DEMAND

FORECASTING
• DEMAND FORECASTING MEANS
PREDICTING OR ESTIMATING THE FUTURE
DEMAND FOR A PRODUCT .
• IT IS UNDERTAKEN FOR THE PURPOSE OF
PLANNING AND MAKING LONGTERM
DECISIONS
Business Decision Making –Use of Demand Forecasting

 Forward Planning and Scheduling

 Acquiring Inputs
 Making provision for finance
 Formulating pricing strategy
 Planning advertisement
Steps in Demand Forecasting

 Specifying the Objective

 Determining the time Perspective and
type of good
 Selecting a proper method of forecasting
 Collection of data
 Interpretation of results
 Forecasting Horizons.
• Short Term (0 to 3 months): for inventory
management and scheduling.
• Medium Term (3 months to 2 years): for
production planning, purchasing, and
distribution.
• Long Term (2 years and more): for capacity
planning, facility location, and strategic
planning.
 Presentation of a forecast to the
Management
• In presenting a forecast to the management, a managerial
economist should:
1. Make the forecast as easy for the management to understand as
possible.
2. Avoid using vague generalities.
3. Always pin-point the major assumptions and sources.
4. Give the possible margin of error.
5. Avoid making undue qualifications.
6. Omit details about methodology and calculations.
7. Make use of charts and graphs as much as possible for easy
comprehension.
Criteria of a good forecasting method

1 . Simplicity and ease of comprehension.

2. Accuracy – measured by (a) degree of
deviations between forecasts and actuals,
and (b) the extent of success in forecasting
directional changes.
3. Economy.
4. Availability.
5. Maintenance of timeliness.
METHODS OF DEMAND FORECASTING
 SURVEY METHODS
SURVEY METHOS

CONSUMER OPINION METHODS

SURVEY METHODS

COMPLETE
SAMPLE END USE EXPERTS OPINION TEST MARKETING
ENUMERATION
SURVEY METHOD METHOD METHOD METHOD
METHOD

DELPHI METHOD
 STATISTICAL
METHODS

BAROMETRIC
REGRESSION METHOD
RENDPROJECTION
METHODS
Techniques of Demand Forecasting-Survey Methods

Though statistical techniques are essential

in clarifying relationships and providing
techniques of analysis, they are not
substitutes for judgement. What is needed
is some common sense mean between pure
guessing and too much mathematics.
Consumer Survey
 Delphi Method
• Delphi method: it consists of an effort to arrive at a
consensus in an uncertain area by questioning a
group of experts repeatedly until the results appear
to converge along a single line of the issues causing
disagreement are clearly defined.
• Developed by Rand Corporation of the U.S.A in
1940s by Olaf Helmer, Dalkey and Gordon. Useful in
technological forecasting (non-economic variables).
 Delphi method
Advantages
1. Facilitates the maintenance of anonymity of the respondent’s
identity throughout the course.
2. Saves time and other resources in approaching a large number
of experts for their views.
Limitations/presumptions:
1. Panelists must be rich in their expertise, possess wide
knowledge and experience of the subject .
2. Presupposes that its conductors are objective in their job,
possess ample abilities to conceptualize the problems for
discussion, generate considerable thinking, stimulate dialogue
among panelists and make inferential analysis of the
multitudinal views of the participants.
 Statistical Methods
• Statistical methods are considered to be
superior due to the following reasons :
• The element of subjectivity is minimum
• Method of estimation is Scientific.
• Estimates are more reliable.
• It is very economical method.
TREND ANALYSIS METHOD

• THIS METHOD IS USED WHEN A

DETAILED ESTIMATE HAS TO
BE MADE
• TIME PLAYS AN IMPORTANT
ROLE IN THIS METHOD
 TIME SERIES PREDICTS
• This method uses historical and cross –
sectional data for estimating demand
• Finding a Trend value for a specific year

• FINDING SEASONAL FLUCTUATIONS IN THE

VARIABLE
• PREDICTING TURNING POINTS IN FUTURE
MOVEMENTS OF THE VARIABLE
 Analysis of time series and trend projections

Four sets of factors: secular trend (T), seasonal

variation (S), cyclical fluctuations (C ), irregular or
random forces (I).
O (observations) = TSCI
Assumptions:
1. The analysis of movements would be in the order
of trend, seasonal variations and cyclical changes.
2. Effects of each component are independent of each
other.
 There are three techniques of trend
projection
• Graphical
• Fitting Trend Equation
• Box-Jenkins method
• The above method can be used by long
standing firms by using the data from sales
department and books of account .
• New firms can use older firms data belonging
to the same industry .
 Linear Trend
It is represented: Y= a + b (T) (i)
• Y=Demand
• X= Time Period
• a & b are constants .
• For calculation of Y for any value of X requires
the values of a & b These are :
 Formula for calculating linear trend

• ∑Y=na+b ∑ X ----- ( ii )

• ∑XY=a∑X+b∑X² ------ (iii )

• ∑Y = Sum of the values of (sales) data

• Na = Number of years
• b∑X= Total of number of years
• ∑XY= Total of X multiplied by Y
• a∑X = Total of number of years
• b∑X² = Total of square of the years
 Problem & Solution
• The data relate to the sale of lifts of a
company over the last five years are as follows

• Year : 2008 2009 2010 2011 2012

Lifts : 605 715 830 790 835

Estimate the demand for lifts in the year 2015 if

the present trend continues
 Problem & Solution
• The data relate to the sale of generator sets
of a company over the last five years

• Year : 2003 2004 2005 2006 2007

sets : 120 130 150 140 160

Estimate the demand for generator sets in the

year 2012 if the present trend continues
 BAROMETRIC METHOD
Three types of indicators
Leading
Coincidental
Lagging
The forecasting technique that use the lead and
lag relationship between economic variables
for predicting the directional changes in the
concerned variable is known as Barometric
technique.
 Simple Linear Regression
• Linear regression analysis establishes a
relationship between a dependent variable
and one or more independent variables.
• In simple linear regression analysis there is
only one independent variable.
• If the data is a time series, the independent
variable is the time period.
• The dependent variable is whatever we wish
to forecast.
 Simple Linear Regression
• Regression Equation
This model is of the form:
Y = a + bX
Y = dependent variable
X = independent variable
a = y-axis intercept
b = slope of regression line
 Simple Linear Regression
• Once the a and b values are computed, a
future value of X can be entered into the
regression equation and a corresponding
value of Y (the forecast) can be calculated.