Forecasting Demand

A VOCABULARY FOR DEMAND

MEASUREMENT
 Market Demand:
 Market demand is the total volume that would be bought by a defined
customer group:
 Market demand function:
 It is the difference between potential, forecasted and actual sales.
 Market forecast:
 Demand estimates
 Market potential:
 Limit of market demand
 Company demand:
 Company’s market demand in a given time period
 Company sales forecast:
 Expected sales level of the company
 Company sales quota:
 Defining and stimulating sales
 Sales budget:
 Expected sales volume and current purchasing, production and cash flow
decision
Common Characteristics of
Forecasting
 Forecasts are rarely perfect

 Forecasts are more accurate for

aggregated data than for individual
items

 Forecast are more accurate for shorter

than longer time periods
Types of Forecasting Models
 Qualitative (technological) methods:
 Forecasts generated subjectively by the
forecaster

 Quantitative (statistical) methods:

 Forecasts generated through mathematical
modeling
 Qualitative Methods
Type Characteristics Strengths Weaknesses
Executive A group of managers Good for strategic or One person's opinion
opinion meet & come up with new-product can dominate the
a forecast forecasting forecast

Market Uses surveys & Good determinant of It can be difficult to

research interviews to identify customer preferences develop a good
customer preferences questionnaire

Delphi Seeks to develop a Excellent for Time consuming to

method consensus among a forecasting long-term develop
group of experts product demand,
technological
changes, and
Statistical Forecasting
 Time Series Models:
 Assumes the future will follow same patterns as
the past

 Causal Models:
 Explores cause-and-effect relationships
 Uses leading indicators to predict the future
 E.g. housing starts and appliance sales
 Composition
of Time Series Data
 Data = historic pattern + random
variation
 Historic pattern may include:
 Level (long-term average)
 Trend
 Seasonality
 Cycle
Time Series Patterns
Methods of Forecasting the Level
 Naïve Forecasting
 Simple Mean
 Moving Average
 Weighted Moving Average
 Exponential Smoothing
Time Series Problem
Determine forecast for Period Orders
periods 11 1 122
 Naïve forecast 2 91
3 100
 Simple average
4 77
 3- and 5-period moving 5 115
average 6 58
 3-period weighted moving 7 75
average with weights 0.5, 8 128
0.3, and 0.2 9 111
10 88
 Exponential smoothing
11
with alpha=0.2 and 0.5
Simple Average (Mean)
Next period’s forecast = average of all
historical data

At  At 1  At 2  .............
Ft 1 
n
Moving Average
Next period’s forecast = simple
average of the last N periods

At  At 1  .........  At  N 1
Ft 1 
N
The Effect of the Parameter N
 A smaller N makes the forecast more
responsive
 A larger N makes the forecast more
stable
Weighted Moving Average

Ft 1  C1 At  C2 At 1  .........  C N At  N 1
where
C1  C2  .........C N  1
The Effect of the Parameter 
 A smaller  makes the forecast more
stable
 A larger  makes the forecast more
responsive
Forecasting Software
 Spreadsheets
 Microsoft Excel, Quattro Pro, Lotus 1-2-3
 Limited statistical analysis of forecast data
 Statistical packages
 SPSS, SAS, NCSS, Minitab
 Forecasting plus statistical and graphics
 Specialty forecasting packages
 Forecast Master, Forecast Pro, Autobox, SCA