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15 : Demand Forecasting
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Prof. Trupti Mishra, School of Management, IIT Bombay
Session Outline Demand Forecasting
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Why Forecast Demand ?
• Business environment is uncertain, volatile, dynamic and risky.
• Better business decisions can be taken if uncertainty can be eliminated or reduced
• Demand forecasting – predicting the future demand for firms product, is one of the ways to reduce uncertainty
Prof. Trupti Mishra, School of Management, IIT Bombay
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Why Forecast Demand ?
• Some of the business decision-making aided by a good demand forecast are: – Determining the optimal level of output
– Planning and scheduling of production, distribution & transportation
– Acquiring inputs (raw material, labour, capital)
– Determining cost and pricing strategy
– Decisions on expansion and exit strategies for the product
– Meeting customer order dates and customer satisfaction
Prof. Trupti Mishra, School of Management, IIT Bombay
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Why Forecast Demand ?
• Demand forecasting is the starting point of fulfilling a customer order. Its accuracy is paramount.
• Based on the forecasted demand, a firm commits its resources, capacities and capabilities for a period of time to create goods and services that its customers value and are willing to pay for
Prof. Trupti Mishra, School of Management, IIT Bombay
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Why Forecast Demand ?
• A low forecast will result in lost sales opportunity and customer dissatisfaction
• A high forecast will lead to accumulation of inventory, resulting in higher costs and less profits for the firm
• Thus forecast accuracy plays a crucial role in determining the effectiveness and efficiency of a firm
Prof. Trupti Mishra, School of Management, IIT Bombay
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Demand Forecasting - Categorization
• Categorization by Level of Forecasting
• Categorization by Time Period
• Categorization by Nature of Goods
Prof. Trupti Mishra, School of Management, IIT Bombay
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Categorization by Level of Forecasting
• Firm level – Refers to forecasting of demand by an individual firm for its products
– Most important category for a manger for taking important decisions related to marketing and production
• Industry level – Refers to demand forecasting of a product in an industry as a whole
– Provides insights into the growth pattern of an industry
– Relative contribution of the industry in national income
Prof. Trupti Mishra, School of Management, IIT Bombay
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Categorization by level of forecasting
• Economy (Macro) level – Refers to forecasting of aggregate demand in the economy
– Helps is various policy formulations at government level
Prof. Trupti Mishra, School of Management, IIT Bombay
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Categorization by Time Period
• Short term
– Usually for a period of time less than a year
• Long term
• - time horizon of 5-7 years,10- 20 years
Prof. Trupti Mishra, School of Management, IIT Bombay
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Categorization by Time Period
• Short term
– Avoid underproduction and over production, inventory, cost on variable factor, sales target and appropriate pricing
• Long term
• - manpower planning, long term capital requirement, investment decisions, interdependence of industry.
Prof. Trupti Mishra, School of Management, IIT Bombay
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Categorization by Nature of Goods
• Consumer goods
– Durable – new demand/ replacement Demand
– Non durable – income level, social status, age, education and occupation of consumers
• Capital goods
• Derived demand
• Long term growth
Prof. Trupti Mishra, School of Management, IIT Bombay
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Steps in Demand forecasting
• Following are the typical steps for a systematic demand forecasting – Understanding objective
– Determining the time perspective
– Understand and identify customer segments
– Identify major factors that influence demand forecast
– Determining the appropriate forecasting technique
– Estimation and interpretation of results
Prof. Trupti Mishra, School of Management, IIT Bombay
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Subjective methods of Demand forecasting
• Deals with
- What do people say
- What do they do
Useful in forecasting for new product or new market for which no past data available.
Prof. Trupti Mishra, School of Management, IIT Bombay
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Subjective methods of Demand forecasting
• Consumer’s Opinion Survey
• Buyers are asked about their future buying intentions of products, their brand preferences and quantity of purchase.
• Possible response to increase in price, probable change in product's feature and competitive product.
Prof. Trupti Mishra, School of Management, IIT Bombay
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Subjective methods of Demand forecasting
• Consumer’s Opinion Survey
• Census Method
• Sample Method
- Stratified Sampling – for detail information
Prof. Trupti Mishra, School of Management, IIT Bombay
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Subjective methods of Demand forecasting
• Consumer’s Opinion Survey - merits
• Simple to administer
• Realistic results
• Suitable for short term decisions
Prof. Trupti Mishra, School of Management, IIT Bombay
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Subjective methods of Demand forecasting
• Sales force Composite
• Salespersons are asked about their estimated sales target in their respective sales territories in a given period of time.
• Sum total of such estimates form the basis of forecasted demand.
Prof. Trupti Mishra, School of Management, IIT Bombay
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Subjective methods of Demand forecasting
• Sales force Composite- Merits
• Simple to administer
• Cost effective
• Reliable figures
Prof. Trupti Mishra, School of Management, IIT Bombay
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Subjective methods of Demand forecasting
• Sales force Composite- Demerits
• Bias of salesperson
• Not suitable for long term
Prof. Trupti Mishra, School of Management, IIT Bombay
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Subjective methods of Demand forecasting
• Expert opinion methods
• Group Discussion – experts meet by brainstorming session or structured discussion
• Osborn 1953
Prof. Trupti Mishra, School of Management, IIT Bombay
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Subjective methods of Demand forecasting
• Expert opinion methods
• Delphi Technique
• Rand corporation – To forecast the impact of technology on warfare
• Getting opinion of experts without face to face interaction
Prof. Trupti Mishra, School of Management, IIT Bombay
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Subjective methods of Demand forecasting
• Expert opinion methods - merits
• Experience of experts
• Time and resources – not required
Prof. Trupti Mishra, School of Management, IIT Bombay
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Subjective methods of Demand forecasting
• Expert opinion methods - Demerits
• Bias
• Risk of loss of confidential information to rival firms
Prof. Trupti Mishra, School of Management, IIT Bombay
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Subjective methods of Demand forecasting
• Market Simulation
• Laboratory testing of consumer Behaviour
• Artificial market
• Grabor – Granger test- 1960- popular technique of market simulation
Prof. Trupti Mishra, School of Management, IIT Bombay
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Subjective methods of Demand forecasting
• Market Simulation – merits
• Consumer behaviour
• Helps in Absolutely new product
Prof. Trupti Mishra, School of Management, IIT Bombay
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Subjective methods of Demand forecasting
• Market Simulation – Demerits
• Considerable amount of time an money
• Behave differently
Prof. Trupti Mishra, School of Management, IIT Bombay
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Subjective methods of Demand forecasting
• Test Marketing
• Steps ahead of market simulation
• Product is actually sold in the certain segment of market , test market
• Real market- where consumers buy without knowing that they are being observed.
Prof. Trupti Mishra, School of Management, IIT Bombay
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Subjective methods of Demand forecasting
• Test Marketing - merits
• Most reliable among qualitative methods
• Suitable for new products
• Less risky
Prof. Trupti Mishra, School of Management, IIT Bombay
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Subjective methods of Demand forecasting
• Test Marketing - Demerits
• Costly – failure leads to sunk
• Time consuming
• Regional differences
Prof. Trupti Mishra, School of Management, IIT Bombay
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Session References
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Managerial Economics: Geetika, Ghosh and Choudhury Supply Chain Management: Chopra, Meindl, Kalra
Prof. Trupti Mishra, School of Management, IIT Bombay