Engineering Economics&

Financial Accounting

Ee&fa1April 28, 2023

Methods of demand forecasting

Sri Sairam Institute of Technology 4

Prepared by :Dr. K. BARANIDHARAN

PROF.MBASRI SAIRAM INSTITUTE OF TECHNOLOGY

CHENNAI

ENGINEERING ECONOMICS

AND FINANCIAL

ACCOUNTING

METHODS OF DEMAND FORECASTING• 1.consumer opinion survey:• Survey of consumers or buyers intentions

rests on the belief that the best and the most obvious way to gauge the demand for a commodity is to take opinion of the users of the product.

• In consumers opinion survey buyers asked about their future buying intention of product, their and brand preferences and quantities of purchases.

i) CENSUS method:involves contracting each and every buyer , but this very time taking and costly and its often not desirable.Ii) SIMPLE method: involves survey of only representative sample of buyers.Merits:Simple, result obtained are realistic,Demerits:Expenses, unsuitable long term forecast

SALES FORCE COMPOSIT• SALESPERSON are in direct contact with

the customers and hence are in a better position to F demand for any product.

• Salesperson are asked about their estimated sales targets in the respective sales territories in a given period of time.

• The sum of total of such estimates forms the basis of forecast demand.

• Merits:• Simple, it is very cost effective as no

additional cost is incurred on collection of data, estimated figures are more reliable

• Demerits;• Result is bias, salesperson unaware

economic environment, short-term only not long-term forecast

EXPERTS OPINION METHOD• Fdis essentially based on the

opinion of experts, either internal or external to the firm.

• GROUP DISSCUSSION;• Expert meet as a group to findout

future demand level. Meetings, conference.

• DELPHI TECHNIQUE:• Collecting opinion is by Delphi technique,

originally developed by the Rand Corporation at the beginning of the Cold War, to forecast the impact of technology on warfare.

• Delphi is a way of getting the opinion of experts without their face to face interaction.

• Carefully selected independent experts anwers questionnaries in two or more rounds,

• Merits:• Decisions are enriched with the experience of

component experts.• The firm need not spend time and resources in

collection of data by survey.• Very useful when the product is absolute new to

all the markets.• Demerits:• The techniques relies more on the experience of

experts than on available data, and may thus involve some amount of bias.

• Risk and loss of confidential

MARKET SIMULATION• It is like Laboratory testing of consumer

behaviour.• Laboratory experiment can be useful is ascertaing

consumers, reactions to changes in price, packaging etc.,

• Merits;• Market experiments often provide useful• New product is best• Demerits:• Amount, time, money, spend• People behaviour entirely different

TEST MARKETING

• In test marketing the product is actually sold in certain segment of the market, regarded as test market.

• Merits:• Most reliable• Very suitable for new product• Less risk• Demerits:• costly

QUANTITATIVE METHODS

• the methods should be used only when past data is not available, as in the case of new products, new price, and new market.

• Past data is available it is advisable that firms use statistical tools, as they are more scientific and cost effective.

Trend Projection• A classical method trend projection is a

powerful statistical tool that is frequently used to predict future values of a a variable on the basis of Time series data.

• Components of Time series data:• Secular trend• Seasonal trend• Cyclical trend• Random events

• Merits:• Simple to apply• It is reliable in forecasting demand• Demerits:• The accuracy of trend projection

method depends on the availability of time series data; the longer the series, the better the result

• Past data not available

Methods of trend projection• A) Graphical method: very simple but provides a

general indication and fails to predict future value of demand.

• B) Least square method:Least squares estimation is based on the minimisation of squared diviations between the best fitting line and the original observation given.

• C) ARIMA method:Auto Rrgressive Integrated Moving Average, method has been given by Box and Jenkins, therefore this method is also known as Box Jenkins method.

SMOOTHING TECHNIQUES

• Smoothing techniques are used when the time series data exhibit little trend or seasonal variations , but the great deal or irregular or random variations.

• The basic idea is to “smoothen: these variations and then proceed with forecasting of future values

• Moving average:• Weighted moving average• Exponential smoothing: assigns greater weights to

the more recent data.• Barometric techniques:• In barometric forecasting we construct an index of

relevant economic indicators and forecast future trends on the basis of the indicators.

• Merits: macro and micro economics- less costly• Demerits: it may not applicable for LTF

ECONOMETRIC METHODS

Econometrics the social science in which the tools of economic theory, mathematics and statistical inference are applied to the analysis of economic phenomena.Two methods:1. Regression Analysis2. Correlation

CONTROLLED EXPERIMENTS• Refers To Such Exercises where

some of major determinants of demand are manipulated to suit to the customers with different taste and preferences, income groups, and such others.

JUDGEMENTAL APPROACH• Directly related to the given product or

service, the management has no alternative other than using its own judgment.

• Even when the above methods are used the forecasting process is supplemented with the factor of judgment for the following reasons:

• Historical data for significantly long period is not available.

• Sales fluctuations are wide and significant.