Demand Forecasting

 Demand + Forecasting

 Acc. to Benham” The demand for anything at a given

price, is the amount of it which will be bought per unit of
a time at that price.”

 Forecasting stand for estimating or prediction.

 Demand Forecasting refers to the prediction or estimation

of a future situation under given constraints.
Demand forecasting enables an organization to take various
business decisions, such as planning the production process,
purchasing raw materials, managing funds, and deciding the price
of the product.
Examples
 Demand Forecasting for-

Sufficient food for estimated no. of Guests in a party.

Adequate no. of goods required by customers in a

particular time period.

In Industries, for estimation of raw materials required.

For prediction of the services(manpower) required for

production.
Types of Demand Forecasting

1)Short Time Forecast-:

-- -Are prepared for one year & reviewed monthly or half yearly.

---Used for marketing activities such as selling or advertising.

2) Long Time Forecast-:

---For long term planning, like investment decision for a new
unit or during expansion of existing unit.

---Though it helps in planning, the margin of error is higher.

 Techniques for demand forecasting
1) Analytical Methods-:
a) User Expectation method-:It depends upon the survey of buyers
intention. The survey of buyers will provide:
Customers buying plan.
Total likely consumption of Product.
Merits
 It comes directly from customers.

 It is easy & inexpensive.

Demerits
 Customers may misjudge.
 Consumers may confused due to various alternatives.
b) Collective Opinion method-
 It depends upon the collective opinion of salesman of a
particular product in different territories.

 Under this method, the salesmen have to report to the

head office, their estimates of expectations of sales in their
territories.

 Also referred to as “Hunch Method "of Forecasting.

E.g. Information obtained from retailers and wholesalers.

c) Experts Opinion Method-:
Steps involved-:
 Views of Experts in their respective fields are taken.
 These opinions are then exchanged among various
experts of same fields.
 Forecast is achieved by averaging these opinions.

Advantage-:
 Depends upon experts research & analysis, so it is
reliable as well.
 No danger of “ group think” mentality.
2)Statistical Methods-:

a) Trend Projection Method

b) Graphical Method

c) Least Square Method

d) Regression Analysis Method

 Statistical techniques are used to maintain the objectivity as

well as precision in Demand Forecasting.
a) Trend Projection Method-:
 In this method, previous data's on a product considering its sales
are chronologically arranged
 This arrangement is called “Time Series”.
 This time series represents the effective demand for a particular
product .
Merits-:
 It does not require the formal knowledge of economic
 theory and the market, it only needs the time series data.
Demerits-:
 It assumes that the past is repeated in future. Also, it is an
appropriate method for long-run forecasts, but inappropriate
for short-run forecasts.
 Trend Projection can be either done-:
 Graphically or, Period Year Quarter Sales(In
 Statistically. Million
s)
1. 2005 (I) 1000
1) Graphically-: 2 (II) 1100
3. (III) 1400
 Lets take e.g
4. (IV) 1200
of sales of a
5. 2006 (I) 1300
company in last 6. (II) 1500
3 years. 7. (III) 1100
 Now, using these 8. (IV) 1400
9. 2007 (I) 1600
data's we can predict
10. (II) 1800
the sale for year 2008. 11. (III) 1700
12. (IV) 1900
Graph of sales of the company using Trend Projection method.
Statistically,

 Constant Rate of Change=

“ Y=mx+c”

Here, Y= Sales by the company,

m= Slope,
x= Time Period,
c= Intercept.
Significance of Demand Forecasting
 It provides appropriate production scheduling so as to
avoid the problem of over-production & problem of short
supply.
 Helping the firms to reduce the cost for purchasing raw
material.
 Setting sales targets, establishing sales controls &
incentives.
 Manufacturers prefer “Make to Stock” rather than “Make
to Order". Demand Forecasting helps to plan ahead and
provide the finished goods to their customers as soon as
possible.
 Inventory Control
for Quantitative Analysis

Definition:
Inventory is the raw materials, component parts, work-in-
process, or finished products that are held at a location in the
supply chain.

Inventory control can be defined as, “which ensures the supply

of required quantity and quality of inventory at the required
time and at the same time prevent unnecessary investment in
inventories”
Objectives of Inventory Control

 To ensure that the supply of raw material & finished goods

will remain continuous so that production process is not
halted and demands of customers are duly met.

 To minimise carrying cost of inventory.

 To keep investment in inventory at optimum level.

 To reduce the losses of theft, obsolescence & wastage etc.

 To make arrangement for sale of slow moving items.

 To minimise inventory ordering cost.

Benefits of Inventory

• Hedge against uncertain demand

• Hedge against uncertain supply
• Economize on ordering costs
• Smoothing

To summarize, we build and keep inventory in

order to match supply and demand in the most
cost effective way.
Types of Inventories

 Raw materials & purchased parts

 Partially completed goods called work in progress
 Finished-goods inventories
(manufacturing firms)
or merchandise
(retail stores)
 Replacement parts, tools, & supplies
 Goods-in-transit to warehouses or customers
Functions of Inventory
 To meet anticipated demand
 To smooth production requirements
 To decouple operations
 To protect against stock-outs

 To take advantage of order cycles

 To help hedge against price increases
 To permit operations
 To take advantage of quantity discounts
Effective Inventory Management

 A system to keep track of inventory

 A reliable forecast of demand
 Knowledge of lead times
 Reasonable estimates of
Holding costs
Ordering costs
Shortage costs
 A classification system
Main Techniques in Inventory Control

1.ABC Analysis
The ABC (Always Better Control) inventory control technique
is based on the principle that a small portion of the items may
typically represent the bulk of money value of the total
inventory in construction process, while a relatively large
number of items may from a small part of the money value of
stores. The money value is ascertained by multiplying the
quantity of material of each item by its unit price.
 Procedure for ABC Analysis

 Make the list of all items of inventory.

 Determine the annual volume of usage & money value of each item.
 Multiply each item’s annual volume by its money value.
 Compute each item’s percentage of the total inventory in terms of annual
usage in money
 “A” Category – 5% to 10% of the items represent 70% to 75% of the
money value.
 “B” Category – 15% to 20% of the items represent 15% to 20% of the
money.
 “C” Category – The remaining number of the items represent 5% to 10%
of the money value.
 The relative position of these items show that items of category A
should be under the maximum control, items of category B may not
be given that much attention and item C may be under a loose
control.
Advantages of ABC analysis:

 This approach helps the materials manager to exercise

selective control and focus his attention only on a few
items when he is confronted with lakhs of stores items.
 By concerning on ‘A’ category the materials manager is
able to control inventories and show visible results in a
short span of time
 By controlling the ‘A’ its and doing a proper inventory
analysis, obsolete stocks are automatically pinpointed.
 Many organizations have claimed that the ABC analysis
has helped in reducing the clerical costs and resulted in
better planning and improved inventory turnover.
• ABC analysis has to be resorted to because
equal attention to ‘A’ ‘B’ and ‘C’ items will not be
worth while and would be very expensive.
• Concentrating on all the items is likely to have a
diffused effect on all the items irrespective of the
priorities.
It gets harder to do correctly the longer you do them.

Needs to be completed in the moment for the most

accuracy.

Still might reflect the biases of the data collector.

EOQ analysis
(Economic Order Quantity

The EOQ refers to the order size that will result in the lowest
total of ordering and carrying costs for an item of inventory. If
a firm place unnecessary orders it will incur unneeded order
costs. If a firm places too few order, it must maintain large
stocks of goods and will have excessive carrying cost.

Assumptions
Demand is known with certainty and is constant over time
No shortages are allowed
Lead time for the receipt of orders is constant
Order quantity is received all at once