Demand forecasting

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DEMAND FORECASTING PRESENTED BY : KSHITIJ SINGH MANOJ KUMAR MANVI AGARWAL MAYAN AGARWAL

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Transcript of Demand forecasting

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DEMAND FORECASTING

PRESENTED BY : KSHITIJ SINGHMANOJ KUMAR

MANVI AGARWALMAYAN AGARWAL

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INTRODUCTION

Our life is full of uncertainties and so is the buisness. Changes are even seen in the behaviour of consumer depending on his tastes and preferences over time .

In short all calculations and speculations of a firm regarding the details of his product depends on demand.

And in this topic we will study about various methods to calculate those predictions and objectives behind them.

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MEANING A forecast is a guess or anticipation or a prediction about any event which is likely to happen in the future.

For example : An individual may forecast his job prospects, a consumer may forecast an increase in his income and therefore purchases, similarly a firm may forecast the sales of its product.

Demand Forecasting means predicting or estimating the future demand for a firm’s product or products .

Important aid in effective and efficient planning

It is backbone of any business

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The short term objectives are as follows :

1.Formulation of Production policy : helps to overcome the problem of over production and under production.

2. Regular Availability of Labour : helps to properly arrange skilled and unskilled labour.

3.Regular supply of Raw Material : helps in predicting requirement of raw material in future .

4.Arrangement of funds : enables to estimate the financial requirements .

5. Price policy formulation : enables the management to evolve a suitable price strategy .

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If the period of forecasting is more than one year then it is termed as long term forecasting .

• The long term objectives are as follows :

1.Labour requirements : helps in arranging skilled labour .

2.Arrangement of funds : enables to arrange long term finances on reasonable conditions.

3.To decide about Expansion :enables to plan for a new project as well as expansion and modernisation of existing unit .

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NEED AND SIGNIFICANCE

• It is necessary to forecast demand in buisness because :

1.Effective planning : provides scientific and reliable basis for anticipating future operations

2.Reduction of uncertainty : aims at reducing the area of uncertainty that surrounds mangerial decision making with respect to costs , production, sales , profit etc .

3.Investment decision : investments are made keeping in mind the the returns and returns depend on market demand.

4. Resource allocation : efficient allocation of resources when future estimates are available .

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5. Pricing decisions : in order to pursue optimal pricing strategies firm need to have complete information about the future demand.Two concepts arises here :

(a)Overoptimistic :these estimates may lead to an excessively high price and lost sales.

(b)Overpessimistic : these estimates of demand may lead to a price which is set too low resulting in losses.

6.Competitve strategy : the level of demand for a product will influence decisions , which the firm will take regarding the non-price factors .

7. Managerial control : forecasting disclose the areas where control is lacking . It is must in order to control costs of production .

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How ??

Step 5 estimating future events

Step 4 Gather and analyze data

Step 3 Select a forecasting technique

Step 2 Selection of products

Step 1 Determine purpose of forecast

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SO ,WE KNOW WHAT IT’S ALL ABOUT!!!

NOW LETS ANALYSE THE

METHODS OF

DEMAND

FORECASTING.

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QUALITATIVE TECHNIQUESThey mainly employ human judgement to predict future

events .

They are also called macroeconomic methods.

This involves the prediction of economic aggregates such as , unemployment, GDP growth, short-term interest rates etc..

This involves :

1) Expert opinion methods

2) Survey methods :

a.Complete enumeration survey

b.Sample survey

c.Sales force opinion

d.End use survey

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• Expert Opinion Method : This technique of forecasting demand seeks the views of experts on the likely level of demand in the future. They have a rich experience of the behaviour of demand.

• If the forecasting is based on the opinion of several experts, then it is known panel consensus.

• A specialized form of panel opinion is the Delphi Method. This method seeks the opinion of a group of experts through mail about the expected level of demand.

• The responses so received are analyzed by an independent body

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• Survey Methods : In it we have four major survey methods : -

a) Consumers Complete Enumeration Survey :

• In this method data is collected from all the customers and then added up to arrive as the total expected demand of the product.

• The method is comprehensive and can give better forecasts of demand.

• This method is time consuming and costly.

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b) Consumers Sample Survey :• Only a few consumers are selected and their views on

the probable demand are collected.• Thus, it is a miniature form of Complete Enumeration

Survey.• The sample is considered to be a true representation

of the entire population.• This method is simple and cheaper.• The results of survey can be obtained quickly and

results are good.

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c) Sales Force Opinion Survey :• In this method sales persons are expected to estimate

expected sales in their respective territories.• The sales force, which has been selling the product to

wholesalers / retailers / consumers over a period of time, is considered to know the product and the demand pattern very well.

• These method does not require intricate mathemathical calculations.

• This method is based on the first hand knowledge of the salesman.

• It is useful to forecast the sales of new products.

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d) Consumer’s End Use Survey :• The end use method focuses on forecasting the

demand for intermediary goods. • Such goods can also be exported or imported besides

being used for domestic production of other goods.• Can be calculated as :

D = Dc + De – I + x1 . O1 + x2 . O2 + … +xn . On • For example, milk is a commodity which can be used

as an intermediary good for the production of ice cream, paneer and other dairy products.

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Dm = Dmc + Dme – Im + xi . Oi + xp . Op + … +xn . On

Where :

Dmc =Final consumption demand for milk,

Dme =Export demand for milk,

Im =Import of milk,

xi =Per unit milk requirement of the ice cream industry

Oi =Output of the ice cream industry

Xp and Op notations are similar to xi and Oi for the paneer

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“ARE YOU STILL THERE??”

HMMM GREAT !!!

THAT FINISHES THE QUALITATIVE METHODS.

NOW LETS LOOK AT THE

“QUANTITATIVE METHODS”

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QUANTATIVE TECHNIQUES

This method involves various statistical tools to data for predicting future events.

These methods are also called microeconomic methods.Involves the prediction of activity of particular firms, branded products, commodities, markets, and industries. They are much more reliable.

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a) Trend Projection Method : • This method is used when a detailed estimate has to

be made.• Time plays a n important role in this method .• This method uses historical and cross –sectional data

for estimating demand

This technique assumes that whatever has been the pattern of demand in the past, will continue to hold good in the future as well.

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• In this method data is arranged chronologically which yields a ‘time series’.

• The time series represent the past pattern of effective demand for a particular product and is used to project the trend of the time series.

• To do so there are two methods :

a.Graphical method

b.Least Square method

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Graphical method :• A trend line can be fitted through a series

graphically .• Old values of sale for different areas are plotted on

graph and a free hand curve is drawn passing through as many points as possible .

• Based on trend equation, we find ‘Line of Best Fit’ and then it is projected in a scatter diagram,dividing points equally on both sides

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Least Square Method :

• It is a mathematical procedure for fitting a line to a set of observed data points in a manner that the sum of the squared differences between the calculated and observed value is minimised.

• The linear trend is the most widely used mode of time series analysis.

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It is represented: Y= a + b x

• Y=Demand

• X= Time Period

• a & b are constants .

• For calculation of Y for any value of X requires the values of a & b .These are calculated using :

∑Y=na + b∑X

∑XY=a∑X+b∑X²

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PROBLEM & SOLUTION

• The data relate to the sale of generator sets of a company over the last five years

• Year : 2003 2004 2005 2006 2007 sets : 120 130 150 140 160

Estimate the demand for generator sets in the year 2012 if the present trend continues

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Let the base year be 2002.

YEAR X Y X2 XY

2003 1 120 1 120

2004 2 130 4 260

2005 3 150 9 450

2006 4 140 16 560

2007 5 160 25 800

TOTAL 15 700 55 2190

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For a linear equation Y = a + bXThe set of normal equation are :

ΣY = na + bΣXΣXY = aΣX + bΣX2

1.Substituting the Table Values in equation (ii) & (iii), We get700 = 5a +15b

2190 = 15a + 55b2.By multiplying equation iv by 3 and subtracting it from equation v

we get 10b =90 b =93. Substitute this value in equation iv we have

700 =5a +15 b 700 = 5a +15 (9)

5a =565 a = 113

Trend equation Y=113 + 9x For 2012 ,x will be 10 (2012 - 2002)Y(2012) = 113+9 x 10 =203 sets

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b) Barometric Method : • Method uses business barometers or indicators of various

economic phenomena.

• The term Barometer is used to indicate the economic phenomena.

• The assumption behind this is that the past pattern tend to repeat themselves in future and future can be predicted with the help of certain happenings of the present.

• Forecasting Techniques that use the lead and lag relationship between Economic variable for predicting the directional changes in the concerned variables are known as Barometric Techniques.

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• Some of the important indicators are :

a.Employment

b. Wholesale prices

c. Industrial production

d. Gross national product

• Example : The bhuj earthquake in January 2001, led to a massive destruction of Property and buildings in Gujrat. This necessitated constructions of building. The construction was followed by a spurt in demand for cement, fans, Tube lights etc. Thus one can say, that the construction of buildings leads to the demand for cement.

• In this case the construction of building is the leading indicator or the barometer.

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c) Econometric methods :• Refers to the application of mathematical economic

theory and statistical procedures to economic data to establish quantitative results.

• These models are very complex in practice as they combine the knowledge of economics , mathematics and statistics.

• Employs the following two :

1. Regression method

2. Simultaneous Equations

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Regression Method :• Linear regression analysis establishes a relationship

between a dependent variable and one or more independent variables.

• In simple linear regression analysis there is only one independent variable.

• If the data is a time series, the independent variable is the time period.

• The dependent variable is whatever we wish to forecast.

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• Regression EquationThis model is of the form:

Y = a + bXWhere,

Y = dependent variable X = independent variable

a = y-axis intercept b = slope of regression line

• Solution:

a = (∑X²) ( ∑Y) - (∑X )( ∑X Y)

N∑X² - (∑X )²

b = N∑X Y - (∑X )( ∑ Y)

N∑X² - (∑X )²

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Example :• The data of a firm relating to sales and advertisement

is given below .If the manager decides to spend Rs 30 mill in the year 2005 what will be the prediction for sales YEAR AD.EX. SALES

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

5

8

10

12

10

15

18

20

21

25

45

50

55

58

58

72

70

85

78

85

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YEAR AD.EX mill SALES(‘0000) units

X2 XY

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

5

8

10

12

10

15

18

20

21

25

45

50

55

58

58

72

70

85

78

85

25

64

100

144

100

225

324

400

441

625

225

400

550

696

580

1080

1260

1700

1638

2125

N=10 ∑X=144 ∑Y=656 ∑X2=2448 ∑XY=10254

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• Using formula the caluculated values of a & b are :

a = 34.54

b = 2.15

• Therefore , for Y =a + b x

Y=34.54 +2.15 x ,

x =30

Y =34.54+2.15 (30)= 99 Thousand

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Simultaneous Equations :• When the inter relationship between the economic variables

becomes complex, the use of single equation regression method becomes difficult. In such cases forecasting of demand is done using multiple simultaneous equations. This is the complex statistical methods of forecasting.

These variables are of two types :

• endogenous,

• exogenous.

The number of equation in such a model is equals the number of endogenous variables.

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WARNING !!

The limitations are :

Forecasts are subject to degree of error and they can never be made with 100% accuracy.

Also quantitative techniques are based on certain assumptions so conclusions are not better.

Managers often neglect to examine whether the forecasts are supported by reliable information.

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QUERIES ??(IF GENUINE PLEASE THEN ONLY)

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