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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
3. 4. 5. 6.
Time period Levels of forecasting -- International level -- Macro level -- Industry level -- Firm level Purpose - General or Specific Methods Of Forecasting Nature Of Commodity Nature Of Competition
2.
3.
METHODS OF FORECASTING
SURVEY METHOD 1.Survey of buyers intentions STATISTICAL METHOD 1.Trend projection method
4.Barometric 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
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.
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 1996 1997 1998 1999 2000 SALES IN Rs.LAKHS 45 52 48 55 60
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
X 1 2 3 4 5 X=15
X2 1 4 9 16 25 X2=55
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
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 Y 1996 42.1+3.3(1) 45.4 follows: = =
Y 1997 = Y 1998 = Y 1999 = Y 2000 = 42.1+3.3(2) = 42.1+3.3(3) = 42.1+3.3(4) = 42.1+3.3(5) = 48.7 52.0 55.3 58.6
Thus, the forecast sales for 61.9 2001 is year Y 2001 42.1+3.3(6) = Rs.61.9 lakhs. =
MOVING AVERAGES METHOD Moving averages method can be used when the
forecast period is either oddYEAR or even.
1993 1994 SALES IN Rs.LAKHS 12 15 14 16 18 17 19 20 22 25 24
These are the annual sales of goods 1995 during the period of 1993-2003. 1996 We have to find out the trend of the 1997 sales using (1) 3 yearly moving averages 1998 and (2) 4 yearly moving averages 1999 and forecast the value for 2005. 2000
2001 2002 2003
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 41/3= 13.7 45/3= 15 48/3 =16 51/3 =17 54/3 = 18 56/3 = 18.7 61/3 = 20.2 67/3 = 22.3 71/3 = 23.7
1993 94 95 96 97 98 99 2000 01 02
12 15 14 16 18 17 19 20 22 25
41 45 48 51 54 56 61 67 71
93 94 95 96 97 98 99 00
12 15 14 16 18 17 19 20
57 63 65 70 74 78 86 91
120/8 = 15 128/8 = 16 135/8 = 16.9 144/8 = 18 152/8 = 19 164/8 = 20.5 177/8 = 22.1
57 = 93 + 94 +95 + 96 = 12 + 15 + 14 + 16 01 22 177
120= 57 +63, 128 = 16 +65 and so on. 02 is total of25 years and so the avg. is calculated by dividing 120 120 8
The trend values from the previous tables can be plotted on a graph as follows:
REGRESSION METHOD
Method of Least Squares
YEAR 1998 1999 2000 2001 2002
SALES
(Rs. In crores)
240
280
240
300
340
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 (n) SALES (RS. TIME DEVIATION TD SQUARED PRODUCT OF
CRORE) (y) FROM MIDDLE YEAR 2000 (x) (x2)
98 99 00 01 02 X=5
-2 -1 0 +1 +2 x = 0
4 1 0 1 4 x2 = 10
The equation is
Y = a + bx
a independent variable b exhibits rate of growth a & b can be found out as follows:
e.g. fit a linear regression line to the following data & estimate the demand at price Rs.30
YEAR
81 82 15
83 12 38
84 26 37
85 18 37
86 12 37
87 8 34
88 38 25
89 26 22
90 19 22
91 29 20
92 22 14
52 46
1000 units
15 15 12 26 18 12 8 38 26 19 29 22
52 46 38 37 37 37 34 25 22 22 20 14
225 225 144 676 324 144 64 1444 676 361 841 484
2704 2116 1444 1369 1369 1369 1156 625 484 484 400 196
780 690 456 962 666 444 272 950 572 418 580 308 Si Pi = 7098
Pi = 240 Si = 384
a = Si - b Pi = [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
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