Professional Documents
Culture Documents
Demand Forecasting
Forecasting is the process of estimating
future demand in terms of the quantity,
timing, quality and location for desired
products and services
Types of Forecasts
Long Term (2-10 years)
Intermediate Term (1-24 months)
Short Term (1-5 weeks)
Forecasting Outputs
Forecasting Inputs
Constraints
Decisions
Performance Criteria
Forecasting System
Constraints
Decisions
Inputs
Forecasting Methods
Internal
Data:Historical,
Subjective, Survey
Predictive
Causal
Time Series
Routine Short Term
Environmental
Data: Social,
Economic,
Political,
Technological
Outputs
Estimates of
Long,Medium &
Short Term
Demand
Forecast Error
Performance Criteria
Accuracy, Stability,
Responsiveness, Objective,
Preparation Time
Forecasting : Outputs
Forecast of Expected Demand and not
future sales. Demand relates to orders
received, sales refer to shipments made.
Output expressed in appropriate form marketing, production, finance.
Translate demand for output units into
requirements for various production inputs.
Forecasting System :
Performance Criteria
Accuracy of the forecast : Idle resources or
shortages
Time required to prepare a forecast
Benefit to cost ratio
Forecasting Methods
Predictive or Subjective (Estimates Survey
& Delphi Method)
Causal (Regression Analysis, Econometric
Models & Input Output Models)
Time Series (Trend, Seasonal, Cyclical,
Random)
Routine Short Term Forecasting (Moving
Averages and Exponential Smoothing)
Moving Averages
Week
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
Total Absolute
Deviation
Mean Absolute
Deviation
92.6
96.3
10.4
9.3
Lowest
9.6
Week
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
Total Absolute
Deviation
Mean Absolute
Deviation
106.7
102.5
6.9
7.1
6.8
Lowest
Exponential Smoothing
Exponential smoothing takes the forecast of
the prior period and adds an adjustment to
obtain the forecast of the current period
The adjustment is a proportion of the
forecast error (actual minus estimate)
Forecastt= Forecastt-1 + (Actualt-1 - Forecastt-1)
Exponential Smoothing
Week
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
Total Absolute
Deviation
Mean Absolute
Deviation
124.5
126.1
13.4
12.5
Lowest
12.6
Regression Method
Regression Method can be used for Demand
Forecasting.
Historical Yearly Data can be used to
forecast for future years.
Make a Scatter Plot and calculate
Correlation Coefficient.
If Correlation Coefficient is +/- 0.7 or more,
linear regression (Y = a + bX) can be used,
where X is Year and Y is Demand.
Y = a + bX
Y = Na + b X
Summing up .Eq 1
Y = a + bX
XY = aX + bX2
Multiplying by X
XY = aX + b X2 Summing Up Eq 2
a = (Y - b X )/N
XY = (Y - b X ) X/N + b X2
= X Y/N - b (X)2/N + b X2
NXY = X Y - b (X)2 + N b X2
N b X2 - b (X)2 = NXY - X Y
b = (NXY- X Y)/(N X2 (X)2)
Similarly derive for a
a = (X2 Y XXY)/(NX2 (X)2)
Year
1
2
3
4
5
6
7
8
9
10
Total
Time
Annual
Period
Sales
X
Y
1
1000
2
1300
3
1800
4
2000
5
2000
6
2000
7
2200
8
2600
9
2900
10
3200
55
11
12
21000
X2
1
4
9
16
25
36
49
64
81
100
XY
1000
2600
5400
8000
10000
12000
15400
20800
26100
32000
385
133300
Year
1
2
3
4
5
6
7
8
9
10
Time
Period
X
-5
-4
-3
-2
-1
1
2
3
4
5
0
Annual
Sales
Y
1000
1300
1800
2000
2000
2000
2200
2600
2900
3200
X2
25
16
9
4
1
1
4
9
16
25
XY
-5000
-5200
-5400
-4000
-2000
2000
4400
7800
11600
16000
21000
110
20200
Y = a + bX
Sum Y = Na + bSumX
Sum XY = aSumX + bSumX 2
Y = a + bX
Sum Y = Na + bSumX
Sum XY = aSumX + bSumX 2
21000 = 10a + 0
20200 = 0 + 110b
a = 913.32, b = 215.76
a = 2100, b = 183.64
Y = 913.32 + 215.76X
Y = 2100 + 183.64X
11
12
3286.68
3502.44
11
12
6
7
3201.84
3385.48
Coefficient of Determination
Exam Score is dependent on Study Hours
Study Hours (X) vs Exam Score (Y). More
the study hours, higher is the exam score.
Analyze Available Data. Calculate
Coefficient of Determination (r2)and
Correlation Coefficient (r)
Coefficient of Determination gives the % of
explained Variations
SrNo
1
2
3
4
5
6
7
8
9
10
Study Exam
Student Hours Score
X
Y
1
2
Tom
1
53
Mary
5
74
Sarah
7
59
Oscar
8
43
Cullyn
10
56
Jaime
11
84
Theresa
14
96
Knut
15
69
Jim
15
84
Courtney 19
83
Sum
105
Average 10.5
Observns 10
701
70.1
Y' = a + bX
Y' = 49.477+1.964X
SSE
(Y-Y' )2
SSR
SST
2
(Y'-AVG(Y) ) (Y - Avg(Y))2
51.44
59.30
63.23
65.19
69.12
71.08
76.97
78.94
78.94
86.79
2.43
216.16
17.86
492.39
172.08
166.87
361.98
98.77
25.62
14.40
348.15
116.69
47.26
24.11
0.96
0.96
47.26
78.12
78.12
278.71
292.41
15.21
123.21
734.41
198.81
193.21
670.81
1.21
193.21
166.41
701
1568.56
1020.34
2588.90
Variations
Explained
39.41%
Coefficient of
Determination
= (Corelation Coeff)2
= 1- (1568.56/2588.90)
= (0.62779)2
0.3941
0.3941
Standard Error
= 1568.56/(10-2)
14.0025
100
y = 1.9641x + 49.477
R2 = 0.3941
Exam Score
80
Series1
60
Linear (Series1)
40
20
0
0
10
Study Hours
12
14
16
18
20
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.627790986
R Square
0.394121523
Adjusted R Square 0.318386713
Standard Error
14.00249438
Observations
10
ANOVA
df
Regression
Residual
Total
Intercept
X Variable 1
1
8
9
SS
MS
F
Significance F
1020.34121 1020.34121 5.203967954 0.051972204
1568.55879 196.0698488
2588.9
Orders Orders
SrNo
X
1
1 1
1068
2 2
1026
3 3
767
4 4
885
5 5
1156
6 6
1146
7 7
892
8 8
938
9 9
769
10 10
677
11 11 1174
12 12 1009
Ship
Costs
Y
2
4489
5611
3290
4113
4883
5425
4414
5506
3346
3673
6542
5088
Sum
11507 56380
Average 958.92 4698
Observns 12
Y - Avg(Y) (X -Avg(x))(Y-AVG(Y))
6
5x6
-209.3333333 -22834.77778
912.6666667
61224.72222
-1408.333333
270282.6389
-585.3333333
43265.88889
184.6666667
36394.72222
726.6666667
135947.2222
-284.3333333
19026.63889
807.6666667
-16893.69444
-1352.333333
256830.6389
-1025.333333
289058.5556
1843.666667
396541.9722
389.6666667
19515.80556
4.55E-13 3.63798E-12
1488360.333
SQRT
Y' = a + bX
SSE
2
(Y-Y' )
43820.4444
832960.444
1983402.78
342615.111
34101.7778
528044.444
80845.4444
652325.444
1828805.44
1051308.44
3399106.78
151840.111
5236.35
5029.20
3751.77
4333.77
5670.38
5621.06
4368.29
4595.17
3761.64
3307.88
5759.16
4945.35
558530.42
338492.94
213232.59
48737.23
619964.60
38438.26
2089.39
829612.83
172752.82
133314.47
612843.09
20348.47
289460.78
109471.78
895979.98
132910.00
944871.44
851418.58
108928.50
10642.85
877402.93
1933367.56
1125346.95
61018.20
301766.917 10929176.7
549.33 3305.93
56380
3588357.12
7340819.55 10929176.67
11899.1736
4500.17361
36832.0069
5463.67361
38841.8403
35000.1736
4477.84028
437.506944
36068.3403
79477.0069
46260.8403
2508.34028
(X -Avg(X)) (Y -Avg(Y))
Correlation
Coefficient
0.8196
Y' = a + bX
b (Slope)
a (intercept)
4.9322
-31.1895
SSR
SST
2
2
(Y'-AVG(Y) ) (Y - Avg(Y))
43820.44
832960.44
1983402.78
342615.11
34101.78
528044.44
80845.44
652325.44
1828805.44
1051308.44
3399106.78
151840.11
Coefficient of
Determination
= (Corelation Coeff)2
Variations
0.6717 Explained
0.6717
67.17%
Standard Error
599.0290
Independent Variables
Natural Gas Sale (X1)
Naptha Price (X2)
Furnace Oil Sale (X3)
Furnace Oil Price (X4)
Naptha Price and Naptha
Demand has negative
relationship
Naptha Demand has inverse
relationship with Gas Sale.
Positive relationship with
Furnace Oil and Furnace Oil
Price
Student
SAT Score
2 Year GPA
421
2.90
377
2.93
585
3.00
690
3.45
608
3.66
390
2.88
415
2.15
481
2.53
729
3.22
501
1.99
613
2.75
709
3.90
366
1.60
Regression
Example
Estimate
GPA
For SAT
Score
350
&
800
Year
Sales of X1
Sales of X2
Profit
2007
12
16
192
2008
14
13
87
2009
10
11
(181)
2010
14
(216)
2011
16
10
(8)
Qty
X1
12
14
10
14
16
Qty
X2
16
13
11
8
10
Profit
Y
192
87
-181
-216
-8
X1Y
2304
1218
-1810
-3024
-128
Sq X1
144
196
100
196
256
X2Y
3072
1131
-1991
-1728
-80
Sq X2
256
169
121
64
100
X1*X2
192
182
110
112
160
66
58
-126
-1440
892
404
710
756
Multiple Regression
Y = A + BX1 + CX2
SUM Y = N*A + B*SUM X1 + C*SUM X2
SUM X1Y = A*SUM X1 + B*SUM SqX1 + C*SUM X1X2
SUM X2Y = A*SUM X2 + B*SUM X1X2 + C*SUM SqX2
-126 = 5A + 66B + 58C
-1440 = 66A + 892B + 756C
404 = 58A + 756B + 710C
Eq 1
Eq 2
Eq 3
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.999673241
R Square
0.999346589
Adjusted R Square 0.998693179
Standard Error
6.280605814
Observations
5
Multiple Regression
ANOVA
df
Regression
Residual
Total
Intercept
X1
X2
SS
MS
F
Significance F
2 120659.908 60329.95399 1529.431112 0.000653411
2 78.89201878 39.44600939
4
120738.8
Coefficients
-1229.713615
38.45774648
60.07511737
Standard Error
t Stat
P-value
Lower 95%
26.74174571 -45.98479203 0.000472567 -1344.77406
1.467263844 26.21051874 0.001452452 32.14461969
1.097156078 54.75530652 0.000333373 55.35443578
Upper 95%
-1114.65317
44.77087326
64.79579897
Lower 95.0%
-1344.77406
32.14461969
55.35443578
Upper 95.0%
-1114.65317
44.77087326
64.79579897
Econometric Models
It consists of a system of statistical equations that
interrelate the activities of different sectors in the
economy and help to assess their impact on the
demand for a product or service.
Econometric models are used when causative
factors used in a regression equation are
interdependent.
Used for Long Term Demand Estimation
Modelling for the National Economy(example
Steel)
Estimates Survey
Individual Salesmen submit estimates of demand
in their areas for a future period.
These estimates are pooled at regional level and
adjusted for regional economic and demographic
factors
Regional estimates are combined at headquarters
Drawbacks are : recent experiences influence,
dominant personalities may divert from general
consensus, lack of measure for any accuracy.
National
Level
Regional
Level
Zonal
Level
Sales
Man
Sales
Man
Estimates Survey
Regional
Level
Zonal
Level
Sales
Man
Zonal
Level
Sales
Man
Sales
Man
Delphi Method
Panel of experts respond to a questionnaire
about future demand.
Individual estimates are summarised and
returned to panel members for revision.
Feedback allows arriving at a consensus
Cost depends on panel composition and
number of rounds made.
Used for Technological Forecasting
Expert
5
Expert 2
Expert
4
Expert 3
Time Series
Total Demand D = T x S x C x R or
Total Demand D = T + S + C + R
T = Trend Component, S = Seasonal
Component, C = Cyclical Component and R
= Random Component
Total Demand can be either a product or
sum of all the above 4 components
Time Series
700
600
500
Demand
400
300
200
100
0
Q1 Q2
Q3
Q4 Q1
Q2
Q3 Q4
Q1
Q2 Q3
Q4
Q1 Q2
Q3 Q4
Quarter
Q1
Q2 Q3
Q4
Q1 Q2
Q3
Q4 Q1
Q2
Q3 Q4
Trend Component
Cyclical Component
Random
Compute Seasonal
Indices. Deseasonalize by
dividing vales by seasonal
indices
Use Regression to fit the
Trend with
Deseasonalized Data
Isolate Trend component
and use Moving averages
for Cylical Component
Isolate Cylical and
remaining is Random
586.67/725 = 0.81
Annual
Year
Q1
Q2
Q3
Q4
Total
2002
520
730
820
530
2600
2003
590
810
900
600
2900
2004
650
900
1000
650
3200
1760
2440
2720
1780
8700
586.67
813.33
906.67
593.33
725
Total
Average
8700/12 = 725
813.33/725 = 1.12
0.81
1.12
1.25
0.82
4.00
Index
12 = 4Qtr x 3 yr
520/0.81 = 642.61
Deseasonalise by dividing by seasonal indices for each quarter
Year
Q1
Q2
Q3
Q4
Total
2002
642.61
650.72
655.70
647.61
2596.64
2003
729.12
722.03
719.67
733.15
2903.96
2004
803.27
802.25
799.63
794.24
3199.40
2175.00
2175.00
2175.00
2175.00
8700.00
900/1.12 = 802.25
Total
2003
2004
2005
2006
2007
2008
Quarter
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
X
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Y=TSCR
289
410
301
213
212
371
374
333
293
441
411
363
324
462
379
301
347
520
340
521
381
594
573
504
444
592
571
507
Year
2002
2003
2004
2005
2006
2007
2008
Total
Average
3390
484.29
2949
421.29
Q4
213
333
363
301
521
504
507
Annual
Total
1213
1290
1508
1466
1728
2052
2114
2742
391.71
11371
406.11
2842.75
2842.75
2842.75
4.00
2842.75
11371.00
Year
Quarter
2005 Q1
Q2
Q3
Q4
2003 Q1
Q2
Q3
Q4
2004 Q1
Q2
Q3
Q4
2005 Q1
Q2
Q3
Q4
2006 Q1
Q2
Q3
Q4
2007 Q1
Q2
Q3
Q4
2008 Q1
Q2
Q3
Q4
Total
Y=TSCR
289
410
301
213
212
371
374
333
293
441
411
363
324
462
379
301
347
520
340
521
381
594
573
504
444
592
571
507
11371
SI
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
Y=TCR
358.76
343.81
290.16
220.83
263.17
311.11
360.53
345.24
363.72
369.81
396.19
376.34
402.21
387.42
365.34
312.06
430.76
436.06
327.75
540.14
472.96
498.11
552.36
522.52
551.17
496.43
550.43
525.63
11371.00
Y = 9.83X + 263.54
11371 = 28A + 406B
182843 = 406A + 7714B
A = 263.54, B = 9.83
X
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
XY
358.76
687.63
870.47
883.31
1315.86
1866.66
2523.68
2761.88
3273.51
3698.09
4358.11
4516.05
5228.67
5423.87
5480.17
4992.96
7322.87
7849.01
6227.25
10802.86
9932.25
10958.42
12704.17
12540.45
13779.27
12907.26
14861.54
14717.61
406.00
182842.62
X2
1
4
9
16
25
36
49
64
81
100
121
144
169
196
225
256
289
324
361
400
441
484
529
576
625
676
729
784
7714.00
700
600
500
400
Series1
300
200
100
Seasonalised Data
Q
3
Q
1
Q
3
Q
1
Q
3
Q
1
Q
3
Q
1
Q
3
Q
1
Q
3
Q
1
Q
3
Q
1
600.00
500.00
400.00
300.00
Series1
200.00
100.00
0.00
1
11
13
15
17
19
Deseasonalized Data
21
23
25
27
Year
2002
2003
2004
2005
2006
2007
2008
Total
Quarter
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
X
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Y=TSCR
289
410
301
213
212
371
374
333
293
441
411
363
324
462
379
301
347
520
340
521
381
594
573
504
444
592
571
507
11371
SI
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
Y=TCR
358.76
343.81
290.16
220.83
263.17
311.11
360.53
345.24
363.72
369.81
396.19
376.34
402.21
387.42
365.34
312.06
430.76
436.06
327.75
540.14
472.96
498.11
552.36
522.52
551.17
496.43
550.43
525.63
Trend T
Y=9.83X+263.54
273.37
283.20
293.03
302.86
312.69
322.52
332.35
342.18
352.01
361.84
371.67
381.50
391.33
401.16
410.99
420.82
430.65
440.48
450.31
460.14
469.97
479.80
489.63
499.46
509.29
519.12
528.95
538.78
11371.00
11370.10
Y=CR
1.31
1.21
0.99
0.73
0.84
0.96
1.08
1.01
1.03
1.02
1.07
0.99
1.03
0.97
0.89
0.74
1.00
0.99
0.73
1.17
1.01
1.04
1.13
1.05
1.08
0.96
1.04
0.98
Cyclical
C
Random
R
1.17
0.98
0.85
0.85
0.96
1.02
1.04
1.02
1.04
1.02
1.03
0.99
0.96
0.87
0.88
0.91
0.91
0.96
0.97
1.07
1.06
1.07
1.09
1.03
1.03
0.99
1.04
1.01
0.85
1.00
1.00
1.06
0.97
1.01
0.98
1.04
0.96
1.03
1.01
1.03
0.85
1.10
1.09
0.76
1.21
0.94
0.98
1.05
0.96
1.05
0.93
1.05
Mean = 0.99
1.10
1.05
1.00
0.95
0.90
0.85
0.80
1
13
Quarters
17
21
25
Summary
Forecasting provides vital information for any future
activity
Estimates of Demand cover quantity, timing, locations,
quality
Long, Intermediate, Short Term Forecasts
Cost Benefits
Forecasting Methods Predictive, Causal, Time Series,
Moving Averages, Exponential Smoothing
Forecast error Idle resources or shortages
Forecasting is more as an art rather than a science