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    Demand forecastingDemand forecasting

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    Accurate demand forecasting is essential for a firm toAccurate demand forecasting is essential for a firm toenable it to produce the required quantities atenable it to produce the required quantities atthe right time and arrange well in advance for thethe right time and arrange well in advance for the

    various factors of production, viz., raw materials,various factors of production, viz., raw materials,equipment, machine accessories,equipment, machine accessories, labourlabour,,buildings, etc.buildings, etc.In a developing economy like India, suppleIn a developing economy like India, suppleforecasting seems more important. However, theforecasting seems more important. However, the

    situation is changing rapidly.situation is changing rapidly.The National Council of Applied EconomicThe National Council of Applied EconomicResearchResearch..

    Factors involved in Demand ForecastingFactors involved in Demand Forecasting1.1. How far ahead?How far ahead?

    a. Long terma. Long term egeg., petroleum, paper, shipping. Tactical., petroleum, paper, shipping. Tacticaldecisions. Within the limits of resources alreadydecisions. Within the limits of resources alreadyavailable.available.

    b. Shortb. Short--termterm egeg., clothes. Strategic decisions. Extending., clothes. Strategic decisions. Extendingor reducing the limits of resourcesor reducing the limits of resources..

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    Factors involved in forecastingFactors involved in forecasting

    2.2. Undertaken at three levels:Undertaken at three levels:

    a.a. MacroMacro--levellevelb.b. Industry levelIndustry level egeg., trade associations., trade associationsc.c. Firm levelFirm level3. Should the forecast be general or specific3. Should the forecast be general or specific

    (product(product--wise)?wise)?4. Problems or methods of forecasting for new4. Problems or methods of forecasting for new

    visvis----vis well established products.vis well established products.5. Classification of products5. Classification of products producer goods,producer goods,

    consumer durables, consumer goods, services.consumer durables, consumer goods, services.6. Special factors peculiar to the product and the6. Special factors peculiar to the product and the

    marketmarket risk and uncertainty. (risk and uncertainty. (egeg., ladies., ladiesdresses)dresses)

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    Purpose of forecastingPurpose of forecasting

    Purposes of shortPurposes of short--term forecastingterm forecasting

    a.a. Appropriate production scheduling.Appropriate production scheduling.b.b. Reducing costs of purchasing raw materials.Reducing costs of purchasing raw materials.

    c.c. Determining appropriate price policyDetermining appropriate price policyd.d. Setting sales targets and establishing controls andSetting sales targets and establishing controls and

    incentives.incentives.

    e.e. Evolving a suitable advertising and promotional campaign.Evolving a suitable advertising and promotional campaign.f.f. Forecasting short term financial requirements.Forecasting short term financial requirements. Purposes of longPurposes of long--term forecastingterm forecasting

    a.a. Planning of a new unit or expansion of an existing unit.Planning of a new unit or expansion of an existing unit.b.b. Planning long term financial requirements.Planning long term financial requirements.c.c. Planning manPlanning man--power requirements.power requirements.

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    Length of forecastLength of forecast

    ShortShort--term forecaststerm forecasts upto 12 months, eg., salesupto 12 months, eg., sales

    quotas, inventory control, production schedules,quotas, inventory control, production schedules,

    planning cash flows, budgeting.planning cash flows, budgeting. MediumMedium--termterm 11--2 years, eg., rate of2 years, eg., rate of

    maintenance, schedule of operations, budgetarymaintenance, schedule of operations, budgetary

    control over expenses.control over expenses.

    LongLong--termterm 33--10 years, eg., capital expenditures,10 years, eg., capital expenditures,

    personnel requirements, financial requirements,personnel requirements, financial requirements,

    raw material requirements.raw material requirements.

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    Forecasting demand for new productsForecasting demand for new products JoelJoelDeanDean

    1.1. Project the demand for a new product as anProject the demand for a new product as anoutgrowth of an existing old product.outgrowth of an existing old product.

    2.2. Analyse the new product as a substitute for someAnalyse the new product as a substitute for someexisting product or service.existing product or service.

    3.3. Estimate the rate of growth and the ultimateEstimate the rate of growth and the ultimatelevel of demand for the new product on the basislevel of demand for the new product on the basisof the pattern of growth of established products.of the pattern of growth of established products.

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    4. Estimate the demand by making direct enquiries from the ultimate4. Estimate the demand by making direct enquiries from the ultimatepurchasers, either by the use of samples or on a full scale.purchasers, either by the use of samples or on a full scale.

    5. Offer the new product for sale in a sample market, eg., by direct mail or5. Offer the new product for sale in a sample market, eg., by direct mail orthrough one multiple shop organisation.through one multiple shop organisation.

    6. Survey consumers reactions to a new product indirectly through the6. Survey consumers reactions to a new product indirectly through theeyes of specialised dealers who are supposed to be informed abouteyes of specialised dealers who are supposed to be informed aboutconsumers need and alternative opportunities.consumers need and alternative opportunities.

    Criteria of a good forecasting methodCriteria of a good forecasting method1.1. AccuracyAccuracy measured by (a) degree of deviations between forecastsmeasured by (a) degree of deviations between forecasts

    and actuals, and (b) the extent of success in forecasting directionaland actuals, and (b) the extent of success in forecasting directionalchanges.changes.

    2.2. Simplicity and ease of comprehension.Simplicity and ease of comprehension.3.3. Economy.Economy.4.4. Availability.Availability.5.5. Maintenance of timeliness.Maintenance of timeliness.

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    Role of MacroRole of Macro--level forecastinglevel forecasting

    in demand forecastsin demand forecasts Various macro parameters found useful forVarious macro parameters found useful for

    demand forecasting:demand forecasting:

    1.1.National income and per capita income.National income and per capita income.2.2.Savings.Savings.3.3.Investment.Investment.4.4.Population growth.Population growth.5.5.Government expenditure.Government expenditure.6.6.Taxation.Taxation.7.7.Credit policy.Credit policy.

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    Techniques of demand forecastingTechniques of demand forecasting

    1.1. Survey methodSurvey methoda) Complete enumeration.a) Complete enumeration.b) Sample surveyb) Sample survey

    c)End use method.c)End use method.22 opinion poll methodsopinion poll methods

    a) Expert opiniona) Expert opinionb)Delphi methodb)Delphi method

    c) Market studies and experiments.c) Market st

    udies and experiments.33 statistical methodsstatistical methods

    a)a) Trend projection method a) graphical methodTrend projection method a) graphical methodb)b) Fitting trend equation or least square method.Fitting trend equation or least square method.

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    1 survey methods1 survey methods

    Complete enumerationComplete enumeration Best in shortBest in short--run period.run period.

    All the buyers are contacted.All the buyers are contacted. Is best done in a particular region .Is best done in a particular region . Bias may creep in.Bias may creep in.

    Buyers may not know their actual demand.Buyers may not know their actual demand. Uncertainty.Uncertainty.

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    Sample methodSample method Again for the short period.Again for the short period.

    Direct interview or through mailed q

    uestionnaireDirect interview or thro

    ugh mailed q

    uestionnaire Used generally by govt dept,or the dept whichUsed generally by govt dept,or the dept which

    takes the policies for a year.takes the policies for a year. End use method:usedEnd use method:used for those industriesfor those industriesusing inputs,what is the demand for them in theusing inputs,what is the demand for them in the

    industries.industries. All the technological ,structural and otherAll the technological ,structural and other

    changes are also studied.changes are also studied.

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    Opinion poll methodsOpinion poll methods

    1Expert opinion:1Expert opinion:To ask experts in the field to provideTo ask experts in the field to provideestimates, eg., dealers, industry analysts, specialistestimates, eg., dealers, industry analysts, specialistmarketing consultants, etc.marketing consultants, etc.

    Advantages:Advantages:

    1.1. Very simple and quick method.Very simple and quick method.2.2. No danger of a groupNo danger of a group--think mentality.think mentality.2.2. Delphi methodDelphi method: it consists of an effort to arrive at a: it consists of an effort to arrive at a

    consensus in an uncertain area by questioning a group ofconsensus in an uncertain area by questioning a group ofexperts repeatedly until the results appear to convergeexperts repeatedly until the results appear to convergealong a single line of the issues causing disagreement arealong a single line of the issues causing disagreement areclearly defined.clearly defined.

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    AdvantagesAdvantages

    1.1. Facilitates the maintenance of anonymity of the respondentsFacilitates the maintenance of anonymity of the respondentsidentity throughout the course.identity throughout the course.

    2.2. Saves time and other resources in approaching a large number ofSaves time and other resources in approaching a large number ofexperts for their views.experts for their views.

    Limitations/presumptions:Limitations/presumptions:

    1.1. Panelists must be rich in their expertise, possess wide knowledge andPanelists must be rich in their expertise, possess wide knowledge andexperience of the subject and have an aptitude and earnestexperience of the subject and have an aptitude and earnestdisposition towards the participants.disposition towards the participants.

    2.2. Presupposes that its conductors are objective in their job, possessPresupposes that its conductors are objective in their job, possessample abilities to conceptualize the problems for discussion,ample abilities to conceptualize the problems for discussion,generate considerable thinking, stimulate dialogue among panelistsgenerate considerable thinking, stimulate dialogue among panelistsand make inferential analysis of the multitudinal views of theand make inferential analysis of the multitudinal views of theparticipants.participants.

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    Analysis of time series andAnalysis of time series and

    trend projectionstrend projections The time series relating to sales represent the past patternThe time series relating to sales represent the past pattern

    of effective demand for a particular product. Such dataof effective demand for a particular product. Such datacan be presented either in a tabular form or graphicallycan be presented either in a tabular form or graphically

    for further analysis. The most popular method of analysisfor further analysis. The most popular method of analysisof the time series is toof the time series is toproject the trendproject the trendof the time series.aof the time series.atrend line can be fitted through a series either visually ortrend line can be fitted through a series either visually orby means of statistical techniques.by means of statistical techniques. Popular becausePopular because::simple, inexpensive, time series data often exhibit asimple, inexpensive, time series data often exhibit apersistent growth trend.persistent growth trend.

    DisadvantageDisadvantage: this technique yields acceptable results so: this technique yields acceptable results solong as the time series shows along as the time series shows apersistent tendency to movepersistent tendency to movein the same direction.in the same direction.Whenever aWhenever a turning point occurs,turning point occurs,however, thehowever, the trend projection breaks down.trend projection breaks down.

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    solvesolve

    YearYear 19921992

    19931993 19941994 19951995

    19961996 19971997 19981998

    SalesSales 1010

    1212 1111 1515

    1818 1414 2020