DEMAND FORECASTING

What Is Forecasting?

Process of predicting a future event

Underlying basis of all business decisions

Sales will be $200 Million!

Production Inventory Personnel Facilities

What is Demand Forecasting?(1)

Demand Forecasting is predicting the future demand for products/services of an organization

To forecast is to estimate or calculate in advance

Since forecasts are estimates and involve consideration of so many price and non-price

factors, no estimate is necessarily 100% accurate

What is Demand Forecasting/(2)

Demand forecasting involves estimating future overall market

demand for the proposed products/range This involves extensive market and marketing research into existing and new markets, end applications, current market size and future demand potential, market segmentation, customer profiling/attitudes/preferences et al Purpose is to finally help business decisions on how to cater to the overall market and plan its marketing mix and product-market positioning et al Demand forecasting is essentially an outward/external looking process Important as forms basis for sales forecasting operational planning and actions

Why Demand Forecasting?

To help decide on facility capacity planning and capital

budgeting To help evaluate market opportunities worthy of future investments To help assess its market share amongst other competitors To serve as input to aggregate production planning and materials requirement planning To plan for other organizational inputs ( like manpower, funds and financing) and setting policies and procedures

Forecasting Factors
Time required in future Availability of historical data

Relevance of historical data into future

Demand and sales variability patterns Required forecasting accuracy and likely errors

Long term/short term characteristics

Long term forecasts

Short term forecasts

Single or multi-year horizon Monthly or annual time bucket Aggregate units (e.g., product/ service categories) Input to long term decisions Expensive & time consuming methods
Accuracy importance Trumpet of doom

Weekly or monthly horizon Daily & weekly time bucket Detailed units (e.g., SKU) Input to short term decisions Inexpensive & quick methods
Accuracy importance Trumpet of doom

Qualitative Methods

Executive Judgment

Grass Roots

Historical analogy

Qualitative Methods

Market Research

Delphi Method

Panel Consensus

Delphi Method

l. Choose the experts to participate. There should be a variety of knowledgeable people in different areas. 2. Through a questionnaire (or E-mail), obtain forecasts (and any premises or qualifications for the forecasts) from all participants. 3. Summarize the results and redistribute them to the participants along with appropriate new questions. 4. Summarize again, refining forecasts and conditions, and again develop new questions. 5. Repeat Step 4 if necessary. Distribute the final results to all participants.

Quantitative Forecasting Methods

Quantitative Forecasting

Time Series Models

Causal
Models

Moving Average

Exponential Smoothing

Trend Projection

Linear Regression

EXPONENTIAL SMOOTHING
Used in cases where the variable under forecast doesn't follow a trend. 2 Types- Simple and Weighted
Simple

smoothing- simple average of specific observation called order.

Weighted

in decreasing order as one moves from current period observations to previous observations.

smoothing- weights assigned

 The equation for exponential smoothing follows a Geometric Progression. Values may be written as-

a, a (1-a), a(1-a)^2.. a(1-n) where, a = value of weight assigned to the observation a(1-a) = weight assigned to 1 period previous observation a(1-a)^2 = weight assigned to 2 periods previous observation Sum of all weights always equals Unity.

Exponential Smoothing
Using exponential smoothing, the forecast for the next period is

equal to the forecast for the current period plus a proportion () of the forecast error in the current period. Using exponential smoothing, the forecast is calculated by:

where: is the smoothing constant (a number between 0 and 1) Ft is the forecast for period t Ft +1 is the forecast for period t+1 Yt is the actual data value for period t
Dr. C. Lightner Fayetteville State University

Ft+1= Yt + (1- )Ft

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Time Series Analysis

Time series forecasting models try to predict

the future based on past data. You can pick models based on: 1. Time horizon to forecast 2. Data availability 3. Accuracy required 4. Size of forecasting budget 5. Availability of qualified personnel

MOVING AVERAGE
Used for smoothing Series of arithmetic mean over time Result dependent upon the choice of L(Length of period for computing mean) Given by: First Average MA(3)= (Y1 +Y2 +Y3 )/3 Second Average MA(3)= (Y2 +Y3 + Y4 )/3

LINEAR REGRESSION MODEL

LINEAR REGRESSION MODEL

LINEAR REGRESSION MODEL

TREND PROJECTION METHOD

Concerned with the study of movement

of variable through time. The use of this method requires a long and reliable time series data. used under the assumption that the factors responsible for the past trends in variables to be projected (e.g. sales and demand) will continue to play their part in future in the same manner.

There are three (3) techniques of trend projection based on time series data.
1. Graphical method 2. Fitting Trend Equation

3. Double Long Trend Equation

THANK YOU!!!!