CHAPTER 4 DEMAND FORECASTING Dr. Vasudev P. Iyer

Who said it…..? TV won’t be able to hold on any market it captures after the first six months. People will soon get tired of staring at a plywood box every night’’. –20 th Century Fox’s Daryl Zanuck, 1946.

And this….? “ I think there is a world market for about five computers” Thomas J. Watson of IBM in 1974.

1.THE OBJECTIVES 2.THE CONCEPTUAL ISSUES 3.PREREQUISTIE OF A GOOD FORECAST 4.IMPORTANCE OF DEMAND FORECASTING 5.FORECASTING TECHQ. 6.CURRENT FORECASTING PRACTICES IN BUSINESS

THE OBJECTIVES To understand the meaning of demand forecasting To understand how uncertainty can be minimized with the of demand forecasting To understand the relevant forecasting techniques available. To understand the current forecasting techniques used in the industry.

1.THE OBJECTIVES 2.THE CONCEPTUAL ISSUES 3.PREREQUISTIE OF A GOOD FORECAST 4.IMPORTANCE OF DEMAND FORECASTING 5.FORECASTING TECHQ. 6.CURRENT FORECASTING PRACTICES IN BUSINESS

Meaning of Forecasting Forecasting is a scientific technique of predicting future value of a variable on the basis of current and past trends. Demand, sales, price, cost etc; are the common variables that are forecasted by a firm

Levels of forecasts FIRM LEVEL INDUSTRY LEVEL MACRO LEVEL Sales, cost and expenses Industry as a whole or A product manf. by the indu. National income growth Employment

1.THE OBJECTIVES 2.THE CONCEPTUAL ISSUES 3.PREREQUISTIE OF A GOOD FORECAST 4.IMPORTANCE OF DEMAND FORECASTING 5.FORECASTING TECHQ. 6.CURRENT FORECASTING PRACTICES IN BUSINESS

Prerequisites of a Good Forecast A good forecast should  be consistent with other parts of the business.  be based on adequate knowledge of the relevant past.  take into consideration the economic and political environment.  be timely.

Joel Dean’s Criteria Accuracy Accuracy Simplicity Simplicity Durability Durability Flexibility Flexibility Availability Availability

1.THE OBJECTIVES 2.THE CONCEPTUAL ISSUES 3.PREREQUISTIE OF A GOOD FORECAST 4.IMPORTANCE OF DEMAND FORECASTING 5.FORECASTING TECHQ. 6.CURRENT FORECASTING PRACTICES IN BUSINESS

Thus Spoke the Guru…. “The company that doesn’t see trouble ahead is headed for real trouble” “That is why it hires economists, consultants and futurists” Marketing Insights From A to Z: Philip Kotler, John Wiley & Sons, 2003

Why Forecasting? Reduces uncertainty Helps in planning production Helps in inventory control Helps in future planning Helps in fixing investment targets for different industries

1.THE OBJECTIVES 2.THE CONCEPTUAL ISSUES 3.PREREQUISTIE OF A GOOD FORECAST 4.IMPORTANCE OF DEMAND FORECASTING 5.FORECASTING TECHQ. 6.CURRENT FORECASTING PRACTICES IN BUSINESS

Forecasting Techniques Expert opinion Opinion polls Market research Economic indicators Projections

Expert opinion-Jury Method Jury of executive opinion: A forecast generated by experts (e.g., corporate executives) in meetings. The major drawback is that persons with strong personalities may exercise disproportionate influence.

Expert opinion- Opinions of Sales Representatives Under this method, salesmen are required to estimate expected future DD of the product in their respective territories. RATIONALE Salesmen have the most intimate feel of the market. PROCESS

Expert opinion- Delphi Method Traced back to the Greek times. PROCESS: An attempt to arrive at a consensus in an uncertain area is made by questioning a group of experts repeatedly. The process is moderated by a co-coordinator. MERITS: [1] Less expensive & [2] Opinions of the experts can be gathered at one place. DEMERTIS: [1] A tedious method, [2] Depends upon the skill and insight of the experts and [3] Subjective

Opinion Polls A forecasting method in which sample populations are surveyed to determine consumption trends. Points to be kept in mind: – –may identify changes in trends – –choice of sample is important – –questions must be simple and clear

Market Research Closely related to opinion polls Market research indicates: –why the consumer is or is not buying, –who the consumer is, –how he or she is using the product, –what characteristics the consumer thinks are most important in the purchasing decision.

Economic Indicators Method of forecasting in which economic data are formed into indexes to reflect the state of the economy Indexes of: – leading, –coincident, and –lagging indicators are used to forecast changes in economic activity.

Leading, Coincident & Lagging Leading indicators predict changes in future economic activity. Coincident indicators identify peaks and troughs in economic activity. Lagging indicators confirm upturns and downturns in economic activity.

TIME recession peaktrough recovery

Trough  Things look like they are at their worse  People are looking for the bottom

Recovery  Stock prices rises  Unemployment flatten out  People begin to “feel better”  Interest rate flatten out

Peak  The economic growth rate picks up  Rise in prices  Banks may become a little unstable  Interest rates rise  Low unemployment rate. However, it may begin to pick up.  Euphoric conditions

General rule of thumb If, after a period of increases, the leading indicator index sustains three consecutive declines, a recession (or a slowing) will follow Drawbacks Leading indicators occasionally forecast recessions that do not occur. A change in the index does not indicate the precise size of the decline or increase. The data are subject to revision in the ensuing months.

Projections- The Time Series Method A method of forecasting from past data by using least squares statistical methods. By time series we mean the variable changes with change in time. A time series analysis usually examines – –Trends – –Cyclical fluctuations – –Seasonal fluctuations – –Irregular movements.

Time Series Projections ADVANTAGES 1. Easy to calculate 2. Does not require analytical skill 3. Usually reasonably reliable in the short run

CASELET (12) PRACTICAL APPLICATION OF TIMES SERIES METHOD

THE FIRST STEP DEFINE THE TIME SERIES MODEL THE MODEL D = a + b (t)

THE SECOND STEP CALCULATE THE VALUES OF a & b With the help of the formula a = ∑D/n b= ∑D /∑t2

1.THE OBJECTIVES 2.THE CONCEPTUAL ISSUES 3.PREREQUISTIE OF A GOOD FORECAST 4.IMPORTANCE OF DEMAND FORECASTING 5.FORECASTING TECHQ. 6.CURRENT FORECASTING PRACTICES IN BUSINESS

Ocean Spray Cranberries Annual sales: US $ 1.5 billion Forecasting group: 7 employees Predominant model used : Time series model No of items forecasted: 300

The Wholesale Industry Telephone interviews were conducted with 484 wholesale companies in 22 US states. Sample size 411 small companies Expert opinion was the popular method used. This was followed by sales force estimates and customer survey.

CONSUMER CONFIDENCE INDEX Published in the Economic Times 24/01/ optimism < 100 indicate pessimism. The CCI stood at 81 on the scale of 0 to 100. Used of economic indicators

PRESENT TO FUTURE [CCI] CATERGORYPresent Situation Future Expectations Gen. Business Condition 7699 Job Availability 4667 Family Income 88109