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DEMAND FORECASTING
Shobhit Kumar
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DEMAND FORECASTINGDEMAND FORECASTING
Forecasting of demand is
the art of predicting demand
for a product or service atsome future date on the basis
of certain present and past
behaviour patterns of some
related events.
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Periods of ForecastingPeriods of Forecasting
Depending upon the period the forecast can
be termed as:
Short Range Forecasting
Medium Range Forecasting
Long range Forecasting
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Periods Of ForecastingPeriods Of Forecasting
1.Long Range Planning Normal Period used is Generally 5 Years.
It may Extents from 10 to 15 Years.
Here much importance is given to Long-range growth factors.
Purpose of Long Range Planning To work out expected capital expenditure for future development.
To determine the expected cash flow from sales.
Plan for future manpower requirements.
To plan for the raw material.
Plan for Research & Development.
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Periods Of ForecastingPeriods Of Forecasting
2.Medium Range Planning In Medium Range Forecasting the period may extent over 1 or 2
years.
Purpose of Medium Range Planning To determine budgetary control over expenses.
To determine the dividend policy.
To find and control maintenance expenses.
To determine the schedule operations.
To plan for the capacity adjustments.
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Periods Of ForecastingPeriods Of Forecasting
3.Short Range PlanningIn case of Short Term Forecasting extents from few weeks to three or
six months.
Purpose of Medium Range PlanningEstimate inventory requirements
To provide transport facilities for finished goods.
To decide work load for man and machines.
To find the working capital needed
Finding the required overtime to meet the delivery promises.
Setting up the production run for the products.
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SHORT TERM OBJECTIVES
1.FORMULATION OF PRODUCTION POLICY : Demand forecasts help
in formulating suitable production policy.
(a) Regular supply of material : Determination of desired volume of
production on the basis of demand forecasts, evaluate raw material
requirement in future so as to ensure regular and continuous supply of
material as well as controlling the size of inventory at economic level.
(b) Maximum utilization of machine : The operations can be so planned
that the machines are utilized to its maximum capacity.
(c) Regular availability of labor : Skilled and unskilled workers can beproperly arranged to meet the production schedule requirement.
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SHORT TERM OBJECTIVES (Contd.)
2 .PRICE POLICY FORMATION: Sales forecast enables themanagement to formulate some appropriate pricing
mechanism, so that the level of price does not fluctuate too
much in the periods of inflation.
3.PROPER CONTROL OF SALES: Sale forecast are
calculated region wise and then the sales targets for variousterritories are fixed.
4.ARRANGEMENT OF FINANCE: determine the financial
requirements of the enterprise for the production of desired
output . This can lead to minimize the cost of procuring finance.
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LONG TERM OBJECTIVELONG TERM OBJECTIVE
1.To decide about the production capacity.- Plant size should be such that conforms to sale requirement.
- Too small or too large plant size may not be in the economic interest of the enterprise.
-Analyze demand pattern of the product & the forecast for future the enterprise can plan for
the plant or output of the desired capacity.
2.Labor Requirements.-Expenditure on labor is one of the most important component in the cost of production-Reliable and accurate demand forecasts can ensure the best labor facility and no hindrances
in production process.
3.Long term production planning can help the management to arrange for long
term finances.
- Long term production planning can help the management to arrange the long term finances.
-Long term forecasting helps management to take policy decisions and if any error committed
in this may be difficult and expensive to rectify.
Thus the overall success of an enterprise mainly depends on the quality and reliability of
demand forecasting.
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FORECASTING:FORECASTING:
NEEDS AND USESNEEDS AND USES Scheduling existing resources
How many employees do we need and when?
How much product should we make inanticipation of demand?
Acquiring additional resources
When are we going to run out of capacity? How many more people will we need?
How large will our back-orders be?
Determining what resources are needed
What kind of machines will we require? Which services are growing in demand?declining?
What kind of people should we be hiring?
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BENEFITS:BENEFITS:
Aids decision making.
Informs planning and resource allocationdecisions.
Evaluating the performance of sales
department. Have finished goods of right quality & quantity
at right time with minimum cost.
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BEFORE YOU FORECASTBEFORE YOU FORECAST
Key questions which must be answered
before making a forecast:
what is the purpose of the forecast?
what specifically do we wish to forecast? how important is the past in predicting the
future?
what method or methods will be used to
make the forecast?
What could change the forecast?
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techniques of demand forecasting
Survey methods Statistical method
Consumer survey Expert opinion
delphiSamplesurvey
End use
TrendprojectionRegression method
Least squareTime series
Exponentialsmoothing
Moving average
econometric
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FORESIGHTFORESIGHT
FORECASTING1. A method for translating past experience
into estimates of the future.
2. A method for analyzing future possibilities to
develop strategies to plan for more desirable
futures.
The future is malleable.
It is not preordained.
Many possibilities exist for any future timeperiod.
The future can be changed.
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DELPHI METHODDELPHI METHOD
Under the Delphi method the experts areprovided information on estimates offorecasts of other experts along with theunderlying assumptions. The experts may
revise their own estimates in the light offorecasts made by other experts. Theconsensus of experts about the forecastsconstitutes the final forecast.
This method is used to consolidate thedivergent expert opinions and to arrive at acompromise estimate of future demand.
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ADVANTAGEADVANTAGE
It is simple to conduct .
Used where quantitative data is not
possible. Forecast is reliable.
It is inexpensive.
It takes little time.
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DISADVANTAGESDISADVANTAGES
The expert may be biased.
The result are based on mere hunch of one or
more persons and not on scientific analysis. The method is subjective and the forecast could
be unfavorably influenced by persons with vested
interest.
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CONSUMER SURVEYCONSUMER SURVEY
METHODMETHOD Surveys are conducted to collect
information about future purchase
plans of the probable buyers of the
product.
(a) COMPLETE ENUMERATION
SURVEY- The firm has to go for a door
to door survey for the forecast period by
contacting all the households in the
area.
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ADVANTAGESADVANTAGES
It is simple to use.
It is not affected by personal biases.
Based on collected data.
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DISADVANTAGESDISADVANTAGES
It is costly.
It is time consuming.
Difficult and practically impossible tosurvey all the consumers.
Useful only for products with limited
consumers.
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SIMPLE MOVING AVERAGESIMPLE MOVING AVERAGE
Forecast Ft is average ofn previous observations oractuals Dt :
Note that the n past observations are equally weighted.
Issues with moving average forecasts: All n past observations treated equally; Observations older than n are not included at all;
Requires that n past observations be retained;
Problem when 1000's of items are being forecast.
!
!
!
t
nti
it
ntttt
Dn
F
DDDn
F
1
1
111
1
)(1
.
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SIMPLE MOVINGSIMPLE MOVING
AVERAGEAVERAGE
Include n most recent observations
Weight equally
Ignore older observationsweight
today
123...n
1/n
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.
Include all past observations
Weight recent observations much
more heavily than very old
observations:weight
today
Decreasing weight givento older observations
EXPONENTIAL SMOOTHINGEXPONENTIAL SMOOTHING
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.
EXPONENTIALEXPONENTIAL
SMOOTHINGSMOOTHING Include all past observations
Weight recent observations much
more heavily than very old
observations:weight
today
Decreasing weight givento older observations
0 1 E
E
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EXPONENTIALEXPONENTIAL
SMOOTHING: CONCEPTSMOOTHING: CONCEPT Include all past observations
Weight recent observations much
more heavily than very old
observations:weight
today
Decreasing weight givento older observations
0 1 E
E
E E
E E
E E
( )
( )( )
1
11
2
3
/
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1
2
2
1
)1(
)1()1(
!
!
ttt
tttt
FaaDF
DaaDaaaDF .
tkt FF !
.
EXPONENTIALEXPONENTIAL
SMOOTHING: MATHSMOOTHING: MATH
Thus, new forecast is weighted sum of old forecast and actual demand
Notes:
Only 2 values (Dt and Ft-1 ) are required, compared with n for moving
average
Parameter a determined empirically (whatever works best)
Rule of thumb: E < 0.5
Typically, E = 0.2 orE = 0.3 work well
Forecast forkperiods into future is:
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THANK YOU