CHAPTER 4 DEMAND FORECASTING Dr. Vasudev P. Iyer

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  • CHAPTER 4DEMAND FORECASTING

    Dr. Vasudev P. Iyer

  • Who said it..?TV wont 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.

    20th Century Foxs Daryl Zanuck, 1946.

  • And this.? I think there is a world market for about five computers

    Thomas J. Watson of IBM in 1974.

  • THE OBJECTIVESTHE CONCEPTUAL ISSUESPREREQUISTIE OF A GOOD FORECASTIMPORTANCE OF DEMAND FORECASTINGFORECASTING TECHQ.CURRENT FORECASTING PRACTICES IN BUSINESS

  • THE OBJECTIVESTo understand the meaning of demand forecastingTo understand how uncertainty can be minimized with the of demand forecastingTo understand the relevant forecasting techniques available. To understand the current forecasting techniques used in the industry.

  • THE OBJECTIVESTHE CONCEPTUAL ISSUESPREREQUISTIE OF A GOOD FORECASTIMPORTANCE OF DEMAND FORECASTINGFORECASTING TECHQ.CURRENT FORECASTING PRACTICES IN BUSINESS

  • Meaning of ForecastingForecasting is a scientific technique of predicting future value of a variable on the basis of current and past trends.

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

  • Levels of forecastsFIRM LEVELINDUSTRYLEVELMACROLEVELSales, cost and expensesIndustry as a whole orA product manf. by the indu.National income growthEmployment

  • THE OBJECTIVESTHE CONCEPTUAL ISSUESPREREQUISTIE OF A GOOD FORECASTIMPORTANCE OF DEMAND FORECASTINGFORECASTING TECHQ.CURRENT FORECASTING PRACTICES IN BUSINESS

  • Prerequisites of a Good ForecastA good forecast should

    be consistent with other parts of the business.be based on adequate knowledge of the relevant past.take into consideration the economic and political environment.be timely.

  • Joel Deans CriteriaAccuracySimplicityDurabilityFlexibilityAvailability

  • THE OBJECTIVESTHE CONCEPTUAL ISSUESPREREQUISTIE OF A GOOD FORECASTIMPORTANCE OF DEMAND FORECASTINGFORECASTING TECHQ.CURRENT FORECASTING PRACTICES IN BUSINESS

  • Thus Spoke the Guru.The company that doesnt see trouble ahead is headed for real trouble

    That is why it hires economists, consultants and futuristsMarketing Insights From A to Z: Philip Kotler, John Wiley & Sons, 2003

  • Why Forecasting?

    Reduces uncertainty Helps in planning productionHelps in inventory controlHelps in future planning Helps in fixing investment targets for different industries

  • THE OBJECTIVESTHE CONCEPTUAL ISSUESPREREQUISTIE OF A GOOD FORECASTIMPORTANCE OF DEMAND FORECASTINGFORECASTING TECHQ.CURRENT FORECASTING PRACTICES IN BUSINESS

  • Forecasting Techniques

    Expert opinionOpinion polls Market researchEconomic indicatorsProjections

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

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

  • Expert opinion- Opinions 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.

    PROCESS

  • Expert opinion- Delphi MethodTraced back to the Greek times.

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

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

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

  • Opinion PollsA forecasting method in which sample populations are surveyed to determine consumption trends.

    Points to be kept in mind:may identify changes in trendschoice of sample is importantquestions must be simple and clear

  • Market ResearchClosely related to opinion pollsMarket research indicates:

    why the consumer is or is not buying, who the consumer is, how he or she is using the product, what characteristics the consumer thinks are most important in the purchasing decision.

  • Economic IndicatorsMethod of forecasting in which economic data are formed into indexes to reflect the state of the economyIndexes of: leading, coincident, and lagging indicators are used to forecast changes in economic activity.

  • Leading, Coincident & LaggingLeading indicators predict changes in future economic activity.

    Coincident indicators identify peaks and troughs in economic activity.

    Lagging indicators confirm upturns and downturns in economic activity.

  • TIMErecessionpeaktroughrecovery

  • TroughThings look like they are at their worse

    People are looking for the bottom

  • Recovery

    Stock prices risesUnemployment flatten out People begin to feel betterInterest rate flatten out

  • PeakThe economic growth rate picks upRise in pricesBanks may become a little unstableInterest rates riseLow unemployment rate. However, it may begin to pick up.Euphoric conditions

  • General rule of thumb

    If, after a period of increases, the leading indicator index sustains three consecutive declines, a recession (or a slowing) will followDrawbacksLeading indicators occasionally forecast recessions that do not occur. A change in the index does not indicate the precise size of the decline or increase.The data are subject to revision in the ensuing months.

  • Projections- The Time Series MethodA method of forecasting from past data by using least squares statistical methods. By time series we mean the variable changes with change in time. A time series analysis usually examinesTrendsCyclical fluctuationsSeasonal fluctuationsIrregular movements.

  • Time Series ProjectionsADVANTAGES

    Easy to calculateDoes not require analytical skillUsually reasonably reliable in the short run

  • CASELET (12)PRACTICAL APPLICATION OF TIMES SERIES METHOD

  • THE FIRST STEPDEFINE THE TIME SERIES MODELTHE MODELD = a + b (t)

  • THE SECOND STEPCALCULATE THE VALUES OF a & bWith the help of the formulaa = D/nb= D /t2

  • THE OBJECTIVESTHE CONCEPTUAL ISSUESPREREQUISTIE OF A GOOD FORECASTIMPORTANCE OF DEMAND FORECASTINGFORECASTING TECHQ.CURRENT FORECASTING PRACTICES IN BUSINESS

  • Ocean Spray CranberriesAnnual sales: US $ 1.5 billionForecasting group: 7 employeesPredominant model used : Time series modelNo of items forecasted: 300

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

  • CONSUMER CONFIDENCE INDEXPublished in the Economic Times 24/01/2003100+ optimism < 100 indicate pessimism.The CCI stood at 81 on the scale of 0 to 100.Used of economic indicators

  • PRESENT TO FUTURE [CCI]

    CATERGORYPresent SituationFuture ExpectationsGen. Business Condition7699Job Availability4667Family Income88109