2 Demand Forecasting Demand Forecasting - It is a technique for estimation of probable demand for a product or services in the future. It is based on the analysis of past demand for that product or service in the present market condition. Demand forecasting should be done on a scientific basis and facts and events related to forecasting should be considered. Therefore, in simple words, we can say that after gathering information about various aspect of the market and demand based on the past, an attempt may be made to estimate future demand. This concept is called forecasting of demand.
Why Do We Forecast - In virtually every decision they make, executives today
consider some kind of forecast. Sound predictions of demands and trends are no longer luxury items, but a necessity, if managers are to cope with seasonality, sudden changes in demand levels, price-cutting manoeuvres of the competition, strikes, and large swings of the economy. Forecasting can help them deal with these troubles; but it can help them more, the more they know about the general principles of forecasting, what it can and cannot do for them currently, and which techniques are suited to their needs of the moment. 3 Forecasting As A Planning Tool Forecasting is a planning tool that helps management in its attempts to cope with the uncertainty of the future, relying mainly on data from the past and present and analysis of trends. Scientific forecasting is using mathematical models, historical data, and statistical analysis to make predictions about what will happen in the future. Businesses use short-term forecasting all the time when creating budgets and anticipating expenses. Mostly, these forecasts are based on what they sold and what they paid providers in the recent past. Long-range forecasting requires both quantitative numerical data and qualitative data based on expert opinions and insights. Often, organizations will create a number of long-range forecasts based on “best-case” and “worst-case” scenarios. They will then make plans on how they would respond to each situation and, as time goes on, they will update and adapt the long- term plan. One other important type of planning is the contingency plan. A contingency plan describes what will happen in a possible but not expected situation. Usually, contingency plans are designed to handle emergency situations. 4 Forecasting Time Horizon Business forecasts are classified according to period, time and use. There are long term forecasts as well as short term forecasts. Operation managers need long range forecasts to make strategic-decisions about products, processes and facilities. They also need short term forecasts to assist them in making decisions about production issues that span, only few weeks. Forecasting forms an integral part of planning and decision making, production managers must be clear about the horizon of forecasts. The three divisions of forecast are short range forecast, medium range forecast and long range forecast. 1. Short range forecast: It is typically less than 3 months span. It is used in planning, purchasing for job schedules, job assignments, work force levels, product levels. • How much inventory of a particular product should be carried next month? • How much of each product should be scheduled for production next week? • How much of each raw material should be ordered for delivery next week? 5 Forecasting Time Horizon 2. Medium range forecast: It is typically 3 months to 1 year but has a time span from one to two years. It is used for sales planning, production planning, cash budgeting and so on. 3. Long range forecast: This has a time span of two or more years. It is used for designing and installing new plants, facility location, capital expenditures, research and development, etc. • Selecting a long range Financial Plan for acquiring funds for capital investment • To build new buildings and to purchase new materials • New Product development
6 Design And Developing Logic Of Forecasting System A set of forecasting system design features is proposed to detect, measure, and reduce bias in forecasts and to determine the need for retention of forecasting methods used by an organization. The system is flexible enough to be incorporated into a variety of forecasting environments as part of a marketing control system. Use is made of several statistics that measure forms of forecasting bias including lack of time-series pattern recognition and over-optimism (over-pessimism) The best design of forecasting system model is composed of the integration between statistical and intelligent methods with expert input to generate more accurate demand forecasts. The inputs to the model are history demand, time series, demand factors history series and the expert inputs.
7 Sources Of Data For Forecasting Top forecasting methods include Qualitative Forecasting (Delphi Method, Market Survey, Executive Opinion, Sales Force Composite) These methods are based on emotions, intuitions, judgments, personal experiences, and opinions. This means that there is no math involved in qualitative forecasting methods. Quantitative Forecasting (Time Series). These methods depend wholly on mathematical or quantitative models. The outcome of this method relies entirely on mathematical calculations. Sources Of Data for Forecasting Delphi Method - The agreement of a group of experts in consensus is required to conclude in the Delphi method. This method involves a discussion between experts on a given problem or situation. Market Survey - In a market survey, interviews and surveys of customers are made to understand the task of the customer and tap the trend well in advance. 8 Sources Of Data For Forecasting Executive Opinion - As the name suggests, the executives or managers are involved in such forecasting. This method is very similar to the Delphi method; however, the only difference here is that the executives may or may not be experts Sales Force Composite - The information and intuition of the salesperson determine the needs of the customer and estimate the sales in the particular region or area assigned to the salesperson. Time Series Model - Time series models look at historical data and identify patterns in the past data to arrive at a point in the future based on these historical values. This is the most common model in which we get the historical data available within the organization.
9 Demand Forecasting
➢ Models For Forecasting
➢ Extrapolative Methods Using Time Series
➢ Casual Method Of Forecasting
➢ Accuracy of Forecast
10 Models For Forecasting While there are numerous ways to forecast business outcomes, there are four main types of models or methods that companies use to predict actions in the future. 1. Time series model - This type of model uses historical data as the key to reliable forecasting. You'll be able to visualize patterns of data better when you know how the variables interact in terms of hours, weeks, months or years. 2. Econometric model - To forecast changes in supply and demand, as well as prices. These models incorporate complex data and knowledge throughout the process of creation. This type of statistical model proves valuable when predicting future developments in the economy. 3. Judgmental forecasting model - Various forecasting models of the judgmental kind utilize subjective and intuitive information to make predictions. For instance, there are times when there is no data available for reference. 4. The Delphi method - This method is commonly used to forecast trends based on the information given by a panel of experts.
11 Extrapolative Methods Using Time Series Extrapolation methods are quantitative methods that use past data of a time series variable and nothing else, except possibly time itself to forecast future values of the variable. The idea is that past movements of a variable, such as company sales or U.S. exports to Japan, can be used to forecast future values of the variable.
12 Casual Methods Of Forecasting Causal forecasting is a strategy that involves the attempt to predict or forecast future events in the marketplace, based on the range of variables that are likely to influence the future movement within that market. There are several elements that go into a causal forecasting model. Typically, the process will begin with an assessment of the market as it currently stands. This will include the current position of the company within that market. From there, there is a need to identify both dependent and independent variables that are likely to exert some influence on the direction that the market will take over a specified period of time. Once there is a reasonable projection of what will happen to the market as a whole, it is possible to apply those same variables and their cumulative effect to the business operation itself. Casual methods of forecasting are estimating technique Based on assumptions that demand to be forecasted (Dependent variable) has cause and effect relationship with one or more than one variable (Independent variable) Suitable for those industries which are witnessing ups & downs regularly 13 Accuracy of Forecast Sales forecasting accuracy refers to how accurate your sales forecast is. It tells how close you come to actually hit your projections. When you get your sales forecasting right, you can reduce guesswork and ensure accurate budgeting. You can also make more informed decisions when setting goals, hiring, prospecting, and other revenue-impacting activities. The more accurate your forecasting, the more likely your sales representative will hit their quota. The forecast accuracy calculation shows the deviation of the actual demand from the forecasted demand. If you can calculate the level of error in your previous demand forecasts, you can factor this into future ones and make the relevant adjustments to your planning.
Excellent: ≤+/-5% Good: >+/-5% and ≤+/-10% Terrible: >+/-10%
