Micro Economics

Demand Forecasting
-Ankit Parmar (238) -Murtuza Motiwala (207) -Nirnay Chavda (221) -Rohit Dharaiya (217) -Sameer Sawant (242) -Sweetu Patel (211)

Agenda

The need for demand forecasting Different methods of demand forecasting Concept : selected example Results Conclusion

What is Demand Forecasting

It

is a proactive process of determining what products are needed : Where, When and in What quantities

customer focused activity foundation of a companys entire logistic process It supports other planning activities like capacity, inventory and even overall business planning

Why Demand Forecasting ?

Reduces future uncertainties and helps study markets that are dynamic, volatile and competitive Effective forecasting helps build stability in operations Helps plan operations of purchasing and finance for better control over waste, inefficiency and conflicts Helps setting sales targets, pricing policies, establishing controls and incentives

Key factors for selecting the RIGHT method

Short Term Forecasting Usually time period for this is till 1 year. For operating decisions like production planning Medium Term Forecasting For 1 to 2 years. For tactical decisions like employment changes Long Term Forecasting Above 2 years For strategic decisions like research and development

Demand Forecasting .. HOW ?

Determine the purpose of forecast Establish a time horizon Select a forecasting technique Gather and analyze data Prepare forecast Monitor forecast

Different Methods of Demand Forecasting

Quantitative (Micro-economic)

Involves prediction of activity of particular firms, branded products,commodities,markets and industries - dimensionality of factors is lower and can be easily incorporated into a model

Qualitative (Macro-economic)

Involves prediction of economic aggregates such as inflation,unemployment,GDP growth - difficult because of complex inter-dependencies in overall economic factors

Different Methods of Demand Forecasting

Survey of Buyers Intentions Expert Opinion Delphi Method Collective Opinion (Basically from Sales) Nave Models Smoothing Techniques.

Survey of Buyers Intentions

Least

sophisticated method Customers are directly contacted to find out their intentions to buy products/commodities in the near future Ideal for short and medium term demand forecasting Intentions recorded through personal interviews, mail or post service, telephone interviews and questionnaires.

Survey of Buyers Intentions

Advantages

Helps in approximating future requirements even without past data. People may not know what they are going to purchase. They may report what they want to buy, but not what they are capable of buying.

Disadvantages

Expert Opinion/Hunch Method

Views

on sales outlook for the firm during the short term or long run can be taken from experts in the field. By averaging the opinions of the experts who are most knowledgeable about the firm and its product, the firm can come arrive at a better forecast than would be provided by these experts or Final decision is arrived at by a consensus.

Expert Opinion/Hunch Method

Advantages

Can be undertaken easily without use of elaborate statistical tools. Judgmental biases. Based on small numbers

Disadvantages

Delphi Method

The Delphi technique was developed at RAND Corporation in the 1950s to help capture the knowledge of diverse experts while avoiding the disadvantages of traditional group meetings. The latter include bullying and time-wasting. The administrator should provide the experts with anonymous summary statistics on the forecasts of other experts and the experts reasons for their forecasts. The process is repeated until there is little change in forecasts between rounds two or three rounds are usually sufficient. The Delphi forecast is the median or mode of the experts final forecasts

Delphi Method

Advantages Experts identity is not disclosed Saves time and other resources in approaching a large number of expert. Limitations/presumptions: Very High fees to afford many experts The expert may not be willing to change the forecast again in view of being shown as not confident.

Collective Opinion (Basically from Sales)

Also

called as Sales force polling. Salespersons are required to estimate expected sales in their respective territories and sections The salespersons are closest to the market and their opinion of future sales can provide valuable information to the firms top management

Collective Opinion (Basically from Sales)

Advantages: 1. Simple no statistical techniques. 2. Based on first hand knowledge. 3. Quite useful in forecasting sales of new products. Disadvantages: 1. Almost completely subjective. 2. Usefulness restricted to short-term forecasting. 3. Salesmen may be unaware of broader economic changes.

Nave Models
Nave forecasting models are based exclusively on historical observation of sales or other variables such as earnings,cash flow etc. Advantages: o Inexpensive to develop, store data and operate Disadvantages: o It does not consider any possible casual relationships that underlie the forecasted variable.

Nave Models (cont`d)

3 Nave Models:
Month 1 2 3 4 5 6 7 8 9 10 11 12 Sales-2009 30500 29800 36700 29100 33400 40600 47500 55100 52800 55040 58100 61000

Nave Models (cont`d)

3
1.

Nave Models:

2.

With the above data we can use actual sales of the current period as the forecast for the next period i.e Y`t+1=Yt= 61,000/If we consider trends then
Y`t+1=Yt+(Yt-Yt-1) = 61000+(61000-58100)=63900

Nave Models (cont`d)

3 Nave Models:
If we want to incorporate the rate of change, rather then the absolute value then Y`t+1=Yt (Yt/Yt-1) = 61000*61000/58100 =64050/-

3.

Nave Models (cont`d)

1.

3 Nave Models: To use actual sales of the current period as the forecast for the next period. Yt+1= Yt. If we consider trends, then Yt+1=Yt+(Yt-Yt-1). If we want to incorporate the rate of change, rather than the absolute amount then Yt+1=Yt(Yt/Yt-1)

2. 3.

Smoothing Techniques (Qualitative)

Example

of Moving Average
Sales 46000 54000 53000 46000 58000 49000 54000

Date 1st Jan 2nd Jan 3rd Jan 4th Jan 5th Jan 6th Jan 7th Jan

Smoothing Techniques (Qualitative)

Moving Avg to be calculated as follows 6days moving avg= Y`7=46000+54000+53000+46000+58000+49000 = 51000 6 Y`8=54000+53000+46000+58000+49000+54000 =52300 6

Smoothing Techniques (Qualitative)

o o

Exponential smoothing Uses weighted average of past data as the basis for forecast. The procedure gives heaviest weight to more recent information and small weight to past information. Y new= a Y old + (1-a) Y` old where, Y new = exponentially smoothed average to be used as the forecast Y old= most recent actual data Y` old=most recent smoothed forecast a= smoothing constant. Smoothing constant (or weight) has a value between 0 & 1 inclusive.

Smoothing Techniques (Qualitative)

Moving averages
Averages that are updated as new Information is received. With the moving average a manager simply employs the most recent observations and drops the oldest observation in the calculation and calculates as average which is used as the forecast for next period. Limitations: One has to retain a great deal of data. All data in the sample are weighed equally.

1. 2.

Smoothing Techniques (Qualitative)

o o

Exponential smoothing
Uses weighted average of past data as the basis for forecast. The procedure gives heaviest weight to more recent information and small weight to the old data Y new= a Y old + (1-a) Y` old where, Y new = exponentially smoothed average to be used as the forecast Y old= most recent actual data Y` old=most recent smoothed forecast a= smoothing constant. Smoothing constant (or weight) has a value between 0 & 1 inclusive.

So, we sat down and thought .. which should be a good subject for demand forecasting ?

Some facts ..

The Indian spa industry, with over 2,300 spas, generates revenues around US$ 400 million annually. At present, India has around 20-25 major spa centers, most of them in the Southern states of Kerala and Karnataka. Indian wellness and health market is estimated to be growing at 25 percent a year. The next four years will see at least 700 new spas - both multinational and Indian brands - build their infrastructure in India. The rise in annual disposable incomes among individuals, coupled with the growing level of health awareness, has created strong opportunities for existing and new entrants in this sector. . With the extended global spa economy now estimated to be worth around $255 billion, there has never been a better time for the wellness industry in India.

The Concept ..
Extending With

existing spa services to companies

an increasing number of working people stressed out, it would be a good idea to offer spa services to employees within the company Employees would be given discounted rates using shared company infrastructure
This

would in turn increase the productivity of employees thus bringing in more profits to the company

Method Used in Forecasting of Mobile SPA

Survey Buyers method Expert Opinion

Opinion Poll Questions

Gender : Male or Female Age group range : 21 years and above Age Group Industry Type : Industry IT/Telecom/Banking/Business/Other Professions Weekly stress factor Willingness to shift to company spa Frequency of spa visit on a monthly basis Time preferred for spa visit Types of spa services preferred Monthly Income Willingness to spend per month on spa services

Number of people taking the poll : 207

Opinion poll Some Results

P o p u la tio n
160 140 120 100 80 60 40 20 0 1 Gende r

Count

G e n d e r M a le G e n d e r F e m a le

Ag e G ro u p
80 70 60 50 40 30 20 10 0 2 1 -3 0 31 -4 0 41 -5 0 5 0 a n d ab o ve A g e G rou p

Age in years

S e ries 1

69% male ; 31% female population

(21-30): 37 % ; (31-40) : 30% (41-50) : 25% ; (50 +) : 8%

Opinion poll Results Contd

In d u s tr y P ro file
70 60 50 40 30 20 10 0 IT Te le c o m B a n k in g B u s in e s s O th e rs In d u s try In d u stry Count of people

S tre s s C h a rt
S e rie s 1

140 120 100 Count of people 80 60 40 20 0 1 S tre s s e d a t w o rk D a i S tre s s e d a t w o rk A t m o s t t h ric e a w e e k

S tre s s e d a t w o rk O n c in a w e e k S tre s s e d a t w o rk n o S tre s s

30% business ; 27% IT ; 18% banking

60% -- once in a week 23% -- daily 12% -- almost thrice a week

Opinion poll Results Contd

M o n th ly in co me
70 60 Count of people 50 40 30 20 10 0 1 15,000 to 20,000 20,000 to 35,000 35,000 to 50,000 50,000 and above

W illin g n e ss to s p e n d p e r mo n th
10 0 80 60 40 20 0 M in im u m 10 0 0 to 3 0 03 0 0 0 to 5 0 0 05 0 0 0 a n d 0 1000 a b ove H o w m u c h a m o u nt y o u w ill b e w illin g to s p e n d on a m o n th ly b a s is fo r S P A s e rvic e s ? Am ount

Count of people

S e rie s 1

56 % -- Rs 20000 to 50000 ~ 22% -- less than 20000 Rs ~ 22% -- more than 50000 Rs

45% -- minimum 1000 Rs per month 33% -- 1000-3000 Rs per month 17% -- 3000-5000 Rs per month 5 % -- 5000 Rs and more per month

Opinion poll Results Contd

90% of the respondents wanted to visit the company spa ,if offered services at lower price 36% of the respondents wished to visit a spa once a week and almost an equal number wished to visit a spa once in a month The remaining percentage chose to visit a spa twice a month 72% of the respondents thought evening time was convenient to attend. 75% of the respondents preferred body massage and 55% preferred head and foot massage 45% of the respondents preferred a choice of more than one of the spa services

Expert Opinion
Sohum Spa and Wellness Sanctury , Mumbai - A whole owned subsidiary of Core Wellness Ltd Dr Priya - Bachelor of Naturopathy and Yogic Sciences
Mobile SPA :
Benefits Time Savings for customers Concerns Doctor consultation/availability at mobile spa

Capital Investment reduction Cost Saving Profitable Business Setup of Environment

Benefits of Demand Forecasting

Early

recognition of market trends Better Market positioning Planning and scheduling production Budgeting of costs and sales revenue Controlling inventories Making policies for long term investment Helps in achieving targets of the firm

Thank You