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METHODS OF DEMAND FORECASTING

What is DEMAND FORECASTING?

DEMAND FORECASTING

Demand forecasting is the activity of estimating the quantity of a product or service that consumers will purchase 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 consumerconsumer-focused 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.

Salient features of a good forecasting method SIMPLICITY ACCURACY ECONOMY AVAILIBILTIY APPLICABILITY .

Use mathematical or simulation models based on historical demand or relationships between variables. markets. .METHODS OF DEMAND FORECASTING Micro economic factors (Quantitative factors) Involves the prediction of particular firms. and industries. Are much more reliable than macro-economic macromethods due to the lower dimensionality of factors and often can be easily incorporated into a model. commodities. branded products.

unemployment. . Its is difficult because of the complex interdependencies in the overall economic factors. GDP growth. and trade flows. short term interest rates. Rely on human judgment and opinion.Macro-economic methods (Qualitative method) MacroInvolves the prediction of economic aggregates such as inflation.

METHODS QUALITATIVE CONSUMER SURVEY METHOD EXPERT OPINION METHOD MARKET EXPERIMENTS QUANTITATIVE TIMES SERIES ANALYSIS MOVING AVERAGE METHOD REGRESSION ANALYSIS .

. This method is also known as the buyers intention and opinion survey method.CONSUMER SURVEY METHOD As the name suggests involves the questioning of customers with regard to his buying plans for the future time period.

Under this method the forecasting team undertakes a complete survey of all the consumers of a given product. . or sample method or the end-use method.Another type of customer survey is the census method. endIts also known as the complete enumeration method.

error. Demerits Census method is costly and tedious. The customer may say what they want but not what they will buy. . The sample survey is cheap and has a comparatively less margin of error.Merits It eliminates the forecaster s bias as the exercise is completely factual and the entire population is covered.

EXPERT OPINION METHOD Expert opinion method as the name suggests is a method whereby opinions of the experts in the field of demand forecasting is sought by firms who are planning to launch a new product or increase the production of an existing product .

Features The experts may be in-house or services may be hired infrom outside experts. consultancy firms and market research organisations. . The experts must have a successful track record and must be highly experienced. organisations. the panel of experts must be drawn mainly from the relevant area of specialisation and the panel must be internally heterogeneous. In order to ensure realistic and scientific predictions.

GROUP DISCUSSION Developed by Osborn in 1953. Decisions may be taken with the help of brainstorming sessions or by structured discussions .TYPES i.

the beginning of the cold war to forecast the impact of technology on warfare Way of getting repeated opinions of experts without their face to face interaction.The Delphi Method: Was developed by Rand Corporation of the USA by Olaf Helmer. . Dalkey and Gordon in the late 1940 s at Helmer.

It consists of an attempt to reach at a consensus in an uncertain area by questioning a group of experts repeatedly until the responses appear to converge along a single line or the issues causing disagreement are clearly defined. .

With external experts.MERITS Decisions are enriched with the help of competent experts. risk of loss of confidential information to rival firms. Firm need not spend time. . DEMERITS Experts may involve some level of bias. resources in collection of data by survey. Very useful when product is absolutely new to all markets.

SURVEY OF SALES FORCE METHOD As salespersons are in direct contact with retailers thy are asked about estimated sales targets in their respective sales territories over a period of time. .

. on the notions of the salespersons who are in direct contact with their customers. DEMERITS Results may be conditioned by the biased of optimism (or pessimism) of salespersons. Salespersons may be unaware of the economic environment of the business and may make wrong estimates.MERITS Cost effective as no other cost is incurred in the collection of data Estimated figures are more reliable as they are based. estimates.

Market studies and experiments can be classified into two: a. Controlled experiments . Test marketing b.MARKET EXPERIMENTS Market experiments refers to market studies and market experiments in the field of consumer behaviour conducted under real but controlled market conditions.

.Test marketing A representative sub-market is chosen where the subproduct is introduced. subThe firm can study the impact of different demand determinants in different sub-markets and choose subthe most effective market strategy. if more varieties of a given product are to be introduced in different sub-markets. More than one test area can be chosen.

Considered less risky than launching the product over a wide region. Very suitable for new products. DEMERITS Very costly as it requires the actual production of the product. . Time consuming to actually observe the buying pattern of consumers. and in the event of the failure of the product the entire cost of test is sunk.MERITS The most reliable among qualitative methods.

A representative group is identified and asked to visit a retail shop where they will reveal their choice and preferences in relation to price and quantities of different products.Controlled experiments They are conducted to find out the demand for a new product and its varieties under different brand names. .

.Merits Controlled experiments are more scientific and accurate information on the buyer preferences can be obtained. Demerits They are very expensive and they are conducted on small scale so generalisations cannot be made. validity. The results have only short term validity. People behave differently when they are being observed.

Time series analysis It is the study of movements of variables through time. It requires a reliable time-series data base. time- .

Time series data are composed of: Secular trend: Change occurring consistently over a long time and is relatively smooth in its path. Seasonal trend: If the fluctuations in data are on account of weather or climatic changes. Cyclical trend: Cyclical movement in the demand of a product that may have a tendency recur every few years. Random trend: Changes which are on account of natural interventions create random variations in the series. .

LAKHS 45 52 48 55 60 .A producer of soaps decides to forecast the next years sales of his product. The data for the last five years is as follows: YEARS 1996 1997 1998 1999 2000 SALES IN Rs.

The data is plotted on a graph: .

The equation for the straight line trend is Y = a + bx a-intercept b-shows impact of independent variable The Y intercept and the slope of the line are found by making substitutions in the following normal equations: Y = na + b x XY = a x + b x2 .

1 .3 .4) solving the two equations. b = 3. LAKHS (Y) 45 52 48 55 60 Y=260 X 1 2 3 4 5 X=15 X2 1 4 9 16 25 X2=55 XY 45 104 144 220 300 XY=813 Substituting the above values in the normal equations: 260=5a +15b (Eq.3) 813=15a + 55b (Eq.YEARS 1996 1997 1998 1999 2000 N=5 SALES Rs. a = 42.

1+3.1+3. the forecast sales for year 2001 is Rs.61.Therefore. .7 52.3(2) 42.1+3.6 61.3 58.4 48.3X Using this equation we can find the trend values for the previous years and estimate the sales for the year 2001 as follows: Y 1996 Y 1997 Y 1998 Y 1999 Y 2000 Y 2001 = = = = = = 42.3(6) = = = = = = 45.3(1) 42.1 + 3.3(3) 42.9 lakhs.0 55.3(5) 42.1+3. the equation for the straight line trend is Y=42.1+3.1+3. lakhs.3(4) 42.9 Thus.

1993We have to find out the trend of the sales using (1) 3 yearly moving averages and (2) 4 yearly moving averages and forecast the value for 2005.LAKHS . YEAR 1993 These are the annual sales of goods during the period of 1993-2003. MOVING AVERAGES METHOD 12 15 14 16 18 17 19 20 22 25 24 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 SALES IN Rs.Moving averages method can be used when the forecast period is either odd or even.

1994 and 1995 YEAR SALES (Rs. TREND VALUES 41 45 48 51 54 56 61 67 71 41/3= 13.3 yearly period: The value of 1993 + 1994 +1995 12 +15+14 = 41 written at the capital period 1994 of the years 1993.7 45/3= 15 48/3 =16 51/3 =17 54/3 = 18 56/3 = 18.2 67/3 = 22.7 61/3 = 20. LAKHS) 12 15 14 16 18 17 19 20 22 25 24 3 YEARLY 3 YEARLY MOVING TOTAL MOVING AVG.7 - 1993 94 95 96 97 98 99 2000 01 02 03 .3 71/3 = 23.

4 YEARLY MOVING AVERAGES YEAR. is calculated by dividing 120 by 8 . LAKHS) 4 YEARLY MOVING TOTAL MOVING TOTAL OF PAIRS OF YEARLY TOTAL 4 YEARLY MOVING AVG. 128 = 16 +65 and so on. 120 is total of 8 years and so the avg.5 177/8 = 22.9 144/8 = 18 152/8 = 19 164/8 = 20. TREND VALUES 93 94 95 96 97 98 99 00 01 02 03 12 15 14 16 18 17 19 20 22 25 24 57 63 65 70 74 78 86 91 - 120 128 135 144 152 164 177 - 120/8 = 15 128/8 = 16 135/8 = 16. SALES (Rs.1 - 57 = 93 + 94 + 95 + 96 = 12 + 15 + 14 + 16 120= 57 +63.

The trend values from the previous tables can be plotted on a graph as follows: .

Method of Least Squares From the above data we can project the sales for 03. (iii) Product of time deviation and sales . (ii) Deviation Squares. First we calculate the required values which are (i) Time (i Deviation. 05. 04.

CRORE) (y) TIME DEVIATION FROM MIDDLE YEAR 2000 (x) TD SQUARED (x2) PRODUCT OF TIME DEVIATION &SALES(xy) 98 99 00 01 02 X=5 240 280 240 300 340 y = 1400 -2 -1 0 +1 +2 x=0 4 1 0 1 4 x2 = 10 -480 -280 0 +300 +680 xy = 220 . In crores) 240 280 240 300 340 YEAR (n) SALES (RS.REGRESSION METHOD YEAR 1998 1999 2000 2001 2002 SALES (Rs.

sales projection from 2003-2005 can be ascertained. applying values to the regression equation.The equation is Y = a + bx a b independent variable exhibits rate of growth a & b can be found out as follows: a = y / n = 1400 / 5 = 280 b = xy / x2 = 220/10 = 22 Now. 20032003 = 280 + 22(3) = Rs.346 crores 2004 = 280 + 22(4) = Rs.368 crores 2005 = 280 + 22 (5) = Rs. Y = 280 + 22x Hence.390 crores .

e.b n Pi .( 2 Si)( Pi) n Pi2 ( Pi) a = Si . S = a + bP where in. b = n Si Pi.Method of Simple linear Regression The linear trend can be fitted in the equation Sales = a + b (Price) i. a and b are constants.

e. fit a linear regression line to the following data & estimate the demand at price Rs.g.30 YEAR PRICE (Pi) SALES (Si) in 1000 units 81 15 52 82 15 46 83 12 38 84 26 37 85 18 37 86 12 37 87 8 34 88 38 25 89 26 22 90 19 22 91 29 20 92 22 14 .

To find the values of a and b the following table is constituted: Pi 15 15 12 26 18 12 8 38 26 19 29 22 Pi = 240 Si 52 46 38 37 37 37 34 25 22 22 20 14 Si = 384 Pi2 225 225 144 676 324 144 64 1444 676 361 841 484 Pi2 = 5708 Si2 2704 2116 1444 1369 1369 1369 1156 625 484 484 400 196 Si2 = 13716 Si Pi 780 690 456 962 666 444 272 950 572 418 580 308 Si Pi = 7098 .

641)] = 44.82 [384-(240)(12 Thus the regression line is S= 44.82 .0.29 thousand units .641P By assigning value 30 to P.( Si)( Pi) = 12(7098)-(240)(384) = 0.641 (30) = 25.b = n Si Pi.641 12(7098)2 n Pi2 ( Pi) 2 12 (5708)-(240) (5708)- a = Si . The corresponding sales level is S = 44.b n Pi= [384-(240)(-0.82 0.

ANY QUESTIONS? .

Thank you Presented by: Nicola Gala Roll no. 11 .

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