What is Forecasting by Sumit

8/7/2019 What is Forecasting by Sumit

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DEMAND FORECASTING

By-: SUMIT SHARMA


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WHAT ISWHAT IS

FORECASTING?FORECASTING?FORECASTINGFORECASTING consistsconsists ofof aa varietyvarietyofof processesprocesses forfor identifyingidentifying whatwhatpossiblepossible futuresfutures couldcould happenhappen..

PREDICTIONPREDICTION consistsconsists ofof aa

varietyvariety ofof processesprocesses forfor identifyingidentifyingwhatwhat possiblepossible futuresfutures willwill happenhappen..


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DEMAND FORECASTINGDEMAND FORECASTING

Forecasting of demand

is the art of predicting

demand for a productor service at some

future date on the basis

of certain present and

past behaviour patterns

of some related events.


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OBJECTIVE

1.SHORT TERM 2.LONG TERM


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1. FORMULATION OF PRODUCTION

POLICY : Demand forecasts help in

formulating suitable production policy.

(a) Regular supply of material : Bythe determination of desired volume of

production on the basis of demandforecasts, evaluate raw materialrequirement in future so as to ensure

regular and continuous supply ofmaterial as well as controlling the size ofinventory at economic level.


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(b) Maximum utilization of

machine : The operations canbe so planned that the machines

are utilized to its maximum

capacity.

(c) Regular availability of

labour: Skilled and unskilledworkers can be properly

arranged to meet the production

schedule requirement.


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2 . Price policy formation:Sales forecast enables the

management to formulate

some appropriate pricingmechanism, so that the level of

price does not fluctuate too

much in the periods of inflation.


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3. Proper control of sales: Sale

forecast are calculated regionwise andthen the sales targets for various

territories are fixed.

4. Arrangement of finance:determine the financial requirements of

the enterprise for the production of

desired output . This can lead tominimize the cost of procuring finance.


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LONG TERM OBJECTIVELONG TERM OBJECTIVE

If period of forecasting more than a year.

1.To decide about production capacity.

2.Expansion of an existing.3.Man power requirement.

4.Long term financial requirement.


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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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MOVING AVERAGE METHODMOVING AVERAGE METHOD

A moving average is an average of some fixed orpre-determined number of observations whichmoves through the series by dropping the top

item of the previous averaged group and addingthe next item. This method can be used todetermine the trend values for given datawithout going into complex mathematicalcalculations. Calculations are based on pre-

determined period in weeks, months & years etc.


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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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it

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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

Weight recent observations much


observations:weight

today


0 1 E

E


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SMOOTHING: CONCEPTSMOOTHING: CONCEPT Include all past observations

Weight recent observations much


observations:weight

today


0 1 E

E

E E

E E

E E

( )

( )( )

1

11

2

3

/


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1

2

2

1

)1(

)1()1(

!

!

ttt

tttt

FaaDF

DaaDaaaDF .

tkt FF !

.


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

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