigning value 30 to P, The corresponding sales level is S = 44.82 – 0.641 (30) = 25.29 thousand units
BAROMETRIC METHOD
• Improvement over trend projection method • Events of the present are used to predict future demand • Basic approach constructing an index of relevant economic indicators Leading indicators Coincident indicators Diffusion indices
IMPORTANCE OF DEMAND FORECASTING
• • • • Planning and scheduling production Budgeting of costs and sales revenue Controlling inventories Making policies for long term investment • Helps in achieving targets of the firm