Annamalai University MBA Chennai DDE

Assignments for MBA(HRD) 1.b)

Techniques of Demand Forecasting



Broadly speaking, there are two approaches to demand forecasting- one is to obtain information about the likely purchase behavior of the buyer through collecting expert’s opinion or by conducting interviews with consumers, the other is to use past experience as a guide through a set of statistical techniques. Both these methods rely on varying degrees of judgment. The first method is usually found suitable for short-term forecasting, the latter for long-term forecasting. There are specific techniques which fall under each of these broad methods.

Simple Survey Method:

For forecasting the demand for existing product, such survey methods are often employed. In this set of methods, we may undertake the following exercise.

1) Experts Opinion Poll: In this method, the experts on the particular product whose demand is under study are requested to give their ‘opinion’ or ‘feel’ about the product. These experts, dealing in the same or similar product, are able to predict the likely sales of a given product in future periods under different conditions based on their experience. If the number of such experts is large and their experience-based reactions are different, then an average-simple or weighted –is found to lead to unique forecasts. Sometimes this method is also called the ‘hunch method’ but it replaces analysis by opinions and it can thus turn out to be highly subjective in nature.

2) Reasoned Opinion-Delphi Technique: This is a variant of the opinion poll method. Here is an attempt to arrive at a consensus in an uncertain area by questioning a group of experts repeatedly until the responses appear to converge along a single line. The participants are supplied with responses to previous questions (including seasonings from others in the group by a coordinator or a leader or operator of some sort). Such feedback may result in an expert revising his earlier opinion. This may lead to a narrowing down of the divergent views (of the experts) expressed earlier. The Delphi Techniques, followed by the Greeks earlier, thus generates “reasoned opinion” in place of “unstructured opinion”; but this is still a poor proxy for market behavior of economic variables.

3) Consumers Survey- Complete Enumeration Method: Under this, the forecaster undertakes a complete survey of all consumers whose demand he intends to forecast, Once this information is collected, the sales forecasts are obtained by simply adding the probable demands of all consumers. The principle merit of this method is that the forecaster does not introduce any bias or value judgment of his own. He simply records the data and aggregates. But it is a very tedious and cumbersome process; it is not feasible where a large number of consumers are involved. Moreover if the data are wrongly recorded, this method will be totally useless.

4) Consumer Survey-Sample Survey Method: Under this method, the forecaster selects a few consuming units out of the relevant population and then collects data on their probable demands for the product during the forecast period. The total demand of sample units is finally blown up to generate the total demand forecast. Compared to the former survey, this method is less tedious and less costly, and subject to less data error; but the choice of sample is very critical. If the sample is properly chosen, then it will yield dependable results; otherwise there may be sampling error. The sampling error can decrease with every increase in sample size

5) End-user Method of Consumers Survey: Under this method, the sales of a product are projected through a survey of its end-users. A product is used for final consumption or as an intermediate product in the production of other goods in the domestic market, or it may be exported as well as imported. The demands for final consumption and exports net of imports are estimated through some other forecasting method, and its demand for intermediate use is estimated through a survey of its user industries.

Complex Statistical Methods:

We shall now move from simple to complex set of methods of demand forecasting. Such methods are taken usually from statistics. As such, you may be quite familiar with some the statistical tools and techniques, as a part of quantitative methods for business decisions.

(1) Time series analysis or trend method: Under this method, the time series data on the under forecast are used to fit a trend line or curve either graphically or through statistical method of Least Squares. The trend line is worked out by fitting a trend equation to time series data with the aid of an estimation method. The trend equation could take either a linear or any kind of non-linear form. The trend method outlined above often yields a dependable forecast. The advantage in this method is that it does not require the formal knowledge of economic theory and the market, it only needs the time series data. The only limitation in this method is that it assumes that the past is repeated in future. Also, it is an appropriate method for long-run forecasts, but inappropriate for short-run forecasts. Sometimes the time series analysis may not reveal a significant trend of any kind. In that case, the moving average method or exponentially weighted moving average method is used to smoothen the series.

(2) Barometric Techniques or Lead-Lag indicators method: This consists in discovering a set of series of some variables which exhibit a close association in their movement over a period or time.

For example, it shows the movement of agricultural income (AY series) and the sale of tractors (ST series). The movement of AY is similar to that of ST, but the movement in ST takes place after a year’s time lag compared to the movement in AY. Thus if one knows the direction of the movement in agriculture income (AY), one can predict the direction of movement of tractors’ sale (ST) for the next year. Thus agricultural income (AY) may be used as a barometer (a leading indicator) to help the short-term forecast for the sale of tractors.

Generally, this barometric method has been used in some of the developed countries for predicting business cycles situation. For this purpose, some countries construct what are known as ‘diffusion indices’ by combining the movement of a number of leading series in the economy so that turning points in business activity could be discovered well in advance. Some of the limitations of this method may be noted however. The leading indicator method does not tell you anything about the magnitude of the change that can be expected in the lagging series, but only the direction of change. Also, the lead period itself may change overtime. Through our estimation we may find out the best-fitted lag period on the past data, but the same may not be true for the future. Finally, it may not be always possible to find out the leading, lagging or coincident indicators of the variable for which a demand forecast is being attempted.

3) Correlation and Regression: These involve the use of econometric methods to determine the nature and degree of association between/among a set of variables. Econometrics, you may recall, is the use of economic theory, statistical analysis and mathematical functions to determine the relationship between a dependent variable (say, sales) and one or more independent variables (like price, income, advertisement etc.). The relationship may be expressed in the form of a demand function, as we have seen earlier. Such relationships, based on past data can be used for forecasting. The analysis can be carried with varying degrees of complexity. Here we shall not get into the methods of finding out ‘correlation coefficient’ or ‘regression equation’; you must have covered those statistical techniques as a part of quantitative methods. Similarly, we shall not go into the question of economic theory. We shall concentrate simply on the use of these econometric techniques in forecasting.

We are on the realm of multiple regression and multiple correlation. The form of the equation may be:

DX = a + b1 A + b2PX + b3Py

You know that the regression coefficients b1, b2, b3 and b4 are the components of relevant elasticity of demand. For example, b1 is a component of price elasticity of demand. The reflect the direction as well as proportion of change in demand for x as a result of a change in any of its explanatory variables. For example, b2< 0 suggest that DX and PX are inversely related; b4 > 0 suggest that x and y are substitutes; b3 > 0 suggest that x is a normal commodity with commodity with positive income-effect.

Given the estimated value of and bi, you may forecast the expected sales (DX), if you know the future values of explanatory variables like own price (PX), related price (Py), income (B) and advertisement (A). Lastly, you may also recall that the statistics R2 (Co-efficient of determination) gives the measure of goodness of fit. The closer it is to unity, the better is the fit, and that way you get a more reliable forecast.

The principle advantage of this method is that it is prescriptive as well descriptive. That is, besides generating demand forecast, it explains why the demand is what it is. In other words, this technique has got both explanatory and predictive value. The regression method is neither mechanistic like the trend method nor subjective like the opinion poll method. In this method of forecasting, you may use not only time-series data but also cross section data. The only precaution you need to take is that data analysis should be based on the logic of economic theory.

(4) Simultaneous Equations Method: Here is a very sophisticated method of forecasting. It is also known as the ‘complete system approach’ or ‘econometric model building’. In your earlier units, we have made reference to such econometric models. Presently we do not intend to get into the details of this method because it is a subject by itself. Moreover, this method is normally used in macro-level forecasting for the economy as a whole; in this course, our focus is limited to micro elements only. Of course, you, as corporate managers, should know the basic elements in such an approach.

The method is indeed very complicated. However, in the days of computer, when package programmes are available, this method can be used easily to derive meaningful forecasts. The principle advantage in this method is that the forecaster needs to estimate the future values of only the exogenous variables unlike the regression method where he has to predict the future values of all, endogenous and exogenous variables affecting the variable under forecast. The values of exogenous variables are easier to predict than those of the endogenous variables. However, such econometric models have limitations, similar to that of regression method.

Demand forecasting

Demand forecasting is the activity of estimating the quantity of a product or service that consumers will purchase. Demand forecasting involves techniques including both informal methods, such as educated guesses, and quantitative methods, such as the use of historical sales data or current data from test markets. Demand forecasting may be used in making pricing decisions, in assessing future capacity requirements, or in making decisions on whether to enter a new market.

Contents

1 Necessity for forecasting demand


1.1 Stock effects
1.2 Market response effect
2 Methods
2.1 Methods that rely on qualitative assessment
2.2 Methods that rely on quantitative data
3 Ex post studies of demand forecasts
4 See also
5 References

Necessity for forecasting demand

Often forecasting demand is confused with forecasting sales. But, failing to forecast demand ignores two important phenomena. There is a lot of debate in demand-planning literature about how to measure and represent historical demand, since the historical demand forms the basis of forecasting. The main question is whether we should use the history of outbound shipments or customer orders or a combination of the two as proxy for the demand.

Stock effects

The effects that inventory levels have on sales. In the extreme case of stock-outs, demand coming into your store is not converted to sales due to a lack of availability. Demand is also untapped when sales for an item are decreased due to a poor display location, or because the desired sizes are no longer available. For example, when a consumer electronics retailer does not display a particular flat-screen TV, sales for that model are typically lower than the sales for models on display. And in fashion retailing, once the stock level of a particular sweater falls to the point where standard sizes are no longer available, sales of that item are diminished.

Market response effect

The effect of market events that are within and beyond a retailer’s control. Demand for an item will likely rise if a competitor increases the price or if you promote the item in your weekly circular. The resulting sales a change in demand as a result of consumers responding to stimuli that potentially drive additional sales. Regardless of the stimuli, these forces need to be factored into planning and managed within the demand forecast.

In this case demand forecasting uses techniques in causal modeling. Demand forecast modeling considers the size of the market and the dynamics of market share versus competitors and its effect on firm demand over a period of time. In the manufacturer to retailer model, promotional events are an important causal factor in influencing demand. These promotions can be modeled with intervention models or use a consensus to aggregate intelligence using internal collaboration with the Sales and Marketing functions





Forecasting Technique in Human Resource Planning



Determining the human resources required by an organization involves identifying the jobs, skills and knowledge required by those jobs and the performance level of the current workforce. Using this data, you can forecast hiring or reorganizing needs for both the short and long term. Forecasting methods typically includes using past data to predict future staffing. Additionally, organizations can use survey, benchmarking and modeling techniques to estimate workforce staffing numbers. Use several methods and cross-check your findings to obtain the most accurate results.

Step 1

Analyze your work operations. Conduct a detailed job analysis for each function in your company and list the policies and procedures required to complete each task. Document the standard output per hour per person. Determine the desired level of output in order to calculate the number of people you need to produce that volume of operations.

Step 2

Conduct a series of online surveys using the Delphi technique--asking several experts in your organization their opinion on forecasting needs based on their experience managing the employees in your organization who directly contribute to the creation of products or services. Experts typically do not share their opinions with each other. Create and distribute your survey using a tool such as Zoomerang, SurveyMonkey or Qualtrics to gather your data. Examine the input and prepare a forecast. Send the forecast to the original participants to get their new input. Repeat the survey process until all participants reach consensus that the forecast appears accurate.

Step 3

Use calculators available from the Society of Human Resource Management website (see Resources) to calculate metrics such as the “average length of service” and “90-day turnover” rates based on your current human resources data. Use this information to help predict future staffing needs.

Step 4

Read reports available from the Department of Commerce on workforce planning needs to help you learn about trends and forecast your budget for hiring, training and paying staff required to compete in a global marketplace. For example, the Department of Defense estimates it spends about $250 annually to support workforce foreign language needs.

Step 5

Document your forecasting process and follow it consistently throughout your company so that all managers align their forecast to your strategic direction, identify skill gaps, create action plans to address shortages, implement plans to hire and retain skilled personnel and evaluate forecasts on an ongoing basis. Using this model, you can more accurately guide workforce planning efforts for all skill areas such as information technology and knowledge management.