CHAPTER IV-

FORCASTING
DEMAND

MANAGERIAL ECONOMICS
 DEMAND FORECASTING
Demand forecasting is a combination of two words; the
first one is Demand and another forecasting. Demand
means outside requirements of a product or service. In
general, forecasting means making an estimation in the
present for a future occurring event
It is a technique for estimation of probable demand for a
product or services in the future. It is based on the
analysis of past demand for that product or service in
the present market condition. Demand forecasting
should be done on a scientific basis and facts and
events related to forecasting should be considered.

2
 THE SCOPE OF DEMAND
FORECASTING
The scope of demand forecasting depends upon the
operated area of the firm, present as well as what is
proposed in the future. Forecasting can be at an
international level if the area of operation is
international. If the firm supplies its products and
services in the local market then forecasting will be at
local level.
The scope should be decided considering the time and
cost involved in relation to the benefit of the
information acquired through the study of demand.
Cost of forecasting and benefit flows from such
forecasting should be in a balanced manner.

3
 KEY BENEFITS OF DEMAND
FORECASTING

OPTIMIZED INVENTORY MANAGEMENT:

Accurate demand forecasting helps you maintain

optimal inventory levels. You'll have enough
products to meet customer demand without
overstocking, which ties up capital and storage
space, or understocking, which can lead to missed
sales opportunities.

4
 KEY BENEFITS OF DEMAND
FORECASTING

COST SAVINGS:

By having the right amount of inventory on hand,

you can reduce storage costs and minimize the
risk of products becoming obsolete or spoiling.
You also won't tie up excess cash in unsold
inventory, making more capital available for other
business needs. This can lead to significant cost
savings over time.

5
 KEY BENEFITS OF DEMAND
FORECASTING

BETTER CUSTOMER SERVICE:

Meeting consumer demands quickly

improves your reputation and customer
satisfaction. You won't have potential
buyers stuck waiting for products to be
restocked or dealing with shortages,
which can result in lost sales and
unhappy customers.
6
 KEY BENEFITS OF DEMAND
FORECASTING

EFFICIENT PRODUCTION AND SUPPLY CHAIN:

Forecasting helps streamline your production
and supply chain operations. Manufacturers can
schedule production more efficiently, reducing
idle time and production costs. This also helps
optimize supply chains to deliver products
wherever and whenever needed.

7
 KEY BENEFITS OF DEMAND
FORECASTING

BETTER-INFORMED MARKETING AND SALES:

With accurate forecasts, you can tailor your

sales and marketing efforts more effectively.
You can plan promotions and campaigns
around expected demand, improving the return
on marketing investments.

8
 KEY BENEFITS OF DEMAND
FORECASTING
REDUCED RISK:

Forecasting allows you to anticipate market

changes and disruptions. You can prepare for
seasonal fluctuations, industry trends and
potential economic downturns, reducing your
business's vulnerability to unexpected events.

9
 KEY BENEFITS OF DEMAND
FORECASTING
BETTER STRATEGIC PLANNING:

Long-term demand forecasting provides

insights into future market trends and
customer preferences, allowing you to make
informed decisions about product
development, market expansion and overall
business strategy.

10
 KEY BENEFITS OF DEMAND
FORECASTING

IMPROVED RESOURCE ALLOCATION:

You can allocate resources, such as

personnel and equipment, more efficiently
when you have a clear understanding of future
demand. This helps in optimizing resource
usage and avoiding unnecessary expenses.

11
 KEY BENEFITS OF DEMAND
FORECASTING

COMPETITIVE ADVANTAGE:

If your business excels in demand forecasting,

you’ll gain a competitive edge. You can respond
faster to changing market conditions, offer
better customer service and make data-driven
decisions that outperform competitors who lack
this capability.

12
 TYPES OF FORECASTING
1. BASED ON ECONOMY
MACRO-LEVEL FORECASTING: It deals with the general economic
environment relating to the economy as measured by the Index of Industrial
Production(IIP), national income and general level of employment, etc.

INDUSTRY LEVEL FORECASTING: Industry level forecasting deals with the

demand for the industry’s products as a whole.

FIRM-LEVEL FORECASTING: It means forecasting the demand for a

particular firm’s product.

13
 TYPES OF FORECASTING
2. BASED ON THE TIME PERIOD
SHORT-TERM FORECASTING: It covers a short
period of time, depending upon the nature of the
industry. It is done generally for six months or less
than one year. Short-term forecasting is generally
useful in tactical decisions.
LONG-TERM FORECASTING CASTING: Long-term
forecasts are for a longer period of time say, two to
five years or more. It gives information for major
strategic decisions of the firm.

14
QUALITATIVE FORECASTING

15
EXPERT JUDGMENT is an import aspect in demand forecasting.
Historical data is used to produce demand forecast but cannot
take into account immediate market changes. It, therefore,
depends on the Analyst to interpret the changes and adjust the
forecast accordingly.
Intuitive sales forecasting uses INTUITIVE DATA, i.e., the
opinions of your sales reps on how they feel about the deals in
their pipeline. This sales forecasting method believes that sales
reps are the closest to the deals and therefore have the best
data about the likelihood of the prospects converting—or not.
The OPINION POLL methods make demand estimation by using
opinions of those who possess knowledge of the market, such
as professional marketing experts and consultants, sales
representatives and executives. The collective judgment of
knowledgeable persons can be an important source of inf

16
INDUSTRIES THAT USE QUALITATIVE
FORECASTING
SALES:
Qualitative forecasting can help companies in sales
make decisions like how much of a product to
produce and when they should order more
inventory.

HEALTHCARE:
Healthcare employees can use qualitative
forecasting to identify trends in public health and
decide which healthcare operations might be in
high demand in the near future.

17
 INDUSTRIES THAT USE QUALITATIVE
FORECASTING
HIGHER EDUCATION:
Colleges or universities can use qualitative
forecasting to predict the number of students who
might enroll for the next term or year.

CONSTRUCTION AND MANUFACTURING:

Qualitative forecasting can show construction and
manufacturing companies the number of different
materials they use to help determine which
materials or equipment they might need for their
next project.
18
 INDUSTRIES THAT USE QUALITATIVE
FORECASTING
AGRICULTURE:
Farmers can use qualitative forecasting to assess
their sales and decide which crops to plant for the
next season based on which products consumers
purchase most often.
PHARMACEUTICAL:
Qualitative forecasting in pharmaceuticals can help
identify which medications are popular among
consumers and which needs people are using
pharmaceuticals to predict which kinds of
pharmaceuticals they might benefit from developing.
19
 QUALITATIVE FORECASTING METHODS

DELPHI METHOD
The Delphi method involves questioning a panel
of experts individually to collect their opinions.
Interviewing or gathering information from the
experts one at a time rather than in a group can
help to prevent bias and ensure that any
consensus about business predictions stems
from the expert opinions on their own. Other
employees then analyze the experts' responses
and return them with additional questions until
settling on a prediction that makes sense for the
company. 20
 QUALITATIVE FORECASTING METHODS
JURY OF EXECUTIVE OPINION
This approach relies on judgments from
experts in sales, finance, purchasing,
administration, or production teams.
Forecasting by executive opinion can ensure
that a team completes a forecast quickly and
considers multiple perspectives from
different departments to best inform their
forecast. Some companies might use
executive opinion forecasting along with a
quantitative method. 21
 QUALITATIVE FORECASTING METHODS
MARKET RESEARCH
Market research evaluates the success of a
company's services or products by introducing them
to potential customers and recording details about
how they react. Companies can conduct market
research with the help of their own employees or by
hiring outside agencies that specialize in market
research activities.
Some ways to conduct market research include focus groups, consumer
surveys, or blind product testing, where a customer tries a product without
having heard of it before. Based on participant reactions, companies can
decide which products or services to continue producing and which might
need revision in the production stage.
22
 QUALITATIVE FORECASTING METHODS
CONSUMER SURVEYS
Consumer surveys ask customers of a business about
their experience as a consumer. Companies might send
consumer surveys to customers through mail-in
questionnaires or forms sent through email. Other
options for conducting consumer surveys include cold-
calling customers on the phone and inviting customers
in to the office for personal interviews. After collecting
information from consumer surveys, employees can
use the details they learn to help inform their
predictions about a company's future based on the
experience of their existing customers.
23
QUALITATIVE FORECASTING METHODS
SALES FORCE POLLING
Sales force polling involves speaking with sales staff
who work closely with customers and might have
thorough information about their satisfaction and
experiences with the company. One advantage of
sales force polling is that it uses information from
employees who are most frequently involved in the
actual business operations, which can ensure that
the details are correct and relevant. Sales force
polling is also simple to conduct since it only
requires meeting with salespeople and focusing on
the information they provide.
24
QUANTITATIVE FORECASTING

25
REGRESSION ANALYSIS is a set of statistical methods used for
the estimation of relationships between a dependent variable and
one or more independent variables. It can be utilized to assess
the strength of the relationship between variables and for
modeling the future relationship between them.

TIME SERIES ANALYSIS TYPES

Because time series analysis includes many categories or
variations of data, analysts sometimes must make complex
models. However, analysts can’t account for all variances, and
they can’t generalize a specific model to every sample. Models
that are too complex or that try to do too many things can lead to
a lack of fit. Lack of fit or overfitting models lead to those models
not distinguishing between random error and true relationships,
leaving analysis skewed and forecasts incorrect.

26
EXTRAPOLATIVE FORECASTING - a method of prediction which
assumes that the patterns that existed in the past will continue
on into the future, and that those patterns are regular and can be
measured. In other words, the past is a good indicator of the
future.
A CASH FLOW FORECAST is a tool used by finance and
treasury professionals to get a view of upcoming cash
requirements across their company. The main purpose of cash
flow forecasting is to assist with managing liquidity. The larger
the company, the more complex and challenging cash flow
forecasting becomes.
AN ECONOMIC FORECASTING, the prediction of any of the
elements of economic activity. Such forecasts may be made in
great detail or may be very general. In any case, they describe
the expected future behavior of all or part of the economy and
help form the basis of planning.
27
 QUANTITATIVE FORECASTING
Quantitative forecasting is an objective, data-based process
that businesses and salespeople can use to make accurate
predictions to guide future business decisions. Using
collected sales data from the past, quantitative forecasting
provides individuals and businesses with the ability to better
understand how they are performing and what they can do to
improve.
A business may use quantitative forecasting methods to
track any patterns that appear over time. By tracking their
past and noting patterns that form using quantitative
forecasting, a salesperson might notice that profits dip in the
winter and then surge in the spring, for example. This can
help them make better decisions about realigning their
strategy for more consistent results.
28
 IMPORTANCE OF QUANTITATIVE
FORECASTING

OBJECTIVITY:
Numbers are neutral and free from any subjective
judgment. Examining empirical data provides a
standard of objectivity that is useful for making
important business decisions. This makes
realistic projections easier to calculate and
guarantees that the information is trustworthy.

29
 IMPORTANCE OF QUANTITATIVE
FORECASTING
RELIABILITY:
As analyst record and use accurate data in
quantitative forecasting, the inferences made
become more reliable. Quantitative forecasting
takes advantage of the available information to
provide reliable and accurate predictions based
on an established history. This makes it easier for
business owners or salespeople to pinpoint areas
for growth.

30
 IMPORTANCE OF QUANTITATIVE
FORECASTING
Transparency: Because data reflects exactly how a business
is performing, it provides a level of transparency that can be
very useful for quantitative forecasts. The collected records
present all of the information accurately and openly, which
provides an added level of clarity for making future business
decisions.

When businesses monitor their history and record their data

for quantitative forecasts, it makes trends easier to identify
and predict. Using this information, businesses can set
realistic expectations and adjust their goals to measure
growth.

31
 IMPORTANCE OF QUANTITATIVE
FORECASTING
PREDICTABILITY:

When businesses monitor their history and record their

data for quantitative forecasts, it makes trends easier to
identify and predict. Using this information, businesses
can set realistic expectations and adjust their goals to
measure growth.

32
 QUANTITATIVE FORECASTING VS.
QUALITATIVE FORECASTING?
Quantitative and qualitative forecasting are
both methods you can use to make better
business decisions. The difference between
the two depends on what kind of information
you are using and how you can use it to
project or forecast future revenue. Here are
the key differences between quantitative and
qualitative forecasting:

33
 IMPORTANCE OF QUANTITATIVE
FORECASTING
QUANTITATIVE FORECASTING: This forecasting method uses
objective, empirical data that already exists to arrive at educated
predictions that can help guide business decisions. This means
that you would use concrete information to reach each
conclusion.
QUALITATIVE FORECASTING: This forecasting method uses
expert knowledge and judgment rather than statistical or data-
based analysis to make predictions. Some examples of
qualitative forecasting methods include executive opinions and
consumer surveys. Qualitative forecasting is also more
concerned with arriving at a conclusion based on other factors
outside of data. This method is most useful when business
owners or salespeople assume future data will not align with any
previous trends.
34
ECONOMETRICS
Econometrics is the use of statistical and
mathematical models to develop theories or test
existing hypotheses in economics and to forecast
future trends from historical data. It subjects real-
world data to statistical trials and then compares
the results against the theory being tested.
Depending on whether you are interested in testing
an existing theory or in using existing data to
develop a new hypothesis, econometrics can be
subdivided into two major categories: theoretical
and applied.
35
KEY TAKEAWAYS
• Econometrics is the use of statistical methods to develop
theories or test existing hypotheses in economics or finance.
• Econometrics relies on techniques such as regression models
and null hypothesis testing.
• Econometrics can also be used to try to forecast future
economic or financial trends.
• As with other statistical tools, econometricians should be
careful not to infer a causal relationship from statistical
correlation.
• Some economists have criticized the field of econometrics for
prioritizing statistical models over economic reasoning.

36
THANK YOU

IRMA A. DIZON

3
7