Chapter 4: Problem 1

Demand forecasting involves predicting of the future demand for a good.

Short Answer

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Answer: Demand forecasting is the process of predicting future demand for a good or service, which is crucial for businesses to estimate production, manage inventory, allocate resources, develop budgets, and make informed decisions. The moving average method, a simple quantitative demand forecasting technique, can be implemented by calculating the average demand over a specified number of previous periods. Using historical demand data, choose the number of periods for calculating the moving average, perform the calculation for all periods, and use the most recent moving average as the forecasted demand for the next period. It is essential to periodically update the forecast by incorporating the most recent demand data and recalculating the moving average to maintain accuracy and adjust for any changes in demand patterns.

Step by step solution

Importance of Demand Forecasting

Demand forecasting is the process of predicting future demand for a good or service. Accurate demand forecasting is crucial for businesses because it helps them estimate the number of products they need to produce, manage inventory levels, allocate resources, develop budgets, and make informed decisions.

Demand Forecasting Methods

There are several methods for demand forecasting, including qualitative and quantitative methods. Some common methods are: 1. Expert judgment 2. Market research and surveys 3. Delphi technique 4. Time series analysis 5. Regression analysis 6. Moving averages 7. Exponential smoothing

Example: Moving Average Method

The moving average method is a simple quantitative demand forecasting technique that calculates the average demand over a specified number of previous periods. Let's illustrate the moving average method with a step-by-step example.

Gather Historical Demand Data

To use the moving average method, historical data on the demand for the good or service is required. Suppose a business has the following demand data for the past six months: Month 1: 100 units Month 2: 120 units Month 3: 110 units Month 4: 140 units Month 5: 130 units Month 6: 150 units

Choose the Number of Periods for Moving Average

Now, decide the number of periods to include in the moving average calculation. For instance, we will use a 3-month moving average in this example.

Calculate the Moving Average

Calculate 3-month moving averages for all periods. Whenever a new month of data is available, the oldest month will be dropped and replaced with the newest month. Moving Average for Month 4: (100 + 120 + 110) / 3 = 110 Moving Average for Month 5: (120 + 110 + 140) / 3 = 123.33 Moving Average for Month 6: (110 + 140 + 130) / 3 = 126.67

Forecast the Demand

The moving average for the most recent period (Month 6) can be used as the forecasted demand for the next month (Month 7). So, the forecasted demand for Month 7 is approximately 127 units.

Update the Forecast Periodically

Remember to update the demand forecast periodically by incorporating the most recent demand data and recalculating the moving average. This will help maintain accurate forecasts and adjust for any trend or seasonality changes in demand patterns. This example demonstrates a basic demand forecasting technique using the moving average method. Depending on the product, market conditions, and available data, businesses may need to use more sophisticated forecasting techniques or combine multiple methods for optimum accuracy.

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