MicroEconomics Demand Forecasting Final 050910

Micro Economics

Demand Forecasting-Ankit Parmar (238)

-Murtuza Motiwala (207)

-Nirnay Chavda (221)

-Rohit Dharaiya (217)

-Sameer Sawant (242)

-Sweetu Patel (211)

Agenda

The need for demand forecasting Different methods of demand forecasting Concept : selected example Results Conclusion

What is Demand Forecasting

It is a proactive process of determining what products are needed :

Where, When and in What quantities

•customer focused activity•foundation of a company’s entire logistic process•It supports other planning activities like capacity, inventory and even overall business planning

Why Demand Forecasting ?

Reduces future uncertainties and helps study markets that are dynamic, volatile and competitive

Effective forecasting helps build stability in operations

Helps plan operations of purchasing and finance for better control over waste, inefficiency and conflicts

Helps setting sales targets, pricing policies, establishing controls and incentives

Key factors for selecting theRIGHT method

Short Term Forecasting Usually time period for this is till 1 year. For operating decisions like production planning

Medium Term Forecasting For 1 to 2 years. For tactical decisions like employment changes

Long Term Forecasting Above 2 years For strategic decisions like research and development

Demand Forecasting .. HOW ?

Determine the purpose of forecast

Establish a time horizon

Select a forecasting technique

Gather and analyze data

Prepare forecast

Monitor forecast

Different Methods of Demand Forecasting

Quantitative (Micro-economic) Involves prediction of activity of particular firms,

branded products,commodities,markets and industries

- dimensionality of factors is lower and can be easily incorporated into a model

Qualitative (Macro-economic) Involves prediction of economic aggregates such as

inflation,unemployment,GDP growth

- difficult because of complex inter-dependencies in overall economic factors

Different Methods of Demand Forecasting

Survey of Buyers’ Intentions Expert Opinion Delphi Method Collective Opinion (Basically from Sales) Naïve Models Smoothing Techniques.

Survey of Buyers’ Intentions

Least sophisticated method Customers are directly contacted to find

out their intentions to buy products/commodities in the near future

Ideal for short and medium term demand forecasting

Intentions recorded through personalinterviews, mail or post service, telephone interviews and questionnaires.

Survey of Buyers’ Intentions

Advantages Helps in approximating future requirements even

without past data. Disadvantages

People may not know what they are going to purchase.

They may report what they want to buy, but not what they are capable of buying.

Expert Opinion/”Hunch” Method”

Views on sales outlook for the firm during the short term or long run can be taken from experts in the field.

By averaging the opinions of the experts who are most knowledgeable about the firm and its product, the firm can come arrive at a better forecast than would be provided by these experts or

Final decision is arrived at by a consensus.

Expert Opinion/”Hunch” Method”

Advantages Can be undertaken easily without use of

elaborate statistical tools. Disadvantages

Judgmental biases. Based on small numbers

Delphi Method The Delphi technique was developed at RAND

Corporation in the 1950s to help capture the knowledge of diverse experts while avoiding the disadvantages of traditional group meetings. The latter include bullying and time-wasting.

The administrator should provide the experts with anonymous summary statistics on the forecasts of other experts and the experts’ reasons for their forecasts.

The process is repeated until there is little change in forecasts between rounds – two or three rounds are usually sufficient. The Delphi forecast is the median or mode of the experts’ final forecasts

Delphi Method Advantages

Experts identity is not disclosed Saves time and other resources in approaching a large number

of expert.

Limitations/presumptions: Very High fees to afford many experts The expert may not be willing to change the forecast again in

view of being shown as not confident.

Collective Opinion (Basically from Sales)

Also called as “Sales force polling”. Salespersons are required to estimate expected sales in their respective territories and sections

The salespersons are closest to the market and their opinion of future sales can provide valuable information to the firms top management

Collective Opinion (Basically from Sales)

Advantages:

1. Simple – no statistical techniques.

2. Based on first hand knowledge.

3. Quite useful in forecasting sales of new products.

Disadvantages:

1. Almost completely subjective.

2. Usefulness restricted to short-term forecasting.

3. Salesmen may be unaware of broader economic changes.

Naïve Models

Naïve forecasting models are based exclusively on historical observation of sales or other variables such as earnings,cash flow etc.

Advantages:o Inexpensive to develop, store data and operate Disadvantages:o It does not consider any possible casual

relationships that underlie the forecasted variable.

Naïve Models (cont`d) 3 Naïve Models:

Month Sales-2009

1 30500

2 29800

3 36700

4 29100

5 33400

6 40600

7 47500

8 55100

9 52800

10 55040

11 58100

12 61000

Naïve Models (cont`d)

3 Naïve Models:1. With the above data we can use actual sales of the current period as the

forecast for the next period

i.e Y`t+1=Yt= 61,000/-

2. If we consider trends then Y`t+1=Yt+(Yt-Yt-1)

= 61000+(61000-58100)=63900

3 Naïve Models:

3. If we want to incorporate the rate of change, rather then the absolute value then Y`t+1=Yt (Yt/Yt-1)

= 61000*61000/58100

=64050/-

Naïve Models (cont`d)

Naïve Models (cont`d)

3 Naïve Models:

1. To use actual sales of the current period as the forecast for the next period. Yt+1= Yt.

2. If we consider trends, then Yt+1=Yt+(Yt-Yt-1).

3. If we want to incorporate the rate of change, rather than the absolute amount then Yt+1=Yt(Yt/Yt-1)

Smoothing Techniques (Qualitative)

Example of Moving Average

Date Sales

1st Jan 46000

2nd Jan 54000

3rd Jan 53000

4th Jan 46000

5th Jan 58000

6th Jan 49000

7th Jan 54000

Smoothing Techniques (Qualitative)

Moving Avg to be calculated as follows 6days moving avg= Y`7=46000+54000+53000+46000+58000+49000 = 51000

6

Y`8=54000+53000+46000+58000+49000+54000 =52300

6

Smoothing Techniques (Qualitative)

Exponential smoothingo Uses weighted average of past data as the basis for forecast.o The procedure gives heaviest weight to more recent information

and small weight to past information.

Y new= a Y old + (1-a) Y` old where,

Y new = exponentially smoothed average to be used as the forecast

Y old= most recent actual data

Y` old=most recent smoothed forecast

a= smoothing constant. Smoothing constant (or weight) has a value between 0 & 1

inclusive.

Smoothing Techniques (Qualitative)

Moving averageso Averages that are updated as new Information is received.

With the moving average a manager simply employs the most recent observations and drops the oldest observation in the calculation and calculates as average which is used as the forecast for next period.

Limitations:

1. One has to retain a great deal of data.

2. All data in the sample are weighed equally.

Smoothing Techniques (Qualitative)

Exponential smoothingo Uses weighted average of past data as the basis for forecast.o The procedure gives heaviest weight to more recent information

and small weight to the old data

Y new= a Y old + (1-a) Y` old where,

Y new = exponentially smoothed average to be used as the forecast

Y old= most recent actual data

Y` old=most recent smoothed forecast

a= smoothing constant. Smoothing constant (or weight) has a value between 0 & 1

inclusive.

So, we sat down and thought ..which should be a good subject for

demand forecasting ?

Some facts .. The Indian spa industry, with over 2,300 spas, generates revenues

around US$ 400 million annually. At present, India has around 20-25 major spa centers, most of them in the Southern states of Kerala and Karnataka.

Indian wellness and health market is estimated to be growing at 25 percent a year.

The next four years will see at least 700 new spas - both multinational and Indian brands - build their infrastructure in India.

The rise in annual disposable incomes among individuals, coupled with the growing level of health awareness, has created strong opportunities for existing and new entrants in this sector. .

With the extended global spa economy now estimated to be worth around $255 billion, there has never been a better time for the wellness industry in India.

Extending existing spa services to companies

The Concept ..

With an increasing number of working people stressed out, it would be a good idea to offer spa services to employees within the company

Employees would be given discounted rates using shared company infrastructure

This would in turn increase the productivity of employees thus bringing in more profits to the company

Method Used in Forecasting of Mobile SPA

Survey Buyers method

Expert Opinion

Opinion Poll – Questions

Gender : Male or Female Age Group Industry Weekly stress factor Willingness to shift to company spa Frequency of spa visit on a monthly basis Time preferred for spa visit Types of spa services preferred Monthly Income Willingness to spend per month on spa services

Number of people taking the poll : 207

Age group range : 21 years and above

Industry Type : IT/Telecom/Banking/Business/Other Professions

Opinion poll – Some ResultsPopulation

020406080

100120140160

1

Gender

Coun

t Gender Male

Gender Female

69% male ; 31% female population

Age Group

01020304050607080

21-30 31-40 41-50 50 and above

Age Group

Age

in y

ears

Series1

(21-30): 37 % ; (31-40) : 30%

(41-50) : 25% ; (50 +) : 8%

Opinion poll – Results ContdIndustry Profile

010203040506070

IT Telecom Banking Business Others

Industry

Industry

Coun

t of p

eopl

e

Series1

30% business ; 27% IT ; 18% banking

Stress Chart

0

20

40

60

80

100

120

140

1

Coun

t of p

eopl

e

Stressed at work Daily

Stressed at work Atmost thrice a week

Stressed at work Oncein a week

Stressed at work noStress

60% -- once in a week

23% -- daily

12% -- almost thrice a week

Opinion poll – Results Contd

Monthly income

0

10

20

30

40

50

60

70

1

Coun

t of p

eopl

e 15,000 to 20,000

20,000 to 35,000

35,000 to 50,000

50,000 and above

56 % -- Rs 20000 to 50000

~ 22% -- less than 20000 Rs

~ 22% -- more than 50000 Rs45% -- minimum 1000 Rs per month

33% -- 1000-3000 Rs per month

17% -- 3000-5000 Rs per month

5 % -- 5000 Rs and more per month

Willingness to spend per month

020406080

100

Minimum1000

1000 to 3000 3000 to 5000 5000 andabove

How much amount you will be willing to spend on amonthly basis for SPA services?

Amount

Coun

t of p

eopl

e

Series1

Opinion poll – Results Contd90% of the respondents wanted to visit the company spa ,if offered services at lower price

72% of the respondents thought evening time was convenient to attend.

75% of the respondents preferred body massage and 55% preferred head and foot massage

45% of the respondents preferred a choice of more than one of the spa services

36% of the respondents wished to visit a spa once a week and almost an equal number wished to visit a spa once in a month

The remaining percentage chose to visit a spa twice a month

Expert Opinion

Sohum Spa and Wellness Sanctury , Mumbai

- A whole owned subsidiary of Core Wellness Ltd

Dr Priya- Bachelor of Naturopathy and Yogic Sciences

Mobile SPA :Benefits Concerns

Time Savings for customers Doctor consultation/availability at mobile spa

Capital Investment reduction

Cost Saving  

Profitable Business  

Setup of Environment  

Benefits of Demand Forecasting

Early recognition of market trends Better Market positioning Planning and scheduling production Budgeting of costs and sales revenue Controlling inventories Making policies for long term investment Helps in achieving targets of the firm

Thank You