Market And Demand Analysis - 2

Presented By: Rashedul Kabir

Sr. Asst. Secretary, R&DSEIP Project, BKMEA

Theoretical Part

Pattern Prediction

Predict the next number in the pattern• 1, 4, 7, 10, 13, ………?

•

• 1, 3, 9, …………..?

...?

Pattern Prediction

• Predict the next number in the pattern (Solution): 1. 2.

3.

Demand Forecasting MethodsForecasting Methods

QuantitativeCasual

Consumption Level

Chain Ratio

End Use

Bass Diffusion

Leading Indicator

Econometric

Time SeriesSmoothing

Moving Average

Weighted Moving Average

Exponential Smoothing

Trend Projection

Trend Projection Adjusted for Seasonal Influence

QualitativeDelphi

Expert Judgment

Scenario Writing

Intuitive Approaches

Forecasting Horizon

Range Horizon Application Method

Long >5 years1. Facility planning2. Capacity planning3. Product planning

1. Economic2. Demographic3. Market

Information

Medium 1-5 years1. Staffing plan2. Aggregate

production plan

1. Time series2. Regression

analysis

Short1 day to 1 year

1. Purchasing2. Detail job

schedule

1. Exponential2. Smoothing3. Trend exploration4. Graphical

methods

Forecasting Methods

Qualitative method Quantitative method

1. Characteristics Based on human judgment, opinions; subjective and nonmathematical

Based on mathematics;quantitative in nature

2. Strength Can incorporate latest changes in the environment and “inside information.”

Consistent and objective; able to consider much information and data at one time

3. Weakness Can bias the forecast and reduce forecast accuracy

Often quantifiable data are not available. Only as good as the data on which they are based

Forecasting methods are classified into two groups

Qualitative Methods1. Jury of executive methods/Expert Judgment/Jury of Executive opinion method: This method involves asking the opinions of a group of managers on expected future sales and combining them in to a sales estimate.

2. Delphi method: This method is used for producing the opinions of a group of experts with the help of a mail survey.

Steps of Delphi method:• A group of experts is sent a questionnaire by mail and asked to express their views.• Received responses are summarized without disclosing identity and send back to

the experts to prove further reasons.• The process may be continued for one or more rounds till a reasonable agreement

emerges in the views of the experts

Continued

Qualitative Methods3. Scenario Writing:

Different sets of assumptions lead to different scenarios. The job of the decision maker is to decide how likely each scenario is and then to make decisions accordingly.

4. Intuitive Approaches

Subjective or intuitive qualitative approaches are based on the ability of human mind to process a variety of information that, in most cases, is difficult to quantify. In brainstorming sessions, individuals are freed from usual group restrictions of peer pressure and criticism.

Quantitative Methods

1. Time Series Methodsa) Trend projection method: Trend projection method involves • Determining the trend of future value by analyzing

past value statistics• Projecting future value by extrapolating the trendLinear relationship is used as most commonly employed relationships i. e.

tbXa tYContinued

Quantitative Methods

1. Time Series Methodsb)Trend Projection Adjusted Seasonal Influence

[Use SPSS software]Y(2016)Q1(1st Quarter)=7.91000+(-.44427)

=7.4673Sales Price forecast for Year 2016, 1st Quarter

Continued

Quantitative Methods

1. Time Series Methodsc) Smoothing Model:i) Exponential smoothing method:Note that the value we entered in the Damping

factor box is α=0-1; forecasts for other smoothing constants can be computed easily by entering a different value for 0-1 in the Damping factor box.

Continued

Quantitative Methods1. Time Series Methodsc) Smoothing Model:ii) Moving average method: As per the moving average method of sales forecasting the forecast for the next period is equal to the average of the sales for several preceding periods.

Where Ft+1 is the forecast for the next period, St is the sales for the current period, and n is the period over which averaging is done.

nSS ntt 11t

1t....SF

Continued

Quantitative Methods

1. Time Series Methodsc) Smoothing Model:iii) Weighted Moving Average : Weighted moving average involves selecting a different weight for each data value and then computing a weighted average of the most recent n values as the forecast.e.g. WMA=1/6*(B2)+2/6*(B3)+3/6*(B4)

Quantitative Methods

2. Causal Methodsa) Chain Ratio MethodThe potential sales of a product may be estimated by applying a series of factors to a measure of aggregate demand.For instance a firm planning to manufacture T-shirt in Bangladesh tried to estimate its potential sales in the following manner –

Adult male population in the country :150 millionProportion of adult male wearing T-shirt : 60%So Adult male population wearing T-shirt : 90 millionNumber of T-shirt one buys per year: 15 pieceTotal T-shirt needed per year: 1315 millionProportion of market capture capacity : 9%Potential sales : 121.5 million piece per year

It is a simple analytical approach to demand estimation but its success rate significantly depended on the information that uses in the estimation process. Continued

Quantitative Methods

2. Causal Methodsb) Consumption level methodThis types of estimation is useful for a product that is directly consumed. The method is basis of elasticity coefficients, the important ones being the income elasticity of demand and the price elasticity of demand.• Income Elasticity of Demand: The income elasticity of demand reflects the responsiveness of

demand to variation in income. Mathematically –

• Price Elasticity of Demand: The price elasticity of demand reflects the responsiveness of demand to variation in price. Mathematically –

-The price elasticity coefficient is applicable to only small variations-The price elasticity measure assumes that the pattern of consumer behavior remain unchanged

12

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12QQII

IIQQ

i XE

12

12

12

12QQPP

PPQQ

p XE

Continued

Quantitative Methods

2. Causal Methodsc) End use methodSuitable for estimating the demand for intermediate products, the end use method, also called the consumption behavior methods, involving the possible steps:• Identify the possible uses of the product• Define the consumption coefficient of the product for various uses• Project the output levels for the consuming industries• Derive the demand for the product

Continued

Quantitative Methods

2. Causal Methodsd) Bass diffusion modelDeveloped by Frank Bass, the Bass diffusion model seeks to estimate the pattern of sales growth for new products, in terms of two factors: p: The coefficient of innovation. It reflects the likelihood that a potential customer would adopt the product because of its innovative features.q: The coefficient of imitation. It reflects the tendency of a potential customer to buy the product because many others have bought it. It can be regarded as a network effect.According to a linear approximation of the model:

Where nt is the sales in period t, p is the coefficient of innovation, N is the potential size of the market, q is the coefficient of imitation, and Nt is the accumulative sales made until period.

211 )()/()( ttt NXNqNpqpNn

Continued

Quantitative Methods2. Causal Methodse) Leading indicator methodSteps:

• Identify the appropriate leading indicator(s): change ahead of other variables

• The lead-lag relationship: lagging variables

For example, the change in the level of urbanization (a leading indicator) may be used to predict the change in the demand for air conditions (a lagging variable).

Continued

Quantitative Methods

2. Causal Methodsf) Econometric methodAn econometric model is a mathematical representation of economic relationship(s) derived from economic theory. The primary objective of econometric analysis is to forecast the future behavior of the economic variables incorporated in the model.An example of the single equation model is given below:

Where Dt is demand for a certain product for year t, Pt is price for the product in year t, and Nt=income in year t.>The simultaneous equation model portrays economic relationships in terms of two or more equations.

ttt NaPaaD 210

Uncertainties in Forecasting(i) Data about past and present market-Lack of standardization-Few observations-Influence of abnormal factors(ii) Methods of forecasting-Inability to handle unquantifiable factors-Unrealistic assumptions-Excessive data requirement(iii) Environmental changes-Technological change-Shift in governmental policy-Developments on the international scene-Discovery of new sources of raw material-Vagaries of monsoon

Coping with Uncertainties• Conduct analysis with data based on uniform and standard definitions.• In identifying trends, coefficients, and relationships, ignore the abnormal

or out-of-the-ordinary observations.• Critically evaluate the assumptions of the forecasting methods and

choose a method which is appropriate to the situation.• Adjust the projections derived from quantitative analysis in the light of a

due consideration of unquantifiable, but significant influences.• Monitor the environment imaginatively to identify important changes.• Consider likely alternative scenarios and their impact on market and

competition.• Conduct sensitivity analysis to assess the impact on the size of demand

for unfavorable and favorable variations of the determining factors from their most likely levels.

Source/Reference• PROJECS Planning Analysis, Selection, Financing, Implementation, and

Review (8th edition), by Prasanna Chandra• Statistics for Business and Economics (11th edition), by Anderson,

Sweeny, and Williams• Sourcing and Supply Chain Management (5th edition), by Handfield,

Monczka, Giunipero, and Patterson• Fundamentals of Statistics (7th edition), S.C. Gupta• Basic Econometrics (4th edition), by Damodar N. Gujarati• Introductory Econometrics: A Modern Approach (5th edition), by

Jeffrey Wooldridge• An Introduction to Statistics (4th edition) ,By Mian & Miyan

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