Demand Forecasting

SO WHAT

³IS´ DEMAND

FORECASTING?

Forecasting customer demand for products and services is a proactive process of determining what products are needed where, when, and in what quantities. Consequently, demand forecasting is a customer²focused activity. Demand forecasting is also the foundation of a company·s entire logistics process. It supports other planning activities such as capacity planning, inventory planning, and even overall business planning.

such as years. Cyclicity Demand gradually increases and decreases over an extended period of time. Business cycles (recession/expansion) product life cycles influence this component of demand. weeks. months. Seasonality Demand shows peaks and valleys at consistent intervals. Trend Demand consistently increases or decreases over time.Characteristics of demand 5 main characters of demand areAverage Demand tends to cluster around a specific level. years. These intervals can be hours. . Elasticity Degree of responsiveness of demand to a corresponding proportionate change in factors effecting it. or seasons. days.

ACTIVE FORECASTS Where factors being forecasted are taken as flexible and are subject to changes. .TYPES OF FORECASTS PASSIVE FORECASTS Where the factors being forecasted are assumed to be constant over a period of time and changes are ignored.

establishing controls and incentives . volatile and competitive Allows operating levels to be set to respond to demand variations Allows managers to plan personnel. Pricing policies. operations of purchasing & finance for better control over wastes inefficiency and conflicts.Why Study forecasting? Reduces future uncertainties. Inventory Control-reduces reserves of slack resources to meet uncertain demand Effective Setting forecasting builds stability in operations. helps study markets that are dynamic. Sales Targets.

How? THE FORECAST Step 6 Monitor the forecast Step 5 Prepare the forecast Step 4 Gather and analyze data Step 3 Select a forecasting technique Step 2 Establish a time horizon Step 1 Determine purpose of forecast .

Research and Development ..g.Production planning MEDIUM TERM 6 months-2 years.g. Strategic Decision E..Employment changes LONG TERM Above 2 years.g.KEY FACTORS FOR SELECTING A RIGHT METHOD TIME PERIOD SHORT TERM 3-6 Months. Tactical Decision E. Operating Decisions. E.

DATA REQUIREMENTS Techniques differ by virtue of how much data is required to successfully employ the technique. Judgmental techniques require little or no data whereas methods such as Time series analysis or Regression models require a large amount of past or historical data. .

CAUSAL MODELS .REGRESSION MODELS .QUALITATIVE METHODS SURVEY OF BUYERS INTENSIONS EXPERTS OPINION METHOD DELPHI METHOD MARKET EXPERIMENTATION METHOD .EXPONENTIAL SMOOTHING .TREND ANALYSIS .TIME SERIES MODELS .COLLECTIVE OPINIONS METHOD - QUANTITATIVE METHODS .MOVING AVERAGES METHODS .

BUYERS INTENSION SURVEY FEATURES EMPLOYS SAMPLE SURVEY TECHNIQUES FOR GATHERING DATA.  DATA PORTRAYS BIASES AND PREFERENCES OF CUSTOMERS.MIXED. PRODUCER.CONSUMER.  .  IDEAL FOR SHORT AND MEDIUM TERM DEMAND FORECASTING. IS COST EFFECTIVE AND RELIABLE.  DATA IS COLLECTED FROM END USERS OF GOODS .

 ACCURATE METHOD AS BUYERS NEEDS AND WANTS ARE CLEARLY IDENTIFIED & CATERED TO.  MOST EFFECTIVE WAY OF ASSESSING DEMAND FOR NEW FIRMS  HELPS .ADVANTAGES IN APPROXIMATING FUTURE REQUIREMENTS EVEN WITHOUT PAST DATA.

but not what they are capable of buying Customers may not want to disclose real information Effects of derived demand may make forecasting difficult .LIMITATIONS People may not know what they are going to purchase They may report what they want to buy.

COMBINES INPUT FROM KEY INFORMATION SOURCES.EXPERTS OPINION METHOD FEATURES PANEL OF EXPERTS IN SAME FIELD WITH EXPERIENCE & WORKING KNOWLEDGE. FINAL DECISION IS BASED ON MAJORITY OR CONSENSUS. REACHED FROM EXPERT¶S FORECASTS . EXCHANGE OF IDEAS AND CLAIMS.

INCORPORATES A VARIETY OF EXTENSIVE OPINIONS FROM EXPERT IN THE FIELD. .ADVANTAGES CAN BE UNDERTAKEN EASILY WITHOUT THE USE OF ELABORATE STATISTICAL TOOLS.

LIMITATIONS JUDGEMENTAL BIASES FOR EXAMPLE Availability heuristic Involves using vivid or accessible events as a basis for the judgment. Law of small numbers People expect information obtained from a small sample to be typical of the larger population .

COMPETATIVE BIASES  Over reliance on personal opinions. STATISTICAL INADEQUACY Lack of statistical and quantifiable data or figures to substantiate the forecasts made.  Possibility of undue influence in certain cases. .

ONE CO-ORDINATOR IS CHOSEN BY MEMBERS OF THE JURY ANONYMOUS FORECASTS ARE MADE BY EXPERTS BASED ON A COMMON QUESTIONNAIRE. CO-ORDINATOR RENDERS AN AVERAGE OF ALL FORECASTS MADE TO EACH OF THE MEMBERS.DELPHI METHOD PANEL OF EXPERTS IS SELECTED. .

2 TO 3 CYCLES ARE UNDERTAKEN. FORECASTS ARE REVISED UNTIL A CONSENSUS IS REACHED BY ALL.3 CONSEQUENCES. CONVERGENCE AND DIVERSION IS ACCEPTABLE. CONSENSUS OR NO AGREEMENT.DIVERSION. .

ADVANTAGES ELIMINATES NEED FOR GROUP MEETINGS. . ELIMINATES BIASES IN GROUP MEETINGS PARTICIPANTS CAN CHANGE THEIR OPINIONS ANONYMOUSLY.

.LIMITATIONS TIME CONSUMING -REACHING A CONSENSUS TAKES A LOT OF TIME. PARTICIPANTS MAY DROP OUT.

MARKET EXPERIMENTATION INVOLVES ACTUAL EXPERIMENTS & SIMULATIONS. SELECTED CUSTOMERS PURCHASE THE PRODUCTS. INFORMATION FROM INTERACTIONS BETWEEN SALES PERSONNEL & CUSTOMERS IS USED FOR FORECASTING. COUPONS ARE ISSUED TO FEW SELECT CUSTOMERS. . PROXIMITY WITH CONSUMERS MAKES INFORMATION COLLECTED RELIABLE. BEST USED IF SALES PERSONNEL ARE HIGHLY SPECIALISED AND WELL TRAINED.

ADVANTAGES USES KNOWLEDGE OF THOSE CLOSEST TO THE MARKET. HELPS ESTIMATING ACTUAL POTENTIAL FOR FUTURE SALES. . PROVIDES FEEDBACK FOR IMPROVING CUSTOMIZING & OFFERING MADE TO CUSTOMERS.

. COMBINES EXPERTISE OF HIGHER LEVEL MANAGEMENT & SALES EXECUTIVES.COLLECTIVE OPINIONS METHOD OPINIONS FROM MARKETING & SALES SPECIALISTS ARE COMPILED.  CONSERVATIVE TARGETS. 2 TYPES OF TARGETS ESTIMATED AMBITIOUS TARGETS.

DIFFERENCES AND PREJUDICES IN OPINIONS MAY ALSO EXIST.LIMITATIONS POWER STRUGGLES MAY OCCUR BETWEEN SPECIALISTS. CONSENSUS MAY NOT BE REACHED IN GOOD TIME. .

´ARE YOU STILL THERE??µ .

THAT FINISHES THE QUALITATIVE METHODS. NOW LETS LOOK AT THE ´QUANTITATIVE METHODSµ .

using the trend equation. dividing points equally on both sides . Known or Independent variables are used for predicting Unknown or dependent variables. we find ¶Line of Best Fit· and then it is projected in a scatter diagram.TIME SERIES MODELS TREND ANALYSIS Past data is used to make future predictions .´ Predictive analysisµ Based on trend equation.

TREND EQUATION Y^ = a + bX + E Y^ = Estimated value of Y a = Constant or Intercept b = slope of trend line X = independent variable E = Error term .

means the extent to which the independent variable explains the relative change in the dependent variable.= EXPLAINED VARIATION 1- = UNEXPLAINED VARIATION Explained variation . lower the error value leading to accurate forecast . Higher the explained variation.

Higher the amount of previous data. Since the averages are calculated on a moving basis. . the seasonal and cyclical variations are smoothened out. better is the forecast.MOVING AVERAGE METHOD Data from a number of consecutive past periods is combined to provide forecast for coming periods.

smoothing. .EXPONENTIAL SMOOTHING Used in cases where the variable under forecast doesn·t follow a trend.weights assigned in decreasing order as  Weighted one moves from current period observations to previous observations.Simple and Weighted  Simple smoothing.simple average of specific observation called order. 2 Types.

Values may be written asa.The equation for exponential smoothing follows a Geometric Progression. a = value of weight assigned to the observation a(1-a) = weight assigned to 1 period previous observation a(1-a)^2 = weight assigned to 2 periods previous observation Sum of all weights always equals Unity. a (1-a).. a(1-a)^2«. . a(1-n) where.

In simple regression analysis. . The values of the independent variable are typically those assumed to "cause" or determine the values of the dependent variable.g. there is one dependent variable (e. sales) to be forecast and one independent variable.CASUAL MODELS REGRESSION MODEL It is a statistical technique for quantifying the relationship between variables.

For example Assuming that the amount of advertising dollars spent on a product determines the amount of its sales. knowing the quantified relationship between the variables allows us to provide forecasting estimates . we could use regression analysis to quantify the precise nature of the relationship between advertising and sales. For forecasting purposes.

.Identification of variables influencing demand for product under estimation.STEPS IN REGRESSION ANALYSIS 1.Estimation of the function.Choosing an appropriate form of function 4. 3. 2.Collection of historical data on variables.

REGRESSION EQUATION Y= Where  Fx E x Fx Y= value being forecasted E = constant value F x = coefficients of regression = independent variable .

BENEFITS OF EFFECTIVE DEMAND FORECASTING HIGHER REVENUES SALES MAXIMIZATION REDUCED INVESTMENTS FOR SAFETY STOCKS IMPROVED PRODUCTION PLANNING EARLY RECOGNITION OF MARKET TRENDS BETTER MARKET POSITIONING IMPROVED CUSTOMER SERVICE LEVELS .

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