DEMAND FORECASTING

Qualitative Methods
These methods rely essentially on the judgment of experts to translate qualitative information into quantitative estimates Used to generate forecasts if historical data are not available (e.g., introduction of new product) The important qualitative methods are:
Jury of Executive Method Delphi Method

JURY OF EXECUTIVE OPINION METHOD

Rationale
Upper-level management has best information on latest product developments and future product launches

Approach
Small group of upper-level managers collectively develop forecasts

Main advantages
Combine knowledge and expertise from various functional areas People who have best information on future developments generate the forecasts

JURY OF EXECUTIVE OPINION METHOD

Main drawbacks
Expensive No individual responsibility for forecast quality Risk that few people dominate the group

Typical applications
Short-term and medium-term demand forecasting

DELPHI METHOD
Rationale
Anonymous written responses encourage honesty and avoid that a group of experts are dominated by only a few members

DELPHI METHOD
Approach
Coordinator Sends Initial Questionnaire Each expert writes response (anonymous) Coordinator performs analysis

Coordinator sends updated questionnaire

No

Consensus reached?

Yes

Coordinator summarizes forecast

DELPHI METHOD
Main advantages
Generate consensus Can forecast long-term trend without availability of historical data

Main drawbacks
Slow process Experts are not accountable for their responses Little evidence that reliable long-term forecasts can be generated with Delphi or other methods

DELPHI METHOD
Typical application
Long-term forecasting Technology forecasting

TIME SERIES PROJECTION METHODS

These methods generate forecasts on the basis of an analysis of the historical time series. The important time series projection methods are:
Trend Projection Method Exponential Smoothing Method Moving Average Method

CASUAL METHODS
Casual methods seek to develop forecasts on the basis of cause-effects relationships specified in an explicit, quantitative manner.
Chain Ratio Method Consumption Level Method End Use Method Leading Indicator Method Econometric Method

CHAIN RATIO METHOD

Market Potential for heated coats in the U.S.:
Population (U) = 280,000,000 Proportion of U that are age over 16 (A) = 75% Proportion of A that are men (M) = 50% Proportion of M that have incomes over $65k (I) = 50% Proportion of I that live in cold states (C) = 50% Proportion of C that ski regularly (S) = 10% Proportion of S that are fashion conscious (F) = 30% Proportion of F that are early adopters (E) = 10% Average number of ski coats purchased per year (Y) = .5 coats Average price per coat (P) = $ 200

CHAIN RATIO METHOD

Market Potential for heated coats in the U.S.:
Market Sales Potential = UxAxMxIxCxSxFxExY = 280 Million x 0.75 x 0.50 x 0.50 x 0.50 x 0.10 x 0.30 x 0.10 x200 = $7.88 Million

CONSUMPTION METHOD

LEVEL

This method is used for those products that are directly consumed. This method measures the consumption level on the basis of elasticity coefficients. The important ones are

CONSUMPTION METHOD

LEVEL

Income Elasticity: This reflects the responsiveness of demand to variations in income. It is calculated as: E1 = [Q2 - Q1/ I2- I1] * [I1+I2/ Q2 +Q1] Where E1 = Income elasticity of demand Q1 = quantity demanded in the base year Q2 = quantity demanded in the following year I1 = income level in the base year I2 = income level in the following year

CONSUMPTION METHOD

LEVEL

Price Elasticity: This reflects the responsiveness of demand to variations in price. It is calculated as: EP = [Q2 - Q1/ P2- P1] * [P1+P2/ Q2 +Q1] Where EP = Price elasticity of demand Q1 = quantity demanded in the base year Q2 = quantity demanded in the following year P1 = price level in the base year P2 = price level in the following year

END USE METHOD

This method forecasts the demand based on the consumption coefficient of the various uses of the product. Projected Demand for Indchem
Consumption Coefficient Alpha Beta Kappa Gamma 2.0 1.2 0.8 0.5 Projected Output in Year X 10,000 15,000 20,000 30,000 Total Projected Demand for Indchem in Year X 20,000 18,000 16,000 15,000 69,000

LEADING INDICATOR METHOD

This method uses the changes in the leading indicators to predict the changes in the lagging indicators. Two basic steps:
1. Identify the appropriate leading indicator(s) 2. Establish the relationship between the leading indicator(s) and the variable to forecast.

ECONOMETRIC METHOD
An advanced forecasting tool, it is a mathematical expression of economic relationships derived from economic theory. Single Equation Model Dt = a0 + a1 Pt + a2 Nt Where
Dt = demand for a certain product in year t. Pt = price of the product in year t. Nt = income in year t.

ECONOMETRIC METHOD
Simultaneous equation method GNPt = Gt + It + Ct It = a0 + a1 GNPt Ct = b0 + b1 GNPt Where GNPt = gross national product for year t.
Gt = Governmental purchase for year t. It = Gross investment for year t.

Ct= Consumption for year t.