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DEMAND FORECASTING

By-: SUMIT SHARMA


WHAT IS
FORECASTING?
FORECASTING consists of a
variety of processes for identifying
what possible futures could happen.

PREDICTION consists of a
variety of processes for identifying
what possible futures will happen.
DEMAND FORECASTING

Forecasting of demand
is the art of predicting
demand for a product
or service at some
future date on the basis
of certain present and
past behaviour patterns
of some related events.
OBJECTIVE

1.SHORT TERM 2.LONG TERM


1. FORMULATION OF PRODUCTION
POLICY : Demand forecasts help in
formulating suitable production policy.
(a) Regular supply of material : By
the 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
labour : Skilled and unskilled
workers can be properly
arranged to meet the production
schedule requirement.
2 . Price policy formation: Sales
forecast enables the management
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 regionwise and then the sales
targets for various territories 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.
LONG TERM OBJECTIVE

If period of forecasting more than a year.


1.To decide about production capacity.
2.Expansion of an existing.
3.Man power requirement.
4.Long term financial requirement.
FORECASTING:
NEEDS AND USES
• Scheduling existing resources
– How many employees do we need and when?
– How much product should we make in anticipation
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?
BENEFITS:
– Aids decision making.
– Informs planning and resource allocation
decisions.
– Evaluating the performance of sales
department.
– Have finished goods of right quality & quantity
at right time with minimum cost.
BEFORE 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?
techniques of demand forecasting

Survey methods Statistical method

Consumer survey Expert opinion Trend


projection
Regression method

econometric
Sample
End use delphi
survey

Least square Exponential


Time series
smoothing
Moving average
FORESIGHT
 FORECASTING
1. 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 time period.
• The future can be changed.
DELPHI METHOD
Under the Delphi method the experts are provided information on estimates of forecasts of other experts along with the underlying assumptions. The experts may revise their own estimates in the light of forecasts made by other experts. The consensus of experts about the
forecasts constitutes the final forecast.
This method is used to consolidate the divergent expert opinions and to arrive at a compromise estimate of future demand.
ADVANTAGE
• It is simple to conduct .
• Used where quantitative data is not
possible.
• Forecast is reliable.
• It is inexpensive.
• It takes little time.
DISADVANTAGES
• 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.
CONSUMER SURVEY
METHOD
• 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.
ADVANTAGES
• It is simple to use.
• It is not affected by personal biases.
• Based on collected data.
DISADVANTAGES

• It is costly.
• It is time consuming.
• Difficult and practically impossible to
survey all the consumers.
• Useful only for products with limited
consumers.
MOVING AVERAGE METHOD
A moving average is an average of some fixed or
pre-determined number of observations which
moves through the series by dropping the top
item of the previous averaged group and adding
the next item. This method can be used to
determine the trend values for given data without
going into complex mathematical calculations.
Calculations are based on pre-determined
period in weeks, months & years etc.
SIMPLE MOVING AVERAGE
• Forecast Ft is average of n previous observations or
actuals Dt :
1
Ft 1  ( Dt  Dt 1    Dt 1 n )
n
t
1
Ft 1   Di
n i t 1 n
• 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.
SIMPLE MOVING
AVERAGE
• Include n most recent observations
• Weight equally
• Ignore older observations

weight

1/n

n ... 3 2 1
today
EXPONENTIAL SMOOTHING
• Include all past observations
• .• Weight recent observations much more
heavily than very old observations:

weight

Decreasing weight given


to older observations

today
EXPONENTIAL
SMOOTHING
• Include all past observations
• .• Weight recent observations much more
heavily than very old observations:
0  1
weight
Decreasing weight given 
to older observations

today
EXPONENTIAL
SMOOTHING: CONCEPT
• Include all past observations
• Weight recent observations much more heavily than very old observations:

0  1
weight
Decreasing weight given 
to older observations
 (1   )
 (1   ) 2

 (1   ) 3

today 
EXPONENTIAL ‘

SMOOTHING: MATH
• .
Ft  aDt  a (1  a ) Dt 1  a (1  a ) 2 Dt 2  
Ft  aDt  (1  a ) Ft 1
• 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:  < 0.5
– Typically,  = 0.2 or  = 0.3 work well
• Forecast for k periods into future is:
Ft  k  Ft

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