“Prediction is very difficult,especially if its about the future.” Nils Bohr
A. Give the fundamental rules of forecastingB. Calculate a forecast using a moving average, weighted moving average, and exponential smoothingC. Calculate the accuracy of a forecast
Forecasting is a tool used for predicting future demand based on past demand information
Demand for products and services is usually uncertain.Forecasting can be used for…• Strategic planning (long range planning)• Finance and accounting (budgets and cost controls)• Marketing (future sales, new products)• Production and operations
Demand forecasting and estimation gives businesses valuable informationabout the markets in which they operate and the markets they plan to pursue. Forecasting and estimation are interchangeable terms that basicallymean predicting what will happen in thefuture. If businesses do not use demand forecasting and estimation, they risk entering markets that have no need for the businesss product.
Demand estimation predicts the needs of customers in a market
Purpose The purpose of demand forecasting and estimation isto find a businesss potential demand so managers can make accurate decisions about pricing, business growth and market potential. Managers base pricing on demand trends in the market. For example, if themarket demand for pizza is high in a city but there arefew competitors, managers know they can price pizzas higher than if the demand was lower. Established businesses use demand forecasting and estimation if they consider entering a new market. If the demand for their product is currently low, but will increase in the future, they will wait to enter the market.
Techniques Managers and business owners use multiple techniques for demand forecasting and estimation. Using historicaldata is one method to determine the potential demand for a product or service. For example, businesses with high- end merchandise might examine census information to determine the average income of an area. Larger businesses might use test markets to estimate demand. Test markets are micromarkets in small cities that are similar to larger markets. If the demand for a product ishigh in the test market, managers assume that the product will perform well in the larger market.
Inventory Consequences Demand forecasting and estimation is critical for inventorymanagement. Businesses buy inventory based upon demandforecasts. For example, grocery stores increase their stock of certain items during hurricane season because they know from past data that demand increases. If businesses do not use accurate demand forecasting and estimation methods, they risk purchasing too much or too little inventory.Businesses with too much inventory might lose some of it to time and expiration dates. Businesses with too little inventory will upset customers and miss revenue opportunities.
Considerations Demand forecasting and estimation methods are typically accurate for short-term business planning. Estimating demand for the long-term is difficult because there are many unforeseen factors that influence demand over time. For example, demand estimation might not take into account an economic recession or other financial problems. Naturaldisasters might also affect the demand for a businesss product. To forecast long-term demand, managers must account for the social, political and economic history of their markets.
Demand estimation is a process that involves coming up with an estimate of the amount of demand for a product or service. The estimate of demand is typically confined to a particular period of time, such as a month, quarter or year. While this is definitely not a way to predict thefuture for your business, it can be used to come up with fairly accurate estimates if the assumptions made are correct.
one of the reasons that companies use demandestimation is to assist with pricing. When you offera new product or start a new business, you may nothave any idea how to price your product. Whenyou have an idea of what the demand will be forthe product, you know approximately how muchyou have to price the product. This way, you canavoid overpricing your product and alienatingsome customers. You may also be able to avoidleaving money on the table.
Another reason that demand estimation iscommonly used is so that it can help withproduction. Before a company puts a largeamount of money into producing a product, it canhave an estimate of the demand for that product.If the demand in the area is for 20,000 units, youshould most likely not invest in making 1 millionunits during that time frame. This way, more ofyour capital can stay on hand instead of beinginvested into inventory.
When making business decisions usingdemand estimation, it is important toremember that these estimations are onlyeducated guesses as to what the demand for aproduct or service will be. If you have a high-quality product that people want, you maynot be able to manufacture them fast enoughto meet demand. Always allow some room forerror in the estimation of the demand for yourbusiness. Otherwise, you may be in for somesurprises as a business owner
Seeking information through questionnaire , interviews etc.Asking information about their consumption behavior ie, buying habits , motives etc.
Advantage Disadvantage They give up to date information about the current market scenario . Validity Much useful information can be obtained that would be difficult to uncover in other ways; for Reliability example, if on sumers are ignorant of the relative prices of different brands, it may be concluded that they are not Sample Bias sensitive to price changes.This can be exploited by the firms for their best possible interest.
Here consumers are studied in an artificial environment .Laboratory experiments or consumer clinics are used to test consumer reactions to changes in variables in the demand function in a controlled environment.Need to be careful in such experiments as the knowledge of being in the artificial environment can affect the consumer behavior.
Advantage Disadvantage Direct observation of the There is less control in this consumers takes place case, and greater cost; rather than something of a furthermore, some hypothetical theoretical customers who are lost at model . this stage may be difficult to recover. Experiments need to be long lasting in order to reveal proper result.
These are various quantitative methods to find the exactrelationship between the dependent variable and theindependent variable(s).The most common method is regression Analysis :Simple (bivariate) Regression: Y = a + bXMultiple Regression: Y = a +bX1 + c X2 +dX3 +..
They require a lot of data in order to be performed. They necessitate a large amount of computation
1. Estimation or prediction of future demand for goods and services.2. Nearer it is to its true value, higher is the accuracy.3. Active and Passive forecasts.4. Short term, long term and medium term.5. Capacity utilization, Capacity expansion and Trade Cycles.6. Different forecasts needed for different conditions, markets, industries.7. Approaches to Forecasting: Judgmental, Experimental, Relational/Causal, Time Series Approaches.
Elements related to Consumers. Elements concerning the Suppliers. Elements concerning the Markets or Industry. Other Exogenous Elements like taxation, government policies, international economic climate, population, income etc.Estimating general conditions, estimating the total market demand and then calculating the firm‟s market share. Multiple methods of forecasting, used depending upon suitability, accuracy and other factors. Subjective methods used when appropriate data is not available
1. Forecasting for new product or new market/area.2. Difficulties in finding similar conditions.3. Test Marketing involves launching in a test area which can be regarded as true sample of total market.4. Difficulties of cost, time, variation of markets and imitation by competitors.
1. Systematic forces may show some variation in time series of sales data of a product.2. Basic parameters like population, technology. Business cycles, seasonal variations and then random events.3. Main focus is to find out the type of variation and then use it for long term forecasting.4. Use judgment to extrapolate the trend line obtained from sales data.5. OLS method to prepare a smooth curve is a better option.6. We may obtain a linear trend, quadratic trend, logarithmic trend or exponential trend each of which gives us a different information about the behavior of demand.
Demand Forecasting1) The sales curve eventually is an S shaped „product life cycle curve‟.2) Price elasticities vary in different stages. Highest in later stages as substitutes are available.3) All these stages give exponential shape to the curve.4) Trend method assumes little variations in business conditions.5) Knowledge of curve helps in planning marketing and planning for the product.
Long Range Strategic Planning Corporate Objectives: Profit, market share, ROCE,strategic acquisitions, international expansion, etc.Annual Budgeting Operating Plans: Annual sales, revenues, profitsAnnual Sales Plans Regional and product specific targetsResource Needs Planning HRM, Production, Financing, Marketing, etc