FORECASTING

DEMAND
CHAPTER 4
WHAT IS FORECASTING
DEMAND
 Is the process of predicting future sales by using historical sales data to make informed
business decisions about everything from inventory planning to running flash sales.
Demand forecasting helps estimate the total sales and revenue for a future period of
time.
 Demand forecasting is the process of making estimations about future customer demand
over a defined period, using historical data and other information.
WHAT IS FORECASTING
DEMAND
 Proper demand forecasting gives businesses valuable information about their potential in
their current market and other markets, so that managers can make informed decisions
about pricing, business growth strategies, and market potential.
 Without demand forecasting, businesses risk making poor decisions about their products
and target markets – and ill-informed decisions can have far-reaching negative effects on
inventory holding costs, customer satisfaction, supply chain management, and
profitability.
WHY IS DEMAND FORECASTING
IMPORTANT?
There are a number of reasons why demand forecasting is an important process for businesses:
 Sales forecasting helps with business planning, budgeting, and goal setting. Once you have a
good understanding of what your future sales could look like, you can begin to develop an
informed procurement strategy to make sure your supply matches customer demand.
 It allows businesses to more effectively optimize inventory, increase inventory turnover rates and
reduce holding costs.
 It provides an insight into upcoming cash flow, meaning businesses can more accurately budget
to pay suppliers and other operational costs, and invest in the growth of the business.
WHY IS DEMAND FORECASTING
IMPORTANT?
 Through sales forecasting, you can also identify and rectify any kinks in the sales
pipeline ahead of time to ensure your business performance remains robust
throughout the entire period. When it comes to inventory management, most
eCommerce business owners know all too well that too little or too much inventory
can be detrimental to operations.
 Anticipating demand means knowing when to increase staff and other resources to
keep operations running smoothly during peak periods.
FORECASTING TIME HORIZONS
A forecast is usually classified by the future time horizon that it covers. Time
horizons fall into three categories:
1. Short-range forecast: This forecast has a time span of up to 1 year but is generally
less than 3 months. It is used for planning purchasing, job scheduling, workforce
levels, job assignments, and production levels.
2. Medium-range forecast: A medium-range, or intermediate, forecast generally spans
from 3 months to 3 years. It is useful in sales planning, production planning and
budgeting, cash budgeting, and analysis of various operating plans.
3. Long-range forecast: Generally 3 years or more in time span, long-range forecasts
are used in planning for new products, capital expenditures, facility location or
expansion, and research and development.
TYPES OF FORECASTS
1. Economic forecasts
 address the business cycle by predicting inflation rates, money supplies, housing
starts, and other planning indicators.
2. Technological forecasts
 concerned with rates of technological progress, which can result in the birth of
exciting new products, requiring new plants and equipment.
3. Demand forecasts
 are projections of demand for a company’s products or services.
 They need demand-driven forecasts , where the focus is on rapidly identifying and
tracking customer desires
SEVEN STEPS IN THE
FORECASTING SYSTEM
1. Determine the use of the forecast
2. Select the items to be forecasted
3. Determine the time horizon of the forecast
4. Select the forecasting model(s)
5. Gather the data needed to make the forecast
6. Make the forecast.
7. Validate and implement the results
FORECASTING APPROACHES
1. Quantitative Forecasts
 Use a variety of mathematical models that rely on historical data and/or associative variables to
forecast demand.
2. Qualitative Forecasts
 Incorporate such factors as the decision maker’s intuition, emotions, personal experiences, and value
system in reaching a forecast.
3. Jury of executive opinion
 Takes the opinion of a small group of high-level managers and results in a group estimate of demand.

4. Delphi method
 The Delphi method, or Delphi technique, leverages expert opinions on your market forecast. This
method requires engaging outside experts and a skilled facilitator.
5. Sales force composite
 The sales force composite demand forecasting method puts your sales team in the driver’s seat. It uses
feedback from the sales group to forecast customer demand. This method gathers the sales division with your
managers and executives. The group meets to develop the forecast as a team.

6. Market research
 Customer survey data is used to forecast market research demand. Sending out surveys and tabulating data
takes time and effort, but it's well worth it. This strategy can provide valuable insights that internal sales data
alone cannot deliver. Market research can assist you in gaining a better understanding of your average
consumer. Your surveys can gather demographic information that can aid in the targeting of future marketing
campaigns. Market research is especially beneficial for new businesses that are still learning to know their
clients.

7. Time series analysis

 When historical data is available for a product or product line and trends are clear, businesses tend to use the
time series analysis approach to demand forecasting. A time series analysis is useful for identifying seasonal
fluctuations in demand, cyclical patterns, and key sales trends.
 The time series analysis approach is most effectively used by well-established businesses who have several
years’ worth of data to work from and relatively stable trend patterns
TREND PROJECTION
The trend projection method leverages your previous sales data to forecast future
sales. It is the most basic and uncomplicated strategy for anticipating demand. Future
forecasts must be adjusted to account for historical abnormalities. Last year, for
example, you may have experienced a dramatic increase in demand. However, because
it occurred after your product was highlighted on a popular television show, it's unlikely
to happen again.
A time-series forecasting method that fits a trend line to a series of historical data
points and then projects the line into the future for forecasts. Trend projection and
regression analysis
 Seasonal variations — Regular upward or downward movements in a time series that tie to

recurring events.
 multiplicative seasonal model , seasonal factors are multiplied by an estimate of average

demand to produce a seasonal forecast.

 Cycles — Patterns in the data that occur every several years.

ASSOCIATIVE FORECASTING METHODS:
REGRESSION AND CORRELATION
ANALYSIS
 Linear-regression analysis — A straight-line mathematical model to describe the functional

relationships between independent and dependent variables.

 Standard error of the estimate — A measure of variability around the regression line.

 Coefficient of correlation — A measure of the strength of the relationship between two variables.

 Coefficient of determination — A measure of the amount of variation in the dependent variable

about its mean that is explained by the regression equation.

 Multiple regression — An associative forecasting method with1 independent variable.

MONITORING AND
CONTROLLING FORECASTS
 Tracking signal —A measurement of how well the forecast is predicting actual values.

 Bias — A forecast that is consistently higher or lower than actual values of a time
series.
 Adaptive smoothing — An approach to exponential smoothing forecasting in which
the smoothing constant is automatically changed to keep errors to a minimum.
 Focus forecasting — Forecasting that tries a variety of computer models and selects
the best one for a particular application.
FORECASTING IN THE SERVICE
SECTOR
Service-sector forecasting may require good short-term demand records, even
per 15-minute intervals. Demand during holidays or specific weather events may
also need to be tracked.
The process of predicting future sales by using historical sales
data to make informed business decisions about everything
from inventory planning to running flash sales.

A. Forecasting demand
B. Demand forecast
 Generally 3 years or more in time span, long-range
forecasts are used in planning for new products, capital
expenditures, facility location or expansion, and research
and development.

A. Time series analysis

B. Long-range forecast
C. Medium-range forecast
Address the business cycle by predicting inflation
rates, money supplies, housing starts, and other
planning indicators
A. Economic forecasts
B. Cycles
C. Demand forecasts
A time-series forecasting method that fits a trend line
to a series of historical data points and then projects
the line into the future for forecasts.

A. Trend projection
B. Market research
It uses feedback from the sales group to forecast
customer demand.

A. Delphi method
B. Sales force composite
C. Technological forecasts
REFERENCE
 https://www.tradegecko.com/ebooks/demand-forecasting
 https://redstagfulfillment.com/what-is-demand-forecasting/