Forecasting

in
Indian scenario
Group 1

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 Agenda
What is forecasting, Why we do it?
Time horizons
Design and steps
Types
Accuracy and issues
Forecasting in Retail Industry
Forecasting in Petroleum Industry
End note
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 What is Forecasting ?
Forecasting is the estimation of future
trends by examining and analyzing available
information.

It is a scientifically calculated guess.

It is a very critical activity for strategic or

tactical production planning.
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 Why Forecasting ?
 To prepare for the future
• How much profit will a business make ?
• How many workers will the company need ?
• Determine demand for a product/service.

 To take effective
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style decisions
• Determine cost to produce a product/service.
• How much money should the company
borrow ?
• When and how borrowed funds should be
repaid ?
• Developing new product/service.
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 Time horizon in forecasting
 Short range (<3 months)

 Medium range (3 months-3 years)

 Long range (>3 years)

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 Less 3 months to After 3 years
than 3 3 years
months
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 Design of forecasting systems

Develop a forecasting logic by identifying the purpose,

data and models to be used

Establish control mechanisms to obtain reliable forecast

Incorporate managerial considerations in using the forecasting

system
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 Developing the Forecasting Logic
Identify purpose Identify a suitable technique
• Purpose of forecast • Collect/analyze past data
Start • Time horizon • Select an appropriate model
• Type of data needed

Develop a forecasting logic

• Establish model parameters
• Build the model

No

Test model adequacy

Satisfactor • Test using historical data
Stop Yes y
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 Sources of data

 Sales force estimates

 Point of sales(POS) data systems
 Forecasts from supply chain partners
 Trade/industry association journals
 B2B portals
 Economic surveys and indicators
 Subjective
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knowledge
 Elements of good forecasting

Timely

Accurate Reliable

Meaningful Written Easy to use

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 Types of forecasting

 Judgmental
Uses subjective inputs

 Time series
Uses historical data assuming the future will be
like the past

 Associative models
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 Judgmental

 Executive opinions
 Sales force composite
 Consumer surveys
 Outside opinion
 Opinions of managers and staff
(Delphi method)

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 Time series

 Trend
Long-term movement in data

 Cyclical
Short term variation in data

 Seasonality
Caused by unusual circumstances
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 Components of time series
Irregular
variation

Trend

CyclesCycle
Business

90
89
88
Seasonal variations

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 Techniques of averaging

 Moving average

 Exponential
smoothening
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 Associative models

 Regression
Technique for fitting a line to a set of points

 Least squares line

Minimizes sum of squared deviations around the line

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 Basic concept

Forecast Error :

FE  Ai  Fi

Where :
Ai = The actual value in time period i
Fi = The forecast value in time period i
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 Basic concept

Mean Error
1 n
FE  [ ( Ai  Fi )] Where,
n i 1
FE = Forecast Error
Ai = The actual value in time period i
Fi = The forecast value in time period i

1 n
MSE  [ ( Ai  Fi )]2
n i 1
Mean Square Error
Where,
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Basic
Mean Absolute Percentage Error
concept
Mean Absolute Deviation
MAD = Mean Absolute Deviation
Ai = The actual value in time period i
Fi = The forecast value in time period i
Where,
MAPE = Mean Square Error
Ai = The actual value in time period i
Fi = The forecast value in time period i

1 n
MAD   Ai  Fi Where,
n i 1
MAD = Mean Absolute Deviation

Ai = The actual value in time period i

Fi = The forecast value in time period i

1  n Ai  Fi
MAPE    100
n  i 1 Ai
Mean Absolute Percentage Error
Where,
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MAPE = Mean Square Error
 Where,
TS = Tracking signal
Basic concept
SFE = Sum of forecast error
MAD = Mean Absolute Deviation

Tracking Signal
SFE
TS  Where,
MAD
TS = Tracking signal
SFE = Sum of forecast error
MAD = Mean Absolute Deviation

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 Issues while using forecasting
system

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Issues while using forecasting
system Click to edit the
Cost outline
Data text format
Availability
 Second Outline
Level
How to get Started?
Choice Of Model
 Third Outline
Level
Estimation Of Parameters
Fourth
Outline
Level
Time frame Key Inferences from
Fifth
research/practice
Outline
 Agency New
reports  Click toCompetitor
edit the
outline text format
 Second Outline
Issues in using the system:-
Level
How to incorporate external
information  Third Outline
 Click to edit
Stability
theVs Responsiveness
outline Level
text format
 Second Outline Level Fourth
Outline
 Third Outline Level
Sales Level
Fourth Outline Level
Promotion Fifth
Fifth Outline Level Outline
 When to change the system?
Parameter Re-estimation Vs
Model Change

Forecast
Reliability
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 Forecasting in Retail sector
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 Insights to the retail sector
 After leading the IT bandwagon, India is poised to grow as a Retail hub

 India have potential to consume ; given the power to spend

 Key challenge areas for the retail growth
• Escalating real estate cost
• Scarcity of skilled workforce
• Structured supply of merchandise

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 Values in Cr. Rs.
Future forecast of different categories in retail sector
Source: TSMG Analysis
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 Forecasting - Retail sector
 Primarily past two-three years of data and the
targeted growth in the particular good is used to
predict the volume of sales.

 Taste and trend are subjective terms and hence

requires much more than just theoretical knowledge
hence more personal & judgmental involvement.

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 Forecasting - Retail sector
High brand retailers Small scale retailers
employ
Click toqualitative
edit the outline
use the forecasting text formaton the
techniques
techniques of the kind historical data and
 Second Outline
studied in theory & considering
Level the behavior
forecasting is done for a trends in the market.
longer time duration  Third Outline
and involves substantial Level
amounts of asset cost. Fourth
Outline Level
Ex: Daily bazaar
 Fifth
Ex: Pantaloons, Big bazaar Outline
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Time Period for which forecasting is done?

 Forecasting is done on a six monthly basis in the

retail industry.
 The production time is considered to be 60 days.
Hence orders usually placed at least 2 months in
advance.

Example :
 For the Diwali season, the forecasting study is
started sometime in March.
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 Forecasting in petrochemical
industry
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 Steps - Petrochemical Industry

Estimates derived at regional level are

aggregated & future demand is estimated
Series of forecasting techniques implemented
on past data and analysis done at various levels
Analysis of supply demand position based on own &
competitor’s capacity and expansion plan
Total market for polyethylene in the medium term of 18-36
months is calculated
Assumptions about tariff structure, exchange rate fluctuation,
imported price, nature of competition & local price
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 Forecasting - Petrochemical
Industry
 Balancing capacity available to actual projected requirement.

 Detailed production planning for the next year by disintegrating available data
into specific products and scheduling plans.

 Helps in establishing performance targets for various departments

(production, material, marketing) and setting up control system.

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 Previous Scenario
 Closure to foreign participation

 Sellers’ market

 Underdeveloped technology

 Emphasis on getting appropriate permits to manufacture.

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Result
Limited use of forecasting methods. Industries
believed in ‘Production concept’
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 Present Scenario
 Globalization

 Buyers Market

 Advanced Technologies Result

Indian market / business is now resorting to
forecasting models, opinion based methods
 Competition
such as Delphi techniques and Consumer
21/12/09 Behavioral Surveys
 Despite having a sophisticated forecasting
system,
managers must use the forecasts obtained from
the system in the context of
external information
I see that you will
get an A in this term

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 THANK YOU

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