1. DEMAND FORECASTING

2. contents MEANING OBJECTIVES OF DEMAND FORECASTING
TYPES OF DEMAND FORECASTING
DETERMINANTS OF DEMAND FORECASTING
REQUIREMENTS FOR GOOD DEMAND FORECASTING
STEPS INVOLVED IN DEMAND FORECASTING

3. Meaning
Forecasting is a prediction of what will occur in the future. Such prediction are rarely perfect, regardless of the quantity of historical data and the extent of the managerial experience.

4. According to professors Norman Gaither and Greg Frazier ‘forecasting’ is a estimating the future demand for products and services and the resources necessary to produce the outputs

5. OBJECTIVES OF DEMAND FORECASTING
SHORT TERM OBJECTIVES:
Regular availability of labour
Price policy formulation
Proper control of sales
Arrangement of finance
Regular supply of raw material
Formulation of production policy

6. Regular availability of labour:
Demand forecasting enables us to properly arrange the skilled and unskilled workers to meet the production requirement scheduled during a given period of time.
Price policy formulation:
Sales forecast enables the management to evolve a suitable price strategy. It is so that price does not fluctuate so much during the period of inflation.
Proper control of sales:
it also helps in formulating suitable sales strategy according to the changing pattern of demand as well as the extent of competition prevalent among the firms.

7. Arrangement of finance:
demand forecasting enables to forecast the financial requirements of the enterprise to have the desired outputs.
Regular supply of raw material:
by determining the volume of production during a given period of time the entrepreneur can forecast the raw material requirement in future.
Formulation of production policy:
sales forecasting enables to formulate the appropriate production policy to overcome the problems related to over-production and under-production

8. Arrangement of finance To decide about expansion
LONG TERM OBJECTIVES:
Labour requirements
Arrangement of finance
To decide about expansion

9. Labour requirements:
In the long run, techniques of production may change. Therefore, trained and skilled labour are needed for new types of job responsibilities. Thus, demand forecasting helps to arrange the skilled labour.
Arrangement of finance:
Assembling the long financial needs, the long tern demand forecasting enables the management to arrange the long term finances on reasonable conditions.
To decide about expansion:
The long term demand forecasting enables to plan a new project, as well as expansion and modernisation of the existing unit.

10. Types of demand forecasting
Long term
Short term
Medium term

11. TYPES OF DEMAND FORECASTING
Short term demand forecasting:
It is concerned with short time period usually less than one year.
This is required for current production scheduling, purchase of raw materials, and inventory of stocks, etc.
Seasonality of sales and its impact On production planning, stock, distribution of products in the market is taken care of by short term demand forecast.

12. Medium term demand forecasting:
1 it is an intermediate between short term and long term situations.
2 it’s need is felt by a firm when the industry to which the firm belongs, is subject to the trade cycle of a medium term.
3 The overall long run trend in demand in such industries may be of increase or decrease.

13. Long term demand forecasting:
It is needed for capacity expansion like Growth of the firm, recruitment and diversification Policies.
Firm has to take care of various factors such as Population, government policies, technology, competition in markets

14. Determinants of demand forecasting
Durable goods
Non-durable goods
Capital goods

15. DETERMINANTS OF DEMAND FORECASTING
Durable goods:
Each consumer products Has a special market For its products which has special peculiarities.
It requires special techniques adopted to meet these Peculiarities which are:
change in size and Characterstics of population.
Saturation Limit of market .

16. continued
Existing stock of goods Tastes and scales of preference of consumers . Replacement demand vs new demand Income levels of consumers Consumer credit outstanding

17. Not durable goods:
These are the goods which can be only used for once.
Demand of Such goods is basically influenced by the following factors:
Disposable income
Price
Size and Characteristics of population

18. Capital goods (producers goods) :
1 These are the goods which help in further production of goods Such as machinery, equipment, etc
These are demanded only when there is a demand for the goods which these capital goods help in producing.
The demand for capital goods is of two types:
Replacement demand
New demand

19. REQUIREMENTS OF GOOD DEMAND FORECASTING
Elements connected to consumers
Elements concerning the suppliers
Elements Concerning the market I. E. Industry
Miscellaneous elements

20. (A)Elements connected to consumers
Total number of consumers
Distribution of consumers product
Total purchasing power and per capita income
Income elasticities
Consumer tastes, social customs, etc
Consumers marketing details- where do they buy, when do they buy etc…
Effect of design, colour, etc on consumers preference

21. (B)Elements concerning the suppliers
Current levels of sales
Current stocks of goods
Trends in sales and stocks
Market share
Pattern of seasonal fluctuations
Research and development trends
Company strength and weakness
Product life cycle
New product possibilities

22. (c)Elements concerning the market
The effect of price change ie price elasticity
Product characteristics
Identification of competitive and complementary products
Number and nature of competitors
Forms of market competition
General price levels
Price of similar goods

23. (D) Miscellaneous elements
Economic environment-showing economic activities, employment, national income, population, trends of income
General government policies
Taxation levels
International environment

24. STEPS INVOLVED IN DEMAND FORECASTING
ClariTy of objectives
Selection of goods
Selection of method
Interpretation of results

25. Techniques of demand forecasting
The main challenge to forecast demand is to select an effective technique
There is no particular method that enables organizations to anticipate risks and uncertainties .
There are basically two approaches: First involves collecting information from customers
through survey and second by using
past data

27. (1)CONSUMER SURVEY METHOD
It uses the direct approach to demand forecasting by directly asking the consumers about their future consumption plan and the burden of forecasting goes to buyer

28. CONSUMER SURVEY METHOD
Complete enumeration survey
Sample survey
End use method
It is of three types:

29. (a)COMPLETE ENUMERATION SURVEY
In this, the consumers are asked about their future plans of purchasing the product in question . The quantities indicated by them are added to obtain the total demand
For example-if there are n consumers and their probable demands for commodity X in the forecast period are x1,x2,x3…….xn, the sales forecast would be
X=X1+X2+X3…….+Xn

30. (B)SAMPLE SURVEY
Under this only a few customers are selected from relevant market through a sampling method , then demand is added to get the final demand
It gives good results when applied carefully especially for new products and brands
Advantages are:
Simple method
Less costly

31. (C)END USE METHOD
It focus on the demand survey of industries using this product as an intermediate product . Demand for the intermediate product is end –use demand in the production of final product

32. ITS ADVANTAGES ARE: Does not require mathematical calculations
Based on the first hand knowledge of the salesman
Helps in forecast the sales of new product
Does not require any historical data

33. Market studies and experiment
(2)Opinion methods
Opinion poll methods aims at collecting opinion from those who are supposed to possess knowledge of market e.g. Sales representatives , sales executives , professional marketing experts
Opinion method
Expert opinion method
Delphi method
Market studies and experiment

34. (A)EXPERT OPINION METHOD
Under this method ,firms having good network of sales representatives can ask them to assess the demand of product in the areas or cities they represent
As sales representatives are very close to customers they know about the future purchase plan ,their reaction to the market and introduction of new product
Then all the estimated demand are added up to get the overall demand for a product

35. Firms which do not have facility, gather information about the demand for their product through the professional market experts or consultants
As this method is too simple and less costly ,it has its own limitations:
Estimates provided them are not reliable
Demand estimates involves the subjective judgments of the assessor

36. (B)DELPHI METHOD
It is an expansion of simple expert opinion poll method. It is used to consolidate the divergent expert opinions and to arrive at a compromise estimate of future demand
Under this experts are provided information on estimates of forecast of other experts with the underlying assumptions. Then experts revise estimates in the light of forecast made by other experts

37. Steps involved in Delphi method:
First step involves the selection of experts . It draws a panel of experts including both inside and outside the organisation who are experts in diversified field
Second step involves making independent predictions in the form of brief statements either by the way of questionnaire or an
Third includes summarizing the statements after necessary editions and clarifications

38. Contd.
Fourth step involves re-distributing the statements with new statements along with the feedback supplied by other experts
Fifth step includes summarizing the statements again and developing new questions if required and re-distributing it again
Last step includes repeating this several times (normally three rounds )till the time ,convergence is obtained

39. contd. Example of Delphi method
Technology forecasting is an example when there is no quantitative data and we predict future technology through Delphi method
Order of development
machine language
assembly language(first generation language)
high level language(second generation languages)
Third generation language(dbase-3)
Fourth generation language(oracle)

40. contd
So, in this next level development would be clubbed under fifth generation ,but the features are yet to be known . If the objective is to predict the capabilities we use Delphi method

41. (c)Market studies and experiments
It involves collecting necessary information regarding the current and future demand for a product . It carries out studies and experiments on consumer behavior under actual market conditions
In this some areas of market are selected with similar features such as income level, cultural background, choice and preferences of consumers

42. (2)Statistical methods
This method uses historical for estimating long term demand
It is considered superior than any other techniques due to following reasons:
Method of estimation is scientific
Estimates are relatively more reliable
It involves small cost

43. Trend projection methods
Statistical methods
Trend projection methods
Econometric methods
Barometric methods

44. (1)Trend projection method
It is concerned with movements of variables through time ,it uses long and reliable time series data
It is based on the assumption that factors responsible for past trends in the variable to be projected as they will continue to play their part in future in same way and to same extent in magnitude and direction
It is applied to time series data on sales . Older firms can get data from their own sales department and new ones from older firms

45. Time series data of XYZ organisation
year
sales
2001 20
2002 24
2003 22
2004 30
2005 36
2006 28

47. (A)GRAPHICAL METHOD
This method helps in forecasting the future sales of an organisation with the help of an graph. The sales data is plotted on a graph and a line is drawn on plotted points and a free hand curve is drawn .

49. (b)Fitting trend method
It means least square method in which a trend line (curve) is fitted to the time series data of sales with the help of statistical techniques
Two types of trends:
Linear trend
Exponential trend

50. (1)Linear trend
When the time series data shows a rising trend in the sales ,then the straight line trend equation is:
y = a + b(X)
Where,
Y=annual sales,
X=time(years),
a and b are constants.
Parameter B gives the measure of annual increase in sales

52. (2)Exponential trend
It implies a trend when sales increase over the past years at an increasing rate or constant rate
Exponential trend equation is:
y= aT(b)
where, y=annual sales
T=time in years
a and b are constants

53. Converting into log: (1) semi logarithmic form: log y =log a + bT
It is used when growth rate is constant
(2)Double log trend of the firm:
log Y =log a +b log T
It is used when growth rate is increasing

54. (C) BOX -JENKINS METHOD
It is used only for short term predictions. This method forecasts demand only with stationary time series data that does not reveal long term trend . It is used in those situation where time series data depicts monthly or seasonal variations with some degree of regularity
For example-this can be used for estimating the sales forecast of woollen clothes during the winter season

55. (2)Barometric method
This method is used to forecast trend in business activities . The technique is to construct an index of economic indicator and to forecast future trend on the basis of movement in the index of economic indicator
This method was introduced by national bureau of economic research in 1930

56. Coincidental indicators
Three indicators used:
Leading indicators: means those factors which move up or down with some other series
Ex: baby powder leads to birth rate
Leading indicators
Coincidental indicators
Lagging indicators

57. Coincident series: are the ones that move up or down with the level of economic activity
Lagging series: those indicators which follow a change after some time lag

58. (3)Econometric method
It combines statistical tools with economic theories for forecasting. It is widely used for a product, for a group of product or for the economy as a whole
Types of econometric method
Regression method
Simultaneous equation method

59. (1)Regression method
It is used to specify the determinants of demands and to determine the nature of relationship between the demand and its determinants
It is the method by which quantity demanded and one or more independent variable is estimated.

60. Two types of regression method:
Simple regression method:
When quantity demanded is estimated as a function of a single independent variable such as price
Multiple regression method:
It is used to estimate demand as a function of two or more independent variables

61. (2)Simultaneous equation method
It involves simultaneous consideration of all variables, as every variable influences other variable in economic decision environment
There are two models endogenous and exogenous variable . We first determine these variables and after that necessary data is collected. After this model is estimated through some appropriate method

62. Demand forecasting of new product
Consumer survey method
Test marketing
Life cycle segmentation analysis
Bounding curves method

63. Life cycle segmentation method
Each product has a LIFE CYCLE of introduction, growth, maturity, saturation and decline.
LIFE CYCLE of the same product may be processing at different stage of market segments.
Further the sales of a new product in any particular market segment tend to follow an S-shaped curve

64. 5 stages of product life cycle
Introduction
Growth
Maturity
Saturation
Decline

65. Introduction: quality has the greater marketing impact, then advertising; but the price and service has the least impact.
Growth: early the adopters have already purchased the goods; so advertising is most effective weapon and then the quality
Maturity: rivals have entered the market; so price elasticity has become very much higher. So price is more essential, followed by advertising, quality and service.

66. Saturation: price is no longer important because it has already income low; product differentiation in quality, packaging, or advertising becomes critical.
Decline: the problem now is to find new product uses and to advertise them; quality and service will have some impact, but price has very little impact.

68. Bounding curve method Market share
This method is based on market share. Market share data of all the existing brands.
Market share
months J F M A S O N D
Brand A 35 30 20 45 50 40
Brand B 25 10 5 15

69. Market change in market share
J-F
F-M
M-A
A-M
M-J
J-J
J-A
A-S
S-O
O-N
N-D
Brand A -5
-10
+25 +5
Brand B
+10

70. QUALITY OF GOOD DEMAND FORECASTING
simplicity
accuracy
Easy availability
economy
Capacity to update forecast

71. IMPORTANCE OF DEMAND FORECASTING
Planning of production
Sales forecasting
Control of business
Control on business activities
Policy making
Useful for stability