What is a demand forecast?

A demand forecast is the prediction of what will happen to your company's

existing product sales. It would be best to determine the demand forecast using
a multi-functional approach. The inputs from sales and marketing, finance, and
production should be considered. The final demand forecast is the consensus of
all participating managers. You may also want to put up a Sales and Operations
Planning group composed of representatives from the different departments that
will be tasked to prepare the demand forecast.
Determination of the demand forecasts is done through the following steps:
Determine the use of the forecast
Select the items to be forecast
Determine the time horizon of the forecast
Select the forecasting model(s)
Gather the data
Make the forecast
Validate and implement results
The time horizon of the forecast is classified as follows:
Description

Forecast Horizon

Short-range

Medium-range

Long-range

Duration

Usually less than

3 months,
maximum of 1
year

3 months to 3
years

More than 3 years

Applicability

Job scheduling,
worker
assignments

Sales and
production
planning,
budgeting

New product
development,
facilities planning

How is demand forecast determined?

There are two approaches to determine demand forecast (1) the qualitative
approach, (2) the quantitative approach. The comparison of these two
approaches is shown below:
Description

Qualitative Approach

Quantitative Approach

Applicability

Used when situation is vague

& little data exist (e.g., new
products and technologies)

Used when situation is stable

& historical data exist
(e.g. existing products,
current technology)

Considerations Involves intuition and

experience

Involves mathematical
techniques

Techniques

Jury of executive opinion

Time series models

Sales force composite

Causal models

Delphi method
Consumer market survey

Qualitative Forecasting Methods

Your company may wish to try any of the qualitative forecasting methods below
if you do not have historical data on your products' sales.
Qualitative Method

Description

Jury of executive
opinion

The opinions of a small group of high-level managers

are pooled and together they estimate demand. The
group uses their managerial experience, and in
some cases, combines the results of statistical
models.

Sales force composite

Each salesperson (for example for a territorial

coverage) is asked to project their sales. Since the
salesperson is the one closest to the marketplace,
he has the capacity to know what the customer
wants. These projections are then combined at the
municipal, provincial and regional levels.

Delphi method

A panel of experts is identified where an expert

could be a decision maker, an ordinary employee, or
an industry expert. Each of them will be asked
individually for their estimate of the demand. An
iterative process is conducted until the experts have
reached a consensus.

Consumer market
survey

The customers are asked about their purchasing

plans and their projected buying behavior. A large

number of respondents is needed here to be able to

generalize certain results.
Quantitative Forecasting Methods
There are two forecasting models here (1) the time series model and (2) the
causal model. A time series is a s et of evenly spaced numerical data and is o
btained by observing responses at regular time periods. In the time series
model , the forecast is based only on past values and assumes that factors that
influence the past, the present and the future sales of your products will
continue.
On the other hand, t he causal model uses a mathematical technique known as
the regression analysis that relates a dependent variable (for example, demand)
to an independent variable (for example, price, advertisement, etc.) in the form
of a linear equation. The time series forecasting methods are described below:
Description
Time Series
Forecasting
Method
Nave Approach Assumes that demand in the next period is the same as
demand in most recent period; demand pattern may not
always be that stable
For example:
If July sales were 50, then Augusts sales will also be 50

Description
Time Series
Forecasting
Method
Moving
Averages (MA)

MA is a series of arithmetic means and is used if little or no

trend is present in the data; provides an overall impression
of data over time
A simple moving average uses average demand for a fixed
sequence of periods and is good for stable demand with no
pronounced behavioral patterns.
Equation:

F 4 = [D 1 + D2 + D3] / 4
F forecast, D Demand, No. Period
(see illustrative example simple moving average)
A weighted moving average adjusts the moving average
method to reflect fluctuations more closely by assigning
weights to the most recent data, meaning, that the older
data is usually less important. The weights are based on
intuition and lie between 0 and 1 for a total of 1.0
Equation:
WMA 4 = (W) (D3) + (W) (D2) + (W) (D1)
WMA Weighted moving average, W Weight, D
Demand, No. Period
(see illustrative example weighted moving average)
Exponential
Smoothing

The exponential smoothing is an averaging method that

reacts more strongly to recent changes in demand by
assigning a smoothing constant to the most recent data
more strongly; useful if recent changes in data are the
results of actual change (e.g., seasonal pattern) instead of
just random fluctuations
F t + 1 = a D t + (1 - a ) F t
Where
F t + 1 = the forecast for the next period
D t = actual demand in the present period
F t = the previously determined forecast for the present
period
= a weighting factor referred to as the smoothing
constant
(see illustrative example exponential smoothing)

Time Series
Decomposition

The time series decomposition adjusts the seasonality by

multiplying the normal forecast by a seasonal factor
(see illustrative example time series decomposition)

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