2. “Prediction is very difficult,
especially if it's about the future.”
Nils Bohr
3. A. Give the fundamental rules of forecasting
B. Calculate a forecast using a moving average,
weighted moving average, and exponential
smoothing
C. Calculate the accuracy of a forecast
4. Forecasting is a tool used for predicting
future demand based on
past demand information
5. 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
6. Demand forecasting and estimation
gives businesses valuable information
about the markets in which they operate
and the markets they plan to pursue.
Forecasting and estimation are
interchangeable terms that basically
mean predicting what will happen in the
future. If businesses do not use demand
forecasting and estimation, they risk
entering markets that have no need for
the business's product.
8. Purpose
The purpose of demand forecasting and estimation is
to find a business's 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 the
market demand for pizza is high in a city but there are
few 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.
9. Techniques
Managers and business owners use multiple techniques
for demand forecasting and estimation. Using historical
data 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 is
high in the test market, managers assume that the product
will perform well in the larger market.
10. Inventory Consequences
Demand forecasting and estimation is critical for inventory
management. Businesses buy inventory based upon demand
forecasts. 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.
11. 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. Natural
disasters might also affect the demand for a business's
product. To forecast long-term demand, managers
must account for the social, political and economic
history of their markets.
12. 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 the
future for your business, it can be used to come up
with fairly accurate estimates if the assumptions
made are correct.
13. one of the reasons that companies use demand
estimation is to assist with pricing. When you offer
a new product or start a new business, you may not
have any idea how to price your product. When
you have an idea of what the demand will be for
the product, you know approximately how much
you have to price the product. This way, you can
avoid overpricing your product and alienating
some customers. You may also be able to avoid
leaving money on the table.
14. Another reason that demand estimation is
commonly used is so that it can help with
production. Before a company puts a large
amount of money into producing a product, it can
have an estimate of the demand for that product.
If the demand in the area is for 20,000 units, you
should most likely not invest in making 1 million
units during that time frame. This way, more of
your capital can stay on hand instead of being
invested into inventory.
15. When making business decisions using
demand estimation, it is important to
remember that these estimations are only
educated guesses as to what the demand for a
product or service will be. If you have a high-
quality product that people want, you may
not be able to manufacture them fast enough
to meet demand. Always allow some room for
error in the estimation of the demand for your
business. Otherwise, you may be in for some
surprises as a business owner
17. Seeking information through questionnaire ,
interviews etc.
Asking information about their consumption
behavior ie, buying habits , motives etc.
18. 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.
19. 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.
20. 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.
21. These are various quantitative methods to find the exact
relationship between the dependent variable and the
independent variable(s).
The most common method is regression
Analysis :
Simple (bivariate) Regression: Y = a + bX
Multiple Regression: Y = a +bX1 + c X2 +dX3 +..
22. They require a lot of data in order to be
performed.
They necessitate a large amount of
computation
23. 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.
24. 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
25. 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.
26. 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.
27. Demand Forecasting
1) 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.
28. Long Range Strategic Planning
Corporate Objectives: Profit, market share,
ROCE,strategic acquisitions, international
expansion, etc.
Annual Budgeting
Operating Plans: Annual sales, revenues, profits
Annual Sales Plans
Regional and product specific targets
Resource Needs Planning
HRM, Production, Financing, Marketing, etc
