DEMAND FORECASTING

INSTRUCTOR: E. GULIYEV
 INTRODUCTION

 Our life is full of uncertainties and so is the buisness.

Changes are even seen in the behaviour of consumer
depending on his tastes and preferences over time .
 In short all calculations and speculations of a firm
regarding the details of his product depends on
demand.
 And in this topic we will study about various methods to
calculate those predictions and objectives behind them
 MEANING
 A forecast is a guess or anticipation or a prediction about any
event which is likely to happen in the future.
 For example : An individual may forecast his job prospects,
a consumer may forecast an increase in his income and
therefore purchases, similarly a firm may forecast the sales
of its product.
 Demand Forecasting means predicting or estimating the future
demand for a firm’s product or products .
 Important aid in effective and efficient planning It is

backbone of any business

 The Short-Term Objectives Are As Follows :

1.Formulation of Production policy : helps to overcome the

problem of over production and under production.
2. Regular Availability of Labour : helps to properly arrange
skilled and unskilled labor
3.Regular supply of Raw Material : helps in predicting
requirement of raw material in future
4.Arrangement of funds : enables to estimate the
financial requirements
5. Price policy formulation : enables the management to
evolve a suitable price strategy
 If the period of forecasting is more than one year then it is
termed as long term forecasting .
The long term objectives are as follows :

1. Labour requirements : helps in arranging skilled

labour .
2. Arrangement of funds : enables to arrange long term
finances on reasonable conditions.
3. To decide about Expansion :enables to plan for a new
project as well as expansion and modernisation of
existing unit .
 NEED AND SIGNIFICANCE

It is necessary to forecast demand in business because:

1. Effective planning : provides scientific and reliable basis for
anticipating future operations
2. Reduction of uncertainty : aims at reducing the area of
uncertainty that surrounds managerial decision making with
respect to costs , production, sales , profit etc .
3. Investment decision : investments are made keeping in mind
the returns and returns depend on market demand.
4. Resource allocation : efficient allocation of resources when
future estimates are available
5. Pricing decisions : in order to pursue optimal pricing strategies
firm need to have complete information about the future
demand.Two concepts arises here :
a)Overoptimistic :these estimates may lead to an excessively high
price and lost sales.
b) Overpessimistic : these estimates of demand may lead to a
price which is set too low resulting in losses.
6. Competitive strategy : the level of demand for a product will
influence decisions , which the firm will take regarding the
non-price factors .
7. Managerial control : forecasting disclose the areas where
control is lacking . It is must in order to control costs of
production .
Case studies
Walmart
With over 11,000 stores in 27 countries and an average of $32 billion in inventory, 
Walmart’s suppy chain is understandably complex. But while their logistics are known for
being precise and technologically advanced, in 2013 they also developed a reputation for
having a serious in-store out-of-stock problem Walmart’s lack of stock on shelves was
attributed to mismanaged inventory – meaning stock was available in warehouses, but there
wasn’t enough staff on hand to move it to the shelves. In this instance, cost-cutting measures
resulted in a negative customer experience for many, which is something that could have
been avoided by properly forecasting demand.

Nike
In 2001, Nike installed demand-planning software without adequate testing, resulting in an
overstock of low-selling shoes and not enough stock of the popular Air Jordans. This ended
up costing Nike $100 million worth of sales In this case, Nike lost out by trying to
implement a new system too quickly. While demand and forecasting technology is essential
for predicting sales and managing inventory, any new system should go through rigorous
testing before being rolled out.
 How ??

Step 5 estimating future events

Step 4 Gather and analyze data

Step3 Select a forecasting technique

Step 2 Selection of products

Step 1 Determine purpose of forecast

 QUALITATIVE
TECHNIQUES
They mainly employ human judgement to predict future
events
 They are also called macroeconomic methods.
 This involves the prediction of economic aggregates such as ,
unemployment, GDP growth, short-term interest rates etc.
This involves :
1) Expert opinion methods
2) Survey methods :
a. Complete enumeration survey
b.Sample survey
c.Sales force opinion
d.End use survey
 Expert Opinion Method:
This technique of forecasting demand seeks the views of experts on
the likely level of demand in the future. They have a rich experience
of the behavior of demand.
If the forecasting is based on the opinion of several experts, then it is
known panel consensus.
A specialized form of panel opinion is the Delphi Method. This method
seeks the opinion of a group of experts through mail about the expected level
of demand.
The responses so received are analyzed by an independent body
NOW LETS HAVE A LOOK AT THE

“QUANTITATIVE
METHODS”
 QUANTATIVE TECHNIQUES

 This method involves various statistical tools to data for predicting

future events.
 These methods are also called microeconomic methods.
 Involves the prediction of activity of particular firms, branded
products, commodities, markets, and industries.
 They are much more reliable.
Least Square Method :
• It is a mathematical procedure for fitting a line
to a set of observed data points in a manner that
the sum of the squared differences between the
calculated and observed value is minimised.
• The linear trend is the most widely used mode
of time series analysis.
 Y= a + b x
It is represented:
• 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 calculated using :
∑Y = na + b∑X
∑XY = a∑X+b∑X²
 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 2012

Sets : 120 130 150 140 160 203

Estimate the demand for generator sets in the year 2012 if the
present trend continues
 Let the base year be 2002.
YEAR X Y X2 XY

2003 1 120 1 120

2004 2 130 4 260

2005 3 150 9 450

2006 4 140 16 560

2007 5 160 25 800

TOTAL 15 700 55 2190

For a linear equation Y = a + bX The
set of normal equation are :
ΣY = na + bΣX
ΣXY = aΣX + bΣX2
1.Substituting the Table Values in equation (ii) &
(iii), We get
700 = 5a +15b
2190 = 15a + 55b
2.By multiplying equation iv by 3 and subtracting it from equation v we
get
10b =90
b =9
3. Substitute this value in equation iv we have
700 =5a +15 b
700 = 5a +15 (9)
5a =565
a = 113
Trend equation Y=113 + 9x
For 2012 ,x will be 10 (2012 - 2002)
Thank you!