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DEMAND FORECASTING

By Shatheeshl@gmail.com

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


Helping for continuous production 2. Regular supply of commodities 3. Formulation of price policy 4. Arrangement of finance 5. Labor requirement
1.

FACTORS INVOLVED IN DEMAND FORECASTING


1. 2.

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

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

2.

3.

CRITERIA FOR GOOD DEMAND FORECASTING


1. 2. 3. 4. 5.

Accuracy Plausibility Durability Availability Economy

METHODS OF FORECASTING
SURVEY METHOD 1.Survey of buyers intentions STATISTICAL METHOD 1.Trend projection method

2.Expert opinion method or Delphi Method

2.Moving averages method

3.Controlled Experiments 3.Regression analysis

4.Simulated market situations

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

SURVEY OF BUYERS INTENTIONS

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.

MARKET SURVEY METHOD CONTROLLED EXPERIMENTS


Different determinants of demand are varied and price quantity relationships are established at different points of time in the same market or different markets. Only one determinant varied ; others kept constant.

SIMULATED MARKET SITUATION


An artificial market situation is created and consumer clinics selected. Consumers are asked to spend time in an artificial departmental store and different prices are set for different buyer groups.

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 1996 1997 1998 1999 2000 SALES IN Rs.LAKHS 45 52 48 55 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

YEARS 1996 1997 1998 1999 2000 N=5

SALES Rs. LAKHS (Y) 45 52 48 55 60 Y=260

X 1 2 3 4 5 X=15

X2 1 4 9 16 25 X2=55

XY 45 104 144 220 300 XY=813

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

4 YEARLY MOVING AVERAGES


YEAR. SALES (Rs. LAKHS) 4 YEARLY MOVING TOTAL 4 YEARLY MOVING TOTAL OF PAIRS OF MOVING AVG. YEARLY TOTAL TREND VALUES

93 94 95 96 97 98 99 00

12 15 14 16 18 17 19 20

57 63 65 70 74 78 86 91

120 128 135 144 152 164

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)

TIME DEVIATION & SALES(xy)

98 99 00 01 02 X=5

240 280 240 300 340 y = 1400

-2 -1 0 +1 +2 x = 0

4 1 0 1 4 x2 = 10

-480 -280 0 +300 +680 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 / x2 = 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 = nSi Pi- (Si)(Pi) nPi2 (Pi) 2 a = Si - b Pi n

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

PRICE (Pi) 15 SALES (Si) in

52 46

1000 units

To find the values of a and b the following table 2 constituted: S P is P S P S2


i i i i i i

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

Pi2 = 5708 Si2 = 13716

b = nSi Pi- (Si)(Pi) = 12(7098)-(240)(384) = 0.641 nPi2 (Pi) 2 12 (5708)-(240)2

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

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

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