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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:

°
  

 


  
 


Duration Usually less than 3 3 months to 3 years More than 3 years

months, maximum of
1 year

Applicability Job scheduling, Sales and production New product

worker assignments planning, budgeting development,
facilities planning

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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:

°
 

 
 

 


Applicability Used when situation is vague & Used when situation is stable &
little data exist (e.g., new products historical data exist
and technologies)
(e.g. existing products, current
technology)
‰onsiderations Involves intuition and experience Involves mathematical techniques

Techniques Jury of executive opinion Time series models

Sales force composite ‰ausal models

Delphi method

‰onsumer market survey

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



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    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.



 
 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.

°    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.


 
  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.

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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  , 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

 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:

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!
" 
 Assumes that demand in the m
 period is the same as demand
in   m period; demand pattern may not always be that stable

For example:

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 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
 
 
 uses average demand for a fixed
sequence of periods and is good for stable demand with no
pronounced behavioral patterns.

Equation:

 !"!#$%

F ± forecast, D ± Demand, No. ± Period

#


  
 %
 
 
 $

A &  

 
 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:
 c'(#c$#°)$*#c$#°+$*#c$#°,$

WMA ± Weighted moving average, W ± Weight, D ± Demand, No.

± Period

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 %&  
 
 $

- 
 The  

 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

*,(
°*#,
$ 

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





#


  
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$

O  
 The  

 
 adjusts the seasonality by

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 multiplying the normal forecast by a seasonal factor

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