What is Forecasting

8/7/2019 What is Forecasting

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DEMAND FORECASTING

Shobhit Kumar


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DEMAND FORECASTINGDEMAND FORECASTING

Forecasting of demand is

the art of predicting demand

for a product or service atsome future date on the basis

of certain present and past

behaviour patterns of some

related events.


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Periods of ForecastingPeriods of Forecasting

Depending upon the period the forecast can

be termed as:

Short Range Forecasting

Medium Range Forecasting

Long range Forecasting


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Periods Of ForecastingPeriods Of Forecasting

1.Long Range Planning Normal Period used is Generally 5 Years.

It may Extents from 10 to 15 Years.

Here much importance is given to Long-range growth factors.

Purpose of Long Range Planning To work out expected capital expenditure for future development.

To determine the expected cash flow from sales.

Plan for future manpower requirements.

To plan for the raw material.

Plan for Research & Development.


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2.Medium Range Planning In Medium Range Forecasting the period may extent over 1 or 2

years.

Purpose of Medium Range Planning To determine budgetary control over expenses.

To determine the dividend policy.

To find and control maintenance expenses.

To determine the schedule operations.

To plan for the capacity adjustments.


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3.Short Range PlanningIn case of Short Term Forecasting extents from few weeks to three or

six months.

Purpose of Medium Range PlanningEstimate inventory requirements

To provide transport facilities for finished goods.

To decide work load for man and machines.

To find the working capital needed

Finding the required overtime to meet the delivery promises.

Setting up the production run for the products.


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SHORT TERM OBJECTIVES

1.FORMULATION OF PRODUCTION POLICY : Demand forecasts help

in formulating suitable production policy.

(a) Regular supply of material : Determination of desired volume of

production on the basis of demand forecasts, evaluate raw material

requirement in future so as to ensure regular and continuous supply of

material as well as controlling the size of inventory at economic level.

(b) Maximum utilization of machine : The operations can be so planned

that the machines are utilized to its maximum capacity.

(c) Regular availability of labor : Skilled and unskilled workers can beproperly arranged to meet the production schedule requirement.


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SHORT TERM OBJECTIVES (Contd.)

2 .PRICE POLICY FORMATION: Sales forecast enables themanagement to formulate some appropriate pricing

mechanism, so that the level of price does not fluctuate too

much in the periods of inflation.

3.PROPER CONTROL OF SALES: Sale forecast are

calculated region wise and then the sales targets for variousterritories are fixed.

4.ARRANGEMENT OF FINANCE: determine the financial

requirements of the enterprise for the production of desired

output . This can lead to minimize the cost of procuring finance.


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LONG TERM OBJECTIVELONG TERM OBJECTIVE

1.To decide about the production capacity.- Plant size should be such that conforms to sale requirement.

- Too small or too large plant size may not be in the economic interest of the enterprise.

-Analyze demand pattern of the product & the forecast for future the enterprise can plan for

the plant or output of the desired capacity.

2.Labor Requirements.-Expenditure on labor is one of the most important component in the cost of production-Reliable and accurate demand forecasts can ensure the best labor facility and no hindrances

in production process.

3.Long term production planning can help the management to arrange for long

term finances.

- Long term production planning can help the management to arrange the long term finances.

-Long term forecasting helps management to take policy decisions and if any error committed

in this may be difficult and expensive to rectify.

Thus the overall success of an enterprise mainly depends on the quality and reliability of

demand forecasting.


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FORECASTING:FORECASTING:

NEEDS AND USESNEEDS AND USES Scheduling existing resources

How many employees do we need and when?

How much product should we make inanticipation of demand?

Acquiring additional resources

When are we going to run out of capacity? How many more people will we need?

How large will our back-orders be?

Determining what resources are needed

What kind of machines will we require? Which services are growing in demand?declining?

What kind of people should we be hiring?


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BENEFITS:BENEFITS:

Aids decision making.

Informs planning and resource allocationdecisions.

Evaluating the performance of sales

department. Have finished goods of right quality & quantity

at right time with minimum cost.


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BEFORE YOU FORECASTBEFORE YOU FORECAST

Key questions which must be answered

before making a forecast:

what is the purpose of the forecast?

what specifically do we wish to forecast? how important is the past in predicting the

future?

what method or methods will be used to

make the forecast?

What could change the forecast?


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techniques of demand forecasting

Survey methods Statistical method

Consumer survey Expert opinion

delphiSamplesurvey

End use

TrendprojectionRegression method

Least squareTime series

Exponentialsmoothing

Moving average

econometric


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FORESIGHTFORESIGHT

FORECASTING1. A method for translating past experience

into estimates of the future.

2. A method for analyzing future possibilities to

develop strategies to plan for more desirable

futures.

The future is malleable.

It is not preordained.

Many possibilities exist for any future timeperiod.

The future can be changed.


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DELPHI METHODDELPHI METHOD

Under the Delphi method the experts areprovided information on estimates offorecasts of other experts along with theunderlying assumptions. The experts may

revise their own estimates in the light offorecasts made by other experts. Theconsensus of experts about the forecastsconstitutes the final forecast.

This method is used to consolidate thedivergent expert opinions and to arrive at acompromise estimate of future demand.


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ADVANTAGEADVANTAGE

It is simple to conduct .

Used where quantitative data is not

possible. Forecast is reliable.

It is inexpensive.

It takes little time.


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DISADVANTAGESDISADVANTAGES

The expert may be biased.

The result are based on mere hunch of one or

more persons and not on scientific analysis. The method is subjective and the forecast could

be unfavorably influenced by persons with vested

interest.


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CONSUMER SURVEYCONSUMER SURVEY

METHODMETHOD Surveys are conducted to collect

information about future purchase

plans of the probable buyers of the

product.

(a) COMPLETE ENUMERATION

SURVEY- The firm has to go for a door

to door survey for the forecast period by

contacting all the households in the

area.


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ADVANTAGESADVANTAGES

It is simple to use.

It is not affected by personal biases.

Based on collected data.


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DISADVANTAGESDISADVANTAGES

It is costly.

It is time consuming.

Difficult and practically impossible tosurvey all the consumers.

Useful only for products with limited

consumers.


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SIMPLE MOVING AVERAGESIMPLE MOVING AVERAGE

Forecast Ft is average ofn previous observations oractuals Dt :

Note that the n past observations are equally weighted.

Issues with moving average forecasts: All n past observations treated equally; Observations older than n are not included at all;

Requires that n past observations be retained;

Problem when 1000's of items are being forecast.

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SIMPLE MOVINGSIMPLE MOVING

AVERAGEAVERAGE

Include n most recent observations

Weight equally

Ignore older observationsweight

today

123...n

1/n


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.

Include all past observations

Weight recent observations much

more heavily than very old

observations:weight

today

Decreasing weight givento older observations

EXPONENTIAL SMOOTHINGEXPONENTIAL SMOOTHING


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.

EXPONENTIALEXPONENTIAL

SMOOTHINGSMOOTHING Include all past observations



observations:weight

today


0 1 E

E


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SMOOTHING: CONCEPTSMOOTHING: CONCEPT Include all past observations



observations:weight

today


0 1 E

E

E E

E E

E E

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1

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1

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FaaDF

DaaDaaaDF .

tkt FF !

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SMOOTHING: MATHSMOOTHING: MATH

Thus, new forecast is weighted sum of old forecast and actual demand

Notes:

Only 2 values (Dt and Ft-1 ) are required, compared with n for moving

average

Parameter a determined empirically (whatever works best)

Rule of thumb: E < 0.5

Typically, E = 0.2 orE = 0.3 work well

Forecast forkperiods into future is:


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THANK YOU

What is Forecasting

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