FORECASTING

Qualitative methods

Amit Sharma

IMPORTANCE OF DEMAND
FORECASTING
1. Price Control:
Demand forecasting helps in controlling prices by
matching the output with future expected demand.
2. Business Planning:
Demand forecasting helps in business planning based
on future activities to be taken up.
For Ex: Entrepreneurs may plan their export, sales,
production targets on the basis of future demand.
3. Competitive Strategy:
Demand forecasting helps business to effectively,
formulate their competitive strategy in terms of
manpower, finance, advertising and other overheads.

TYPE OF DEMAND FORECASTING

1. Short Term Demand Forecasting:

In short term demand forecasting the time span

is limited normally less than 1 year. It is
undertaken to know the requirements of
material, labour, finance etc.
2. Long term demand forecasting

This is undertaken to make future strategic

decisions regarding new product planning,
expansion, diversification, market development
long term demand forecast equips the
entrepreneurs to come out with sustainable
business policies.

LEVELS OF FORECAST
1. Firm Level:
it is based on the demand of product or services at firm level.
Whatever a single firm forecasts about its product or services
is known as firm level forecasting.
2. Industry Level:
it is based on the demand of product or services by a group of
firm in the same category of product or service.
3. National Level:
The forecast is based on the future estimate of demand for the
whole economy. It is worked out on the basis of the level of
savings. Consumption income and investment
4. Global Level:
With the opening of the economy through initiatives like
globalization and liberalization entrepreneurs have started
forecasting demand of international markets.

FACTORS AFFECTING DEMAND

FORECAST
Nature of Goods
Level of Competition
Price
Level of Tech.
Economic out look

BAROMETRIC TECHNIQUES
It

uses lead-lag relationship between

economic variables for predicting the
changes in a certain variable.
Earth quake necessitates Construction of
buildings which leads the demand for
Cement, fans, Acs, Tube lights etc.
This requires ascertaining the lead-lag
relationship between two time series and
than keeping track of leading-series to
predict lagging-series

Virtual Shopping
A

representative sample of consumers shop in a virtual

store simulated on the computer screen.
By doing so, this method eliminates the high cost in terms
of time and money involved in consumer clinics.
Sample customers are asked to take a series of trips
through the simulated virtual store.
Prices, packaging, displays and promotions are changed in
subsequent trips and consumer reaction recorded.

FORECASTING TECHNIQUES (CONTD)

Barometric

Forecasting involves the use of

current values of certain economic variable
called indicators to predict the future values of
other economic variables.
Variables

whose current changes give an indication of

future changes in other variable are called leading
indicators. Eg: Increase in building permits can be used to
forecast an increase in housing construction.
Variables whose changes coincide with changes in other
economic variable are called coincident variables. Eg:
Manufacturing and trade sales

FORECASTING TECHNIQUES (CONTD)

Barometric Forecasting (cont)
Variables whose changes follow changes in other
economic variables are called lagging indicators.
Average duration of unemployment.
Ideally, changes in leading indicators consistently
precede changes in values of other variables.
Each of the categories is consolidated into an index,
and these indices are used as forecasters. These
indicators need to satisfy some criteria if they are to
be used as indicators, that is how many months of
change in the direction of the index is necessary as a
predecessor of a turn in economic activity.

QUALITATIVE METHOD- SURVEYS

Individual and companies plan in advance for
their future purchases. In this method potential
buyers should be approached and asked as to
how much they intend to buy a particular
product or service at a particular point of time.
i. census method:
When the total population of potential buyers in
surveyed it is know as census method.
ii. sample method:
When only a portion of total population of
potential buyer is surveyed it is known as
sample method.
A.

B. OPINION POLL METHOD

The firm can forecast its sales by polling experts within and outside the firm.
There are several techniques
I. Executive Polling:
Top management of a firms sales, production, finance department may be
asked for sales outlook for next quarter or year. Some outside market experts
could also be polled to arrive at a better estimate of demand forecast. To
avoid a bandwagon effect (whereby the opinions of some experts might be
overshadowed by some dominant personality in their midst),
Delphi method can be used. Here, experts are polled separately, and then
feedback is provided without indentifying the expert responsible for a
particular opinion. The hope is that through this feedback procedure the
experts can arrive at some consensus forecast.
II. Sales force Polling:
This is a forecast of the firms sales in each region and for each product line, it
is based on the opinion of the firms sales force in the field These are the
people closest to the market, and their opinion of future sales can provide
valuable information to the firms top management.

FORECASTING TECHNIQUES (CONTD.)

The Delphi method is a systematic, interactive

forecasting method which relies on a panel of independent
experts.
The carefully selected experts answer questionnaires in
two or more rounds. After each round, a facilitator
provides an anonymous summary of the experts forecasts
from the previous round as well as the reasons they
provided for their judgments.
Thus, participants are encouraged to revise their earlier
answers in light of the replies of other members of the
group.
It is believed that during this process the range of the
answers will decrease and the group will converge
towards the "correct" answer.
Finally, the process is stopped after a pre-defined stop
criterion (e.g. number of rounds, achievement of
consensus, stability of results) and the mean or median
scores of the final rounds determine the results

CONSUMER SURVEYS AND OBSERVATIONAL

RESEARCH
Consumer surveys involve questioning a sample of consumers
about how they would respond to particular changes
in the price of the commodity,
incomes,
the prices of related commodities,
advertising expenditures,
credit incentives
and other determinants of demand.
These surveys can be conducted by simply stopping and
questioning people at a shopping center or
by administering questionnaires to a carefully constructed
representative sample of consumers by trained
interviewers.

 Consumer

Surveys:
It involves gathering of information about
consumer behavior from a sample of consumers
which is analyzed and then further projected
onto the population.
Surveys are conducted to assess consumers
perception of various aspects, such as new
variations in products, variations in prices of
the product and related products, new
variations in services provided etc.
The drawback of this method is that the
consumer has to respond to hypothetical
situations.

OBSERVATIONAL RESEARCH
Shortcomings of Surveys (on previous slides)can
be over come by supplementing them with ORs
It refers to gathering of data about consumer
preferences by watching and observing them
buying and using products.
Eg. OR has shown that people buy several
medicines for cold rather than only one type, OR
also uses product scanners found in stores or
people meters in stores or homes (this raises
issues of privacy)
OR tries to determine demographic
characteristics (age sex, race education income
family size)

CONSUMER CLINICS
These are lab experiments where consumers may
be given money to spend in a simulated store to
see how they react to changes in
price,
product,
packaging displays,
price of complementary,
substitutes.
Participants can be selected to represent the
socio economic characteristics of the market

MARKET EXPERIMENTS
Unlike Consumer clinics which are conducted in
the lab-like conditions these are conducted in the
actual market place
E.g a firm may select several markets
representing similar socio economic
characteristics and
change commodity price in some markets,
packaging in some others and
than record the response of the consumer in
different markets

 Market
Seller

experiments:

of a product introduces variations and

tries it out in a representative market.
The seller gathers information on the behavior
of the consumers in this representative
market.
This is a high cost technique.
Advantage of market experiments are that
they can be conducted on a large scale to
ensure validity of results and consumers are
not aware that they are a part of experiments.

VIRTUAL SHOPPING & VIRTUAL

MANAGEMENT
In VS a representative sample of consumers shop in a
virtual store simulated on computer screen instead of
a simulated physical store.
In VS 3 D images are available and allows marketers
to recreate atmosphere of the actual store on the
computer screen. The consumer can se shelves stocked
with all kinds of products, he can view up close any
product by touching its image on the screen so as to be
able to read its label and check its content, and he can
then purchase the product by touching the picture of a
shopping cart. He can be asked to take series of trips
through the, virtual store, then prices packaging,
displays, and changed in subsequent trips and their
reactions are recorded.

VIRTUAL MANAGEMENT
Uses Computational models which mimic human
behavior closely to allow top management to simulate
or test the impact of managerial decisions ( such as
changing the product price or its characteristics)
before implementing those decisions in the real world.
Macy`s Department Store uses computer model, based
on information from consumer surveys and database
information to determine
1)The number of salespeople needed in each department
of the store
2) How to turn browsers into shoppers
3) How to locate service desks and cash registers to
maximize sales.

FORECASTING OF DEMAND

Involves projecting the values of the present to a future

point in time. It is a difficult task. Statisticians have
worked out some models for the purpose.
Aim of economic forecasting is to reduce the risk or
uncertainty that the firm faces in its short term
operational decision making and in planning for its
long term growth.
Distinction between estimation and forecast:
A forecast is a projection of the relevant variable, not
concerned about underlying factors and their behavior.

FORECASTING
Demand

estimation involves primarily

understanding the underlying factors or
variables and their behavior and effects on
the relevant variable. It attempts to
understand why and to what extent is the
estimate influenced by a variable or a
group of variables.

Demand

forecast does not go into such

relationships, it only attempts to project
future demands.

DEMAND FORECASTING
A demand forecast has to be knit into the rest of
the system, and should not be taken in
isolation like:
Capacity installation or expansion
Hiring of labor and other related activities
Changes into political and economic
environment
It should be based on thorough knowledge and
data relating to the past.
Even with these considerations forecast may be
far different from real situation
All rights reserved

ECONOMIC FORECASTING
Forecasting

refers to the process of

analyzing available information regarding
economic variables and relationships and
then predicting the future values of
certain variables of interest to the firm or
economic policymakers.
Forecasts can be short run or long run. It
could be daily, weekly, monthly, quarterly,
annual or five / ten or twenty years.

FORECASTING TECHNIQUES
(CONTD.)
Surveys

Econometric

Models: These give an

estimate of the dependent variable (which
could also be a forecast), if the
independent variables used as data are
forecasts. Eg: The demand of automobiles
which is a function of disposable income,
family size, interest rates and index of
industrial production could be used to
forecast the demand for automobiles

FORECASTING TECHNIQUES (CONTD.)

Trend analysis relies on historical data to predict the

future. It is the use of historical data to discern a long
run trend.
The simplest form of forecasting using trend
analysis is the projection into the future of the
current value of an economic variable.
Eg: One might forecast that next year sales would
be a function of sales in the existing year or
alternately next year sales would be a function of
this years sales and the change in sales between
this year and last year. Or a forecaster might predict
next year sales based on sketching a line that
appears to best fit the historical data.
Models that use only trend analysis might not be
that useful as against those which also take into
consideration seasonal and cyclical factors.

(CONTD.)

Projection Techniques:
1. Visual time series projection
2. Time series projection using least square method
.Visual

Time Series projection : This technique plots the data

and on the basis of the same a trend is projected through these
data points. This method is better than the compound growth rate
as it considers data between the two end points.

.Least

square method of time series projection: This method

ascertains how the dependent variable moves with time and time
becomes the independent variable