BRIEF OUTLINE OF MEANING AND TECHNIQUES OF DEMAND FORECASTING

 MEANING AND FEATURE OF DEMAND FORECASTING

   MEANING
DEMAND FORECASTING FOR A PRODUCT IS THE TECHNIQUE OF ESTIMATING ITS DEMAND IN THE IMMEDIATE OR DISTANT FUTURE.

  DEFINITION:-ACCORDING TO EVAN J. DOUGLAS:- ,” DEMAND FORECASTING WILL TAKEN TO MEANS THE PROCESS OF FINDING THE VALUE FOR DEMAND IN FUTURE TIME PERIODS.”

   CLASSIFICATION OF FORECAST

  PASSIVE FORECAST  :- WHERE PREDICTION ABOUT FUTURE IS BASED ON THE ASSUMPTION THAT FIRM DOES NOT CHANGE THE COURSE OF ACTIONS

 AND ACTIVE FORECAST DONE UNDER THE CONDITIONS OF LIKELY CHANGE

   PURPOSE OF DEMAND FORECASTING

   SHORT TERM FORECASTING –

I.            PRODUCTION POLICY

II.            PROPER MGMT OF INVENTORIES

III.            TO SET UP REASONABLE SALE TARGETS

IV.            FORMULATING A SUITABLE SALES STRATEGY

V.            FORECASTING FINANCIAL REQUIREMENTS

   PURPOSE OF LONG TERM FORECASTING

I.            PLANNING FOR A NEW PROJECT

II.            ASSESSING LONG TERM FINANCIAL NEEDS

III.            ARRANGING SUITABLE MANPOWER

IV.            SUITABLE STRATEGY FOR CHANGING PATTERN OF CONSUMPTION

   STEPS INVOLVED IN DEMAND FORECASTING

I.            SETTING THE OBJECTIVE

II.            SELECTION OF GOODS

III.            SELECTION OF METHOD

IV.            INTERPRETING THE RESULTS

   DETERMINING SCOPE OF DEMAND FORECASTING

   PERIOD COVERED UNDER FORECASTING

   LEVELS OF FORECASTING:-

1. MACRO ECONOMIC LEVEL
2. INDUSTRY LEVEL
3. FIRM LEVEL
4. PRODUCT LINE LEVEL
5. PURPOSE OF FORECASTING
6. NATURE OF PRODUCT
7. MISCELLANEOUS FACTORS

   DETERMINANTS OF DEMAND

   NON –DURABLE GOODS :- D = F( Y,S,P)

I.            DISPOSABLE INCOME

II.            PRICE

III.            POPULATION

                            DURABLE GOODS:-

I.            REPLACEMENT OF DURABLE GOOD

II.            AVAILABILITY OF ALLIED FACILITIES

III.            CREDIT FACILITIES

   DETERMINANTS OF DEMAND

   CAPITAL GOODS:-

I.            GROWTH PROSPECTS OF THE INDUSTRIES USING THE CAPITAL GOODS

II.            THE NORMS OF CONSUMPTION

   METHODS OF DEMAND FORECASTING

   QUALITATIVE DEMAND FORECASTING

   OPINION POLL METHOD:-

1)       Consumer’s survey Method

2)       Complete enumeration survey

3)       Sample survey

4)       End use( input-output survey)

5)       Collective Opinion Method

6)       Delphi Technique

   METHODS

    QUALITATIVE METHODS

1.       CONSUMERS SURVEY METHOD

2.       SALES FORCE METHOD

3.       DELPHI METHOD

   QUANTITATIVE METHODS

1.       TREND PROJECTION METHODS

2.       BAROMETRIC METHOD

3.       REGRESSION METHOD

4.       ECONOMETRIC METHOD

    QUALITATIVE METHODS

   OPINION POLL METHODS

    CONSUMER’S SURVEY METHOD:- APPROACH BUYER TO KNOW THEIR VIEWS ABOUT THE PRODUCT AND THEIR INTENTION TO PURCHASE PRODUCT

•                 COMPLETE ENUMERATION SURVEY:-PROBABLE DEMAND OF ALL THE CONSUMERS ARE ADDED. BUT IT HAS CERTAIN LIMITATION:COSTLY,TIME CONSUMING,NOT REALISTIC INTENTIONS

   CONSUMER’S SURVEY METHOD

    SAMPLE SURVEY :-SOME REPRESENTATIVES HOUSEHOLD ARE SELECTED ON SOME BASIS. ASSUMPTION IS SAMPLE REPRESENT THE UNIVERSE.

    A VARIANT OF SAMPLE SURVEY TECHNIQUE IS TEST MARKETING WHERE SALES IS FORECAST ED IN FEW REPRESENTATIVE MARKETS

    ADVANTAGES:- SHORT TERM PROJECTIONS,SIMPLE,THE RISK OF ERRONEOUS DATA IS REDUCED

    DISADVANTAGES:-SAMPLE MAY NOT BE TRULY REPRESENTATIVE

   END USE METHOD
( INPUT-OUTPUT ) SURVEY

    DEMAND  FOR THE FINAL PRODUCT IS THE END USE DEMAND OF THE INTERMEDIATE PRODUCTS USED IN THE PRODUCT OF FINAL PRODUCT.

•                 INTERMEDIATE PRODUCT MAY HAVE MANY END USE LIKE STEEL CAN BE USED FOR CONSTRUCTION,TRANSPORTATION,FOR AGRICULTURAL AND INDUSTRIAL MACHINERY

•                 MAY HAVE DEMAND FOR BOTH IN THE DOMESTIC AS WELL AS INTERNATIONAL PRODUCT

  MERITS

I.            YIELD ACCURATE PREDICTION

II.            SECTOR WISE DEMAND

III.            USEFUL FOR PRODUCER’S GOODS

   DEMERITS

1. REQUIRES COMPLEX AND DIVERSE CALCULATION
2. COSTLIER
3. MAY NOT BE AVAILABLE
4. COLLECTIVE OPINION METHOD
5. ALSO KNOWN AS SALES FORCE OPINION METHODS
6. COLLECT INFORMATION FROM THE SALESMAN
7. DISCUSSED AND AGREED WITH THE SALES MANGER

   MERITS

I.            SIMPLEST

II.            LESS COSTLY

III.            EASIER TO COLLECT

   DEMERITS

        I.            CONSTANT CHANGE IN CONSUMER’S TASTE AND PREFERENCE

      II.            BIASED VIEW

   DELPHI’S TECHNIQUE

   BASED ON A DISCUSSION BY GROUP OF EXPERTS

   THE TECHNIQUE CONSISTS OF SEVERAL ROUNDS OF INDIVIDUAL AND ANONYMOUS QUESTION TO EACH EXPERT FOLLOWED BY A GROUP DISCUSSION AFTER EVERY ROUND. AND PARTICIPANTS TO REFLECT AND ADJUST THEIR OPINION. PROCESS IS USUALLY REPEATED UNTIL A CONSENSUS IS ACHIEVED

   AN ALTERNATIVE IS TO SEND OUT A SERIES OF QUESTIONNAIRE. A WRITTEN SUMMARY OF ALL RESPONSE IS DISTRIBUTED TO EVERY ONE AFTER EACH ROUND

   STEPS OF DELPHI METHODS

•            CHOOSE A FACILITATOR

•            IDENTIFY YOUR EXPERTS

•            DEFINE THE PROBLEM

•            ROUND ONE QUESTION

•            ROUND TWO QUESTIONS

•            ROUND THREE

•            ACT ON YOUR FINDING

   EVALUATION

   MERITS

a.       SIMPLE TO CONDUCT

b.       USED WHERE QUANTITATIVE DATA IS NOT POSSIBLE

c.        RELIABLE FORECAST

d.       INEXPENSIVE

   DEMERITS

a.       NOT SCIENTIFIC

b.       BIASED

c.        SUBJECTIVE

   TREND PROJECTION METHOD

   LONG RUN TENDENCY OF A TIME SERIES TO INCREASE OR DECREASE OVER A PERIOD OF TIME IS KNOWN AS TREND. PAST TREND IS USED TO PREDICT FUTURE TREND. TREND CAN BE MEASURED BY USING THE FOLLOWING TECHNIQUES:-

•                          GRAPHIC METHODS

•                          LEAST SQUARE METHODS

•                          TIME SERIES ANALYSIS

•                          METHODS OF MOVING AVERAGE

•                          EXPONENTIAL SMOOTHING

•                          ARIMA METHODS

                            BAROMETRIC TECHNIQUES

                            REGRESSION TECHNIQUES

   LEAST SQUARE METHODS

   WITH THE HELP OF TREND LINE IS FITTED TO THE DATA. KNOWN AS THE LINE OF BEST FIT. IT DOES NOT EXPLAIN THE REASONS OF CHANGE.

   LINEAR TREND:- S =A + B T

    A AND B ARE INTERCEPT AND SLOPE AND T IS THE NUMBER OF YEARS THE FOLLOWING TWO NORMAL EQUATION ARE TO BE SOLVED TO FIND OUT THE VALUE OF A AND B

   ΕS =NA + B Ε T--------I

   Ε ST = AΕT + B Ε   T²  -------II

   NON LINEAR TREND

   SECOND AND HIGHER POLYNOMIAL TRENDS:-

   SECOND DEGREE QUADRIC TREND:-

S = A-BT +C T²

   THIRD DEGREE QUADRIC TREND

S = A-BT +C T²-D T³

   EXPONENTIAL TREND

      S =A E^BT

LOG S =LOG A +BT

   TIME SERIES METHODS

   MOVING AVERAGE METHODS: MOVING AVERAGES CONSISTS OF A SERIES OF ARITHMETIC MEANS CALCULATED FROM OVERLAPPING GROUPS OF SUCCESSIVE VALUES OF A TIME SERIES.

   FIRST VALUE OF MOVING AVERAGE =1/N(A+B+C)

   SECOND VALUE OF MOVING AVERAGE=1/N( B+C+D)

   THIRD VALUE OF MOVING AVERAGE =1/N( C+D+E)

   EXPONENTIAL SMOOTHING

   POPULAR APPROACH FOR SHORT TERM FORECASTING.  THIS METHOD DETERMINES THE VALUES BY COMPUTING EXPONENTIALLY WEIGHTED SYSTEM. THE WEIGHT ASSIGNED TO EACH VALUE REFLECT THE DEGREE OF IMPORTANCE OF VALUE.

   S_T =WY_T + (1-W) S_T-1

   WHERE S_T  = CURRENT SMOOTHENED VALUE

   Y_T = CURRENT OBSERVED VALUE

    S_T-1 =PREVIOUS SMOOTHENED VALUE

   W =SMOOTHING CONSTANT

   ARIMA METOD ( OR BOX-JENKIN TECHNIQUES)

   BOX AND JENKIN DEVELOPED A METHOD OF FORECASTING USING INTEGRATIVE INTEGRATED MOVING AVERAGE. SUITABLE TO SITUATIONS WHERE THE INHERENT PATTERN IN UNDERLYING SERIES IS COMPLEX AND DIFFICULT TO UNDERSTAND. USED PRIMARY FOR SHORT TERM FORECASTING

   FIVE STAGES OF ANALYSIS IN THIS METHOD

•                          REMOVAL OF THE TREND

•                          MODEL IDENTIFICATION

•                          PARAMETER ESTIMATION

•                          VERIFICATION

•                          FORECASTING