METHODS AND TECHNIQUES

OF DEMAND FORECASTING
AJAY
2203008
BE(2.2)
 DEMAND FORCASTING
 Demand forecasting means estimation of the
demand for the good in the forecast period.

 It is a process of estimating a future event by

casting forward past data.

 The past data are systematically combined in

a predetermined way to obtain the estimate
of future demand.
DEMAND FORECASTING
 is the activity of estimating the quantity of a
product or service that consumers will
purchase.
 Demand forecasting involves techniques

including both informal methods, such as

educated guesses, and quantitative methods.
 Demand forecasting may be used in making

pricing decisions, in assessing future capacity

requirements, or in making decisions on
whether to enter a new market.
 Forecasting Horizons
 Long Term
5+ years into the future
R&D, plant location, product planning Principally judgment-
based
 Medium Term
1 season to 2 years
Aggregate planning, capacity planning, sales forecasts
Mixture of quantitative methods and judgment
Short Term
1 day to 1 year,
less than season Demand forecasting, staffing levels,
purchasing, inventory levels Quantitative methods
 PURPOSES OF LONG-TERM FORECASTING

 Planning of a new unit or expansion of an existing unit. A

multi-product firm must ascertain not only the total
demand situation, but also the demand for different items
separate.
 Planning long-term financial requirements. As planning for
raising funds requires considerable advance notice, long –
term sales forecasting are quite essential to assess long-
term financial requirement. Planning man-power
requirements. Training & personnel development are long-
term propositions, taking considerable time to complete.
Purpose of short-term Forecasting
 Appropriate production scheduling so as to
avoid the problem of over-production & the
problem of short-supply. Helping the firm to
reducing costs of purchasing raw materials.
Determining appropriate price policy. Setting
sales targets & establishing controls &
incentives. Evolving a suitable advertising &
promotion programme. Forecasting short-
term financial requirements
 OBJECTIVES OF DEMAND
FORECASTING
Inventory
management

Setting up price
strategy

Sales techniques

Determining the
finance

Estimation of change
in technology
 STEPS INVOLVED IN DEMAND
FORECASTING
 Identification of product
 Determining objectives
 Determining scope
 Identifying the risk involved
 Collection and analysis of data
 Methodology to be used
 Interpretation, conclusion and decision
 Reviewing the decision
General Approaches to Forecasting

 JUDGEMENTAL APPROACHES: The essence of the judgmental approach

is to address the forecasting issue by assuming that someone else
knows and can tell you the right answer.

 EXPERIMENTAL APPROACHES: When an item is "new" and when there is

no other information upon which to base a forecast, is to conduct a
demand experiment on a small group of customers

 RELATIONAL/CAUSAL APPROCHES: There is a reason why people buy

our product. If we can understand what that reason (or set of reasons)
is, we can use that understanding to develop a demand forecast.

 TIME SERIES APPROACHES: A time series is a collection of observations

of well-defined data items obtained through repeated measurements
over time.
Qualitative Methods

• These methods are based on emotions, intuitions, judgments, personal

experiences, and opinions. This means that there is no math involved in
qualitative forecasting methods.

Quantitative Methods

• These methods depend wholly on mathematical or quantitative models. The

outcome of this method relies entirely on mathematical calculations.
Delphi
Method
The agreement of a group of
experts in consensus is
required to conclude in the
Delphi method. This method
involves a discussion between
experts on a given problem or
situation. An argument or
brainstorming is done to
complete that everyone
involved in the debate agrees
to.
Market Survey

In a market survey, interviews and surveys of customers are made to

understand the task of the customer and tap the trend well in advance to
deliver the right product or service according to the changing needs of the
customer.
EXECUTIVE OPINION

A method of forecasting using a composite forecast prepared by a

number of individual experts. The experts form their own opinions
initially from the data given, and revise their opinions according to the
others' opinions. Finally, the individuals' final opinions are combined.
Sales Force Opinion

This is a method where the salespeople or intermediaries are the ones

responsible for making their estimate sales goals specific to their
respective scope at a given period
 Time series models
 Time series models look at past patterns of data
and attempt to predict the future based upon the
underlying patterns contained within those data.
Assumptions of Time Series Models
 There is information about the past
 This information can be quantified in the form of

data
 The pattern of the past will continue into the

future
MODEL DESCRIPTION

Naïve Uses last period’s actual value as a

forecast
Simple Mean (Average) Uses an average of all past data as
a forecast
Simple Moving Average Uses an average of a specified
number of the most recent
observations, with each
observation receiving the same
emphasis (weight)
Weighted Moving Average Uses an average of a specified
number of the most recent
observations, with each
observation receiving a different
emphasis
Trend Projection Technique that uses the least
squares method to fit a straight
Associative forecasting:

These models usually consider several variables that are related to the
quantity being predicted. Once these related variables have been found,
a statistical model is built and used to forecast the item of interest.