DEMAND

FORECASTING
By
archana@[Link]
DEMAND FORECASTING
Demand forecasting refers to the prediction
or estimation of a future situation under given
constraints.

TYPES OF FORECASTING:
1. Short Term
2. Medium Term
3. Long Term
OBJECTIVES OF DEMAND
FORECASTING
1. Helping for continuous production
2. Regular supply of commodities
3. Formulation of price policy
4. Arrangement of finance
5. Labor requirement
FACTORS INVOLVED IN DEMAND
FORECASTING
1. Time period
2. Levels of forecasting
-- International level
-- Macro level
-- Industry level
-- Firm level
3. Purpose - General or Specific
4. Methods Of Forecasting
5. Nature Of Commodity
6. Nature Of Competition

DETERMINANTS FOR DEMAND
FORECASTING

1. Capital goods goods required for further production of goods
Demand for capital goods is derived demand
- Replacement demand
- New demand

2. Durable consumer goods goods used continuously for a period
of time
- Replacement demand
- New demand

3. Non-durable consumer goods commodities which are used in a
single act of consumption. Demand for these goods is influenced by
- Disposable income of people
- Price of the commodity
- Size and characteristics of population

CRITERIA FOR GOOD DEMAND
FORECASTING

1. Accuracy
2. Plausibility (Mgt must have confidence and understanding)
3. Durability
4. Availability
5. Economy

7
Demand Forecasting
Steps in Demand Forecasting:
Identification of the objectives.
Estimation of quantity and composition of demand
Estimation of price.
Inventory Control etc
Determination of the nature of the goods.
Capital Goods
Consumer durables
Non consumer durables
Selection of the proper method of forecasting.
Interpretation of results.
METHODS OF
FORECASTING







SURVEY METHOD

STATISTICAL METHOD

[Link] projection method
[Link] averages method
[Link] analysis
[Link] method




Expert Opinion
Delphi Method
Consumer Interview
method
Complete Enumeration
Sample survey -
End-use method

Collective Opinion Method
Expert Opinion


This method was originally developed at Rand
Corporation in 1950 by Olaf Helmer, Dalkey
and Gordon. Under this method, demand is
estimated on the basis of opinions of experts
and distributors other than salesmen and
ordinary consumers.
Delphi Method

Under this method, a panel is selected to give
suggestions to solve the problems in hand. Both
internal and external experts can be the
members of the panel.
Consumer Interview method

Under this method, consumers are interviewed
directly and asked the quantity they would like
to buy. After collecting the data, the total
demand for the product is calculated. When all
the consumers are interviewed, the method is
known as complete enumeration method.
When only a selected group of consumers are
interviewed, it is known as sample survey
method.

Collective opinion method
This method is also known as sales force
opinion method.

SURVEY OF BUYERS
INTENTIONS/ Opinion poll method
Least sophisticated method
Customers are directly contacted to find out
their intentions to buy commodities in the near
future
Intentions recorded through personal
interviews, mail or post service,telephone
interviews and questionnaires.
Two types of Consumer Survey
Complete enumeration Method
Sample survey Method
14
[Link] enumeration:-

1. In this, almost all the potential users of the
product are contacted and are
asked about their future plan of
purchasing the product in question

2. The quantity indicated by the consumers are added
together to obtain the probable demand for the
product.

DF= ID
1
+ID
2
+..+ID
n

15
[Link] survey

Under this , only a sample of potential
consumers or users is selected for
interview.
Consumers to be surveyed are selected
from the relevant market through a
sampling method.
Method of survey may be direct interview
or mailed questionnaire to the sample-
consumers
DF = (ID+ ID+.ID)
N
C
n
DELPHI METHOD
The forecasters are given the forecasts and
assumptions of other experts, and a final report
is compiled with the combined consensus of the
experts.
TREND PROJECTION
METHOD
Based on analysis of past sales patterns
Shows effective demand for the product for a
specified time period
The trend can be estimated by using the Least
Square Method
A producer of soaps decides to forecast
the next years sales of his product.
The data for the last five years is as
follows:
YEARS SALES IN [Link]
1996 45
1997 52
1998 48
1999 55
2000 60
The data is plotted on a graph:
The equation for the straight line trend is
Y = a + bx
a-intercept
b-shows impact of independent variable
The Y intercept and the slope of the line are found
by making substitutions in the following normal
equations:
Y = na + b x
XY = a x + b x
2
Substituting the above values in the normal
equations:
260=5a +15b (Eq.3)
813=15a + 55b (Eq.4)
solving the two equations,
a = 42.1 , b = 3.3
YEARS SALES Rs.
LAKHS (Y)
X X
2
XY
1996 45 1 1 45
1997 52 2 4 104
1998 48 3 9 144
1999 55 4 16 220
2000 60 5 25 300
N=5 Y=260 X=15 X
2
=55

XY=813
Therefore, the equation for the straight
line trend is
Y=42.1 + 3.3X
Using this equation we can find the trend values for
the previous years and estimate the sales for the
year 2001 as follows:





Thus, the forecast sales for year 2001 is Rs.61.9 lakhs.
Y 1996 = 42.1+3.3(1) = 45.4
Y 1997 = 42.1+3.3(2) = 48.7
Y 1998 = 42.1+3.3(3) = 52.0
Y 1999 = 42.1+3.3(4) = 55.3
Y 2000 = 42.1+3.3(5) = 58.6
Y 2001 = 42.1+3.3(6) = 61.9
MOVING AVERAGES METHOD
. Moving average are averages that are updated
as new information is received. With the
moving average a manager simply employs, the
most recent observations, drops the oldest
observation, in the earlier calculation and
calculates an average which is used as the
forecast for the next period.
MOVING AVERAGES
METHOD
Moving averages method can be used when the forecast period is
either odd or even.


These are the annual sales of goods
during the period of 1993-2003.
We have to find out the trend of the
sales using (1) 3 yearly moving averages
and (2) 4 yearly moving averages
and forecast the value for 2005.
YEAR SALES IN
[Link]
1993 12
1994 15
1995 14
1996 16
1997 18
1998 17
1999 19
2000 20
2001 22
2002 25
2003 24
3 yearly period:
The value of 1993 + 1994 +1995
12 +15+14 = 41 written at the capital period 1994 of the years 1993, 1994 and
1995
YEAR SALES (Rs.
LAKHS)
3 YEARLY
MOVING
TOTAL
3 YEARLY MOVING
AVG. TREND VALUES
1993 12 - -
94 15 41 41/3= 13.7
95 14 45 45/3= 15
96 16 48 48/3 =16
97 18 51 51/3 =17
98 17 54 54/3 = 18
99 19 56 56/3 = 18.7
2000 20 61 61/3 = 20.2
01 22 67 67/3 = 22.3
02 25 71 71/3 = 23.7
03 24 - -
4 YEARLY MOVING AVERAGES
YEAR. SALES (Rs.
LAKHS)
4 YEARLY
MOVING TOTAL
MOVING TOTAL
OF PAIRS OF
YEARLY TOTAL
4 YEARLY
MOVING AVG.
TREND VALUES
93 12 - - -
94 15 - - -
95 14 120 120/8 = 15
96 16 128 128/8 = 16
97 18 135 135/8 = 16.9
98 17 144 144/8 = 18
99 19 152 152/8 = 19
00 20 164 164/8 = 20.5
01 22 177 177/8 = 22.1
02 25 - -
03 24 - - -
57 = 93 + 94 +95 + 96 = 12 + 15 + 14 + 16

120= 57 +63, 128 = 16 +65 and so on.
120 is total of 8 years and so the avg. is calculated by dividing 120 by 8
57
63
65
70
74
78
86
91
The trend values from the previous tables can be
plotted on a graph as follows:
REGRESSION METHOD
Method of Least Squares


From the above data we can project the sales for 03, 04, 05.
First we calculate the required values which are (i) Time Deviation,
(ii) Deviation Squares, (iii) Product of time deviation and sales.
YEAR 1998 1999 2000 2001 2002
SALES
(Rs. In crores)
240 280 240 300 340
YEAR (n) SALES (RS.
CRORE) (y)
TIME
DEVIATION
FROM MIDDLE
YEAR 2000 (x)
TD SQUARED (x
2
)

PRODUCT OF
TIME
DEVIATION &
SALES(xy)
98 240 -2 4 -480
99 280 -1 1 -280
00 240 0 0 0
01 300 +1 1 +300
02 340 +2 4 +680
X = 5 y = 1400 x = 0 x
2
= 10

xy = 220
The equation is
Y = a + bx
a independent variable
b exhibits rate of growth
a & b can be found out as follows:
a = y / n = 1400 / 5 = 280
b = xy / x
2
= 220/10 = 22
Now, applying values to the regression equation,
Y = 280 + 22x
Hence, sales projection from 2003-2005 can be ascertained.
2003 = 280 + 22(3) = Rs.346 crores
2004 = 280 + 22(4) = Rs.368 crores
2005 = 280 + 22 (5) = Rs.390 crores
Method of Simple linear Regression
The linear trend can be fitted in the equation

Sales = a + b (Price)
i.e. S = a + bP
where in, a and b are constants.
b = nS
i
P
i
- (S
i
)(P
i
)
nP
i
2
(P
i
)
2


a = S
i
- b P
i
n
e.g. fit a linear regression line to the following
data & estimate the demand at price Rs.30
YEAR
81 82 83 84 85 86 87 88 89 90 91 92
PRICE
(P
i
)
15 15 12 26 18 12 8 38 26 19 29 22
SALES
(S
i
) in 1000
units
52 46 38 37 37 37 34 25 22 22 20 14
To find the values of a and b the following table is constituted:
P
i
S
i
P
i
2
S
i
2
S
i
P
i

15 52 225 2704 780
15 46 225 2116 690
12 38 144 1444 456
26 37 676 1369 962
18 37 324 1369 666
12 37 144 1369 444
8 34 64 1156 272
38 25 1444 625 950
26 22 676 484 572
19 22 361 484 418
29 20 841 400 580
22 14 484 196 308
P
i
= 240 S
i
= 384 P
i
2
= 5708

S
i
2
=
13716
S
i
P
i
=
7098
b = nS
i
P
i
- (S
i
)(P
i
) = 12(7098)-(240)(384) = 0.641
nP
i
2
(P
i
)
2
12 (5708)-(240)
2



a = S
i
- b P
i
= [384-(240)(-0.641)] = 44.82
n 12
Thus the regression line is S= 44.82 - 0.641P
By assigning value 30 to P,
The corresponding sales level is
S = 44.82 0.641 (30) = 25.29 thousand units


BAROMETRIC METHOD
Improvement over trend projection method
Events of the present are used to predict future demand
Basic approach- constructing an index of relevant economic
indicators
Leading indicators
Coincident indicators
Diffusion indices
GNP
BANK DEPOSIT

Advantages of Statistical Methods
The method of estimation is scientific
These are less expensive.
Results are relatively more reliable.

Disadvantages of Statistical Methods
These methods involve complicated calculations.
These do not rely much on personal skill and experience.
These methods require considerable technical skill and
experience in order to be effective
Estimation is based on the theoretical relationship between
sales (dependent variable) and price, advertising, income etc.
(independent variables)
IMPORTANCE OF DEMAND
FORECASTING
Planning and scheduling production
Budgeting of costs and sales revenue
Controlling inventories
Making policies for long term investment
Helps in achieving targets of the firm
Forecasting demand for new
products Joel Dean
1. Project the demand for a new product as
an outgrowth of an existing old product.
2. Analyse the new product as a substitute
for some existing product or service.
3. Estimate the rate of growth and the
ultimate level of demand for the new
product on the basis of the pattern of
growth of established products.
4. Estimate the demand by making direct
enquiries from the ultimate 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 or through one
multiple shop organisation.
6. Survey consumers reactions to a new
product indirectly through the eyes of
specialised dealers who are supposed to be
informed about consumers need and
alternative opportunities.