1. Demand Estimation and Forecasting
Chapter 5
Demand Estimation and Forecasting

2. Data Collection
Statistical analyses are only as good as the accuracy and appropriateness of the sample of information that is used.
Several sources of data for business analysis:
buy from data providers (e.g. ACNielsen, IRI)
perform a consumer survey
focus groups
technology: point-of-sale data sources
This is the critical step in developing demand models-without good input date, it will not be possible to develop reliable models.

3. Forecasting
“Forecasting is very difficult, especially into the future.”
Common subjects of business forecasts:
gross domestic product (GDP)
components of GDP
examples: consumption expenditure, producer durable equipment expenditure, residential construction
industry forecasts
example: sales of products across an industry
sales of a specific product
All businesses need to develop forecasts. In most cases, the revenue forecast is the starting point for business planning. Better forecasts help the firm to operate more efficiently.

4. Forecasting A good forecast should:
be consistent with other parts of the business
be based on knowledge of the relevant past
consider the economic and political environment as well as changes
be timely

5. Forecasting Techniques
Factors in choosing the right forecasting technique:
item to be forecast
interaction of the situation with the forecasting methodology--the value and costs
amount of historical data available
time allowed to prepare forecast

6. Forecasting Techniques
Six forecasting techniques
expert opinion
opinion polls and market research
surveys of spending plans
economic indicators
projections
econometric models

7. Forecasting Techniques
Approaches to forecasting
qualitative forecasting is based on judgments expressed by individuals or group
quantitative forecasting utilizes significant amounts of data and equations

8. Forecasting Techniques
Approaches to quantitative forecasting:
naïve forecasting projects past data without explaining future trends
causal (or explanatory) forecasting attempts to explain the functional relationships between the dependent variable and the independent variables

9. Forecasting Techniques
Expert opinion techniques
Jury of executive opinion: forecasts generated by a group of corporate executives assembled together

10. Forecasting Techniques
Expert opinion techniques
The Delphi method: a form of expert opinion forecasting that uses a series of questions and answers to obtain a consensus forecast, where experts do not meet

11. Forecasting Techniques
Opinion polls: sample populations are surveyed to determine consumption trends
may identify changes in trends
choice of sample is important
questions must be simple and clear

12. Forecasting Techniques
Market research: is closely related to opinion polling and will indicate not only why the consumer is (or is not) buying, but also
who the consumer is
how he or she is using the product
characteristics the consumer thinks are most important in the purchasing decision

13. Forecasting Techniques
Surveys of spending plans: yields information about ‘macro-type’ data relating to the economy, especially:
consumer intentions
examples: Survey of Consumers (University of Michigan), Consumer Confidence Survey (Conference Board)
inventories and sales expectations

14. Forecasting Techniques
Economic indicators: a barometric method of forecasting designed to alert business to changes in conditions
leading, coincident, and lagging indicators
composite index: one indicator alone may not be very reliable, but a mix of leading indicators may be effective

15. Forecasting Techniques
Additional leading indicators to predict future economic activity
building permits, new private housing units
stock prices, 500 common stocks
money supply, M2
interest rate spread, 10-year Treasury bonds minus federal funds
index of consumer expectations

16. Forecasting Techniques
Coincident indicators identify trends in current economic activity
employees on nonagricultural payrolls
personal income less transfer payments
industrial production
manufacturing and trade sales

17. Forecasting Techniques
Lagging indicators confirm swings in past economic activity
average duration of unemployment, weeks
ratio, manufacturing and trade inventories to sales
change in labor cost per unit of output, manufacturing (%)

18. Forecasting Techniques
Additional lagging indicators confirm swings in past economic activity
average prime rate charged by banks
commercial and industrial loans outstanding
ratio, consumer installment credit outstanding to personal income
change in consumer price index for services

19. Forecasting Techniques
Economic indicators: drawbacks
leading indicator index has forecast a recession when none ensued
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

20. Forecasting Techniques
Trend projections: a form of naïve forecasting that projects trends from past data without taking into consideration reasons for the change
compound growth rate
visual time series projections
least squares time series projection
Many businesses with many products use simple projection techniques.

21. Forecasting Techniques
Compound growth rate: forecasting by projecting the average growth rate of the past into the future
provides a relatively simple and timely forecast
appropriate when the variable to be predicted increases at a constant percentage

22. Forecasting Techniques
Visual time series projections: plotting observations on a graph and viewing the shape of the data and any trends