CHAPTER 4CHAPTER 4DEMAND FORECASTINGDEMAND FORECASTING

Dr. Vasudev P. IyerDr. Vasudev P. Iyer

Who said it…..?Who said it…..?

TV won’t be able to hold on any market it captures after the first six months. People will soon get tired of staring at a plywood box every night’’.

– 2020thth Century Fox’s Daryl Zanuck, 1946 Century Fox’s Daryl Zanuck, 1946..

And this….?And this….?

“ “ I think there is a world I think there is a world market for about five market for about five computers”computers”

Thomas J. Watson of IBM in 1974.Thomas J. Watson of IBM in 1974.

1. THE OBJECTIVES

2. THE CONCEPTUAL ISSUES

3. PREREQUISTIE OF A GOOD FORECAST

4. IMPORTANCE OF DEMAND FORECASTING

5. FORECASTING TECHQ.

6. CURRENT FORECASTING PRACTICES IN BUSINESS

THE OBJECTIVESTHE OBJECTIVES

To understand the meaning of demand To understand the meaning of demand forecastingforecasting

To understand how uncertainty can be To understand how uncertainty can be minimized with the of demand forecastingminimized with the of demand forecasting

To understand the relevant forecasting To understand the relevant forecasting techniques available. techniques available.

To understand the current forecasting To understand the current forecasting techniques used in the industry.techniques used in the industry.

1. THE OBJECTIVES

2. THE CONCEPTUAL ISSUES

3. PREREQUISTIE OF A GOOD FORECAST

4. IMPORTANCE OF DEMAND FORECASTING

5. FORECASTING TECHQ.

6. CURRENT FORECASTING PRACTICES IN BUSINESS

Meaning of ForecastingMeaning of Forecasting

Forecasting is a scientific technique Forecasting is a scientific technique of predicting of predicting future value of a future value of a variablevariable on the basis of on the basis of current current and and past trendspast trends..

Demand, sales, price, cost etc; are the Demand, sales, price, cost etc; are the common variables that are forecasted by a common variables that are forecasted by a firmfirm

Levels of forecastsLevels of forecasts

FIRM LEVEL

INDUSTRYLEVEL

MACROLEVEL

•Sales, cost and expenses

•Industry as a whole or•A product manf. by the indu.

•National income growth•Employment

1. THE OBJECTIVES

2. THE CONCEPTUAL ISSUES

3. PREREQUISTIE OF A GOOD FORECAST

4. IMPORTANCE OF DEMAND FORECASTING

5. FORECASTING TECHQ.

6. CURRENT FORECASTING PRACTICES IN BUSINESS

Prerequisites of a Good ForecastPrerequisites of a Good Forecast

A good forecast shouldA good forecast should

be consistent with other parts of the business.be consistent with other parts of the business.be based on adequate knowledge of the be based on adequate knowledge of the

relevant past.relevant past.take into consideration the economic and take into consideration the economic and

political environment.political environment.be timely.be timely.

Joel Dean’s CriteriaJoel Dean’s Criteria

• AccuracyAccuracy• SimplicitySimplicity• DurabilityDurability• FlexibilityFlexibility• AvailabilityAvailability

1. THE OBJECTIVES

2. THE CONCEPTUAL ISSUES

3. PREREQUISTIE OF A GOOD FORECAST

4. IMPORTANCE OF DEMAND FORECASTING

5. FORECASTING TECHQ.

6. CURRENT FORECASTING PRACTICES IN BUSINESS

Thus Spoke the Guru….Thus Spoke the Guru….

““The company that The company that doesn’t see trouble doesn’t see trouble ahead is headed for ahead is headed for real trouble”real trouble”

““That is why it hires That is why it hires economistseconomists, , consultants and consultants and futurists”futurists”

Marketing Insights From A to Z: Philip Kotler, John Wiley & Sons, 2003

Why Forecasting?Why Forecasting?

Reduces uncertainty Reduces uncertainty

Helps in planning productionHelps in planning production

Helps in inventory controlHelps in inventory control

Helps in future planning Helps in future planning

Helps in fixing investment Helps in fixing investment targets for different industriestargets for different industries

1. THE OBJECTIVES

2. THE CONCEPTUAL ISSUES

3. PREREQUISTIE OF A GOOD FORECAST

4. IMPORTANCE OF DEMAND FORECASTING

5. FORECASTING TECHQ.

6. CURRENT FORECASTING PRACTICES IN BUSINESS

Forecasting TechniquesForecasting Techniques

Expert opinionExpert opinion

Opinion polls Opinion polls

Market researchMarket research

Economic indicatorsEconomic indicators

ProjectionsProjections

Expert opinion-Jury MethodExpert opinion-Jury Method

Jury of executive opinionJury of executive opinion: A forecast : A forecast generated by experts (e.g., corporate generated by experts (e.g., corporate executives) in meetings.executives) in meetings.

The major drawback is that persons with The major drawback is that persons with strong personalities may exercise strong personalities may exercise disproportionate influence.disproportionate influence.

Expert opinion- Expert opinion- Opinions of Sales RepresentativesOpinions of Sales Representatives

Under this method, salesmen are required to estimate expected future DD of the product in their respective territories.

RATIONALESalesmen have the most intimate feel of the market. R eview ed b y Top E xecu tives

R eview ed b y D ep t. H ead s

D ata co llec ted b y S M s

PROCESS

Expert opinion- Expert opinion- Delphi MethodDelphi Method

Traced back to the Greek times.Traced back to the Greek times.

PROCESSPROCESS: An attempt to arrive at a consensus in an : An attempt to arrive at a consensus in an uncertain area is made by questioning a group of uncertain area is made by questioning a group of experts repeatedly. The process is moderated by a experts repeatedly. The process is moderated by a co-coordinator.co-coordinator.

MERITSMERITS: [1] Less expensive & [2] Opinions of the : [1] Less expensive & [2] Opinions of the experts can be gathered at one place.experts can be gathered at one place.

DEMERTIS:DEMERTIS: [1] A tedious method, [2] Depends upon [1] A tedious method, [2] Depends upon the skill and insight of the experts and [3] Subjective the skill and insight of the experts and [3] Subjective

Opinion PollsOpinion Polls

A forecasting method in which sample A forecasting method in which sample populations are surveyed to determine populations are surveyed to determine consumption trends.consumption trends.

Points to be kept in mind:Points to be kept in mind:– may identify changes in trends– choice of sample is important– questions must be simple and clear

Market ResearchMarket Research

Closely related to opinion pollsClosely related to opinion polls

Market research indicates:Market research indicates:

– why the consumer is or is not buying, why the consumer is or is not buying, – who the consumer is, who the consumer is, – how he or she is using the product, how he or she is using the product, – what characteristics the consumer thinks are what characteristics the consumer thinks are

most important in the purchasing decision.most important in the purchasing decision.

Economic IndicatorsEconomic Indicators

Method of forecasting in which economic Method of forecasting in which economic data are formed into indexes to reflect the data are formed into indexes to reflect the state of the economystate of the economyIndexes of:Indexes of:– leading, leading, – coincident, and coincident, and – lagging lagging

indicators are used to forecast changes in indicators are used to forecast changes in economic activity.economic activity.

Leading, Coincident & LaggingLeading, Coincident & Lagging

Leading indicators predict changes in Leading indicators predict changes in future economicfuture economic activity. activity.

Coincident indicators identify Coincident indicators identify peaks and peaks and troughstroughs in economic activity. in economic activity.

Lagging indicators confirm Lagging indicators confirm upturns and upturns and downturnsdownturns in economic activity. in economic activity.

TIME

recessionpeak trough

recovery

TroughTrough

Things look like they are at their Things look like they are at their worseworse

People are looking for the bottomPeople are looking for the bottom

RecoveryRecovery

Stock prices risesStock prices rises Unemployment flatten outUnemployment flatten out People begin to “feel better”People begin to “feel better” Interest rate flatten outInterest rate flatten out

PeakPeak

The economic growth rate picks upThe economic growth rate picks upRise in pricesRise in pricesBanks may become a little unstableBanks may become a little unstableInterest rates riseInterest rates riseLow unemployment rate. However, Low unemployment rate. However,

it may begin to pick up.it may begin to pick up.Euphoric conditionsEuphoric conditions

General rule of thumbGeneral rule of thumb

If, after a period of increases, the leading If, after a period of increases, the leading indicator index sustains three consecutive indicator index sustains three consecutive declines, a recession (or a slowing) will declines, a recession (or a slowing) will followfollow

DrawbacksDrawbacksLeading indicators occasionally forecast Leading indicators occasionally forecast recessions that do not occur. recessions that do not occur. A change in the index does not indicate the A change in the index does not indicate the precise size of the decline or increase.precise size of the decline or increase.The data are subject to revision in the ensuing The data are subject to revision in the ensuing months.months.

Projections- The Time Series Projections- The Time Series MethodMethod

A method of forecasting from past data by A method of forecasting from past data by using least squares statistical methods. using least squares statistical methods. By time series we mean the variable By time series we mean the variable changes with change in time. changes with change in time. A time series analysis usually examines– Trends– Cyclical fluctuations– Seasonal fluctuations– Irregular movements.

Time Series ProjectionsTime Series Projections

ADVANTAGESADVANTAGES

1.1. Easy to calculateEasy to calculate

2.2. Does not require analytical skillDoes not require analytical skill

3.3. Usually reasonably reliable in the short Usually reasonably reliable in the short runrun

CASELET (12)CASELET (12)

PRACTICAL APPLICATION OF PRACTICAL APPLICATION OF TIMES SERIES METHODTIMES SERIES METHOD

THE FIRST STEPTHE FIRST STEP

DEFINE THE TIME SERIES MODEL

THE MODELD = a + b (t)

THE SECOND STEPTHE SECOND STEP

CALCULATE THE VALUES OF a & bWith the help of the formula

a = ∑D/nb= ∑D /∑t2

1. THE OBJECTIVES

2. THE CONCEPTUAL ISSUES

3. PREREQUISTIE OF A GOOD FORECAST

4. IMPORTANCE OF DEMAND FORECASTING

5. FORECASTING TECHQ.

6. CURRENT FORECASTING PRACTICES IN BUSINESS

Ocean Spray CranberriesOcean Spray Cranberries

Annual sales: US $ 1.5 billionAnnual sales: US $ 1.5 billion

Forecasting group: 7 employeesForecasting group: 7 employees

Predominant model used : Time series Predominant model used : Time series modelmodel

No of items forecasted: 300No of items forecasted: 300

The Wholesale IndustryThe Wholesale Industry

Telephone interviews were conducted Telephone interviews were conducted with 484 wholesale companies in 22 US with 484 wholesale companies in 22 US states.states.Sample size 411 small companiesSample size 411 small companiesExpert opinion was the popular method Expert opinion was the popular method used.used.This was followed by sales force This was followed by sales force estimates and customer survey.estimates and customer survey.

CONSUMER CONFIDENCE CONSUMER CONFIDENCE INDEXINDEX

Published in the Economic Times Published in the Economic Times 24/01/200324/01/2003

100+ optimism 100+ optimism

< 100 indicate pessimism.< 100 indicate pessimism.

The CCI stood at The CCI stood at 8181 on the scale of 0 to on the scale of 0 to 100100..

Used of economic indicatorsUsed of economic indicators

PRESENT TO FUTURE [CCI]PRESENT TO FUTURE [CCI]

CATERGORY Present Situation

Future Expectations

Gen. Business Condition

76 99

Job Availability 46 67

Family Income 88 109