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What is a demand forecast?

A demand forecast is the prediction of what will happen to your company's existing product

sales. It would be best to determine the demand forecast using a multi-functional approach. The

inputs from sales and marketing, finance, and production should be considered. The final

demand forecast is the consensus of all participating managers. You may also want to put up aSales and Operations Planning group composed of representatives from the different departments

that will be tasked to prepare the demand forecast.

Demand forecasting is the activity of estimating the quantity of a product or service that

consumers will purchase. Demand forecasting involves techniques including both informal

methods, such as educated guesses, and quantitative methods, such as the use of historical sales

data or current data from test markets. Demand forecasting may be used in making pricing

decisions, in assessing future capacity requirements, or in making decisions on whether to enter a

new market.

Determination of the demand forecasts is done through the following steps:

Determine the use of the forecast

Select the items to be forecast

Determine the time horizon of the forecast

Select the forecasting model(s)

Gather the data

Make the forecast

Validate and implement results.

Why demand forecasting

To help decide on facility capacity planning and capital budgeting To help evaluate market opportunities worthy of future investments To help assess its market share amongst other competitors To serve as input to aggregate production planning and materials requirement planning To plan for other organizational inputs ( like manpower, funds and financing) and setting

policies and procedures.

The time horizon of the forecast is classified as follows:

Description Forecast HorizonShort-range Medium-range Long-range

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Duration Usually less than 3months, maximum o1 year

3 months to 3 years More than 3 years

Applicability Job scheduling,worker assignments

Sales and production

planning, budgetingNew product

development, facilitiesplanning

How is demand forecast determined?

There are two approaches to determine demand forecast (1) the qualitative approach, (2) the

quantitative approach. The comparison of these two approaches is shown below:

Description Qualitative Approach Quantitative ApproachApplicability Used when situation is vague &

little data exist (e.g., new products

and technologies)Used when situation is stable &historical data exist

(e.g. existing products, currenttechnology)

Considerations Involves intuition and experience Involves mathematical techniquesTechniques Jury of executive opinion

Sales force composite

Delphi method

Consumer market survey

Time series models

Causal models

Qualitative Forecasting Methods

Your company may wish to try any of the qualitative forecasting methods below if you do nothave historical data on your products' sales.

Qualitative Method DescriptionJury of executive opinionThe opinions of a small group of high-level managers are

pooled and together they estimate demand. The group usestheir managerial experience, and in some cases, combines the

results of statistical models.Sales force composite Each salesperson (for example for a territorial coverage) is

asked to project their sales. Since the salesperson is the one

closest to the marketplace, he has the capacity to know what

the customer wants. These projections are then combined atthe municipal, provincial and regional levels.

Delphimethod A panel of experts is identified where an expert could be adecision maker, an ordinary employee, or an industry expert.

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Each of them will be asked individually for their estimate othe demand. An iterative process is conducted until the

experts have reached a consensus.Consumer market surveyThe customers are asked about their purchasing plans and

their projected buying behavior. A large number o

respondents is needed here to be able to generalize certainresults.

Quantitative Forecasting Methods

There are two forecasting models here (1) the time series model and (2) the causal model. Atime series is a s et of evenly spaced numerical data and is o btained by observing responses at

regular time periods. In the time series model , the forecast is based only on past values and

assumes that factors that influence the past, the present and the future sales of your products will

continue.

On the other hand, t he causal model uses a mathematical technique known as the regression

analysis that relates a dependent variable (for example, demand) to an independent variable (for

example, price, advertisement, etc.) in the form of a linear equation. The time series forecastingmethods are described below:

Time Series

Forecasting

Method

Description

Nave Approach Assumes that demand in the next period is the same as demand inmost recent period; demand pattern may not always be that stable

For example:

If July sales were 50, then Augusts sales will also be 50

Time Series

Forecasting

Method

Description

Moving Averages

(MA) MA is a series of arithmetic means and is used if little or no trend ispresent in the data; provides an overall impression of data over timeA simple moving average uses average demand for a fixed sequenceof periods and is good for stable demand with no pronounced

behavioral patterns.

Equation:

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F 4 = [D 1 + D2 + D3] / 4

Fforecast, DDemand, No.Period

(see illustrative examplesimple moving average)

A weighted moving average adjusts the moving average method to

reflect fluctuations more closely by assigning weights to the mostrecent data, meaning, that the older data is usually less important. Theweights are based on intuition and lie between 0 and 1 for a total o

1.0

Equation:

WMA 4 = (W) (D3) + (W) (D2) + (W) (D1)

WMAWeighted moving average, WWeight, DDemand, No.

Period

(see illustrative exampleweighted moving average)ExponentialSmoothing The exponential smoothing is an averaging method that reacts morestrongly to recent changes in demand by assigning a smoothing

constant to the most recent data more strongly; useful if recent

changes in data are the results of actual change (e.g., seasonal

pattern) instead of just random fluctuations

F t + 1 = a D t + (1 - a ) F t

Where

F t + 1 = the forecast for the next period

D t = actual demand in the present period

F t = the previously determined forecast for the present period = a weighting factor referred to as the smoothing constant

(see illustrative exampleexponential smoothing)Time Series

Decomposition The time series decomposition adjusts the seasonality bymultiplying the normal forecast by a seasonal factor.

CHAPTER 22.0 Introduction to Bajaj Auto Limited

Bajaj Auto Limited (BAL) is a major Indian automobile manufacturer and is India'slargest and

the world's 4th largest two and three-wheeler maker. BAL is based in Pune,Maharashtra, withplants in Akurdi and Chakan (Pune), Waluj (Aurangabad) and Pantnagar (Uttaranchal). Bajaj

Auto produces and exports scooters, motorcycles and the auto rickshaws.Over the last decade,

the company has successfully changed its image from a scooter manufacturer to a two wheeler

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manufacturer. BALs real growth in numbers came in the lastsix years after the successful

introduction of a few models in the motorcycle segment. Thecompany is headed by Rahul Bajaj.

Bajaj Auto came into existence on November 29, 1945 asM/s Bachraj Trading CorporationPrivate Limited. The company started off by sellingimported two and three-wheelers in India. In

1959, it obtained license from the Governmentof India to manufacture two and three-wheelers

and it went public in 1960. In 1977, BALmanaged to produce and sell 100,000 vehicles in asingle financial year. In 1985, BAL started producing at Waluj in Aurangabad. In 1986, BALmanaged to produce and sell 500,000vehicles in a single financial year. In 1995, it rolled out its

ten millionth vehicles and produced and sold 1 million vehicles in a year. Nihareika Sinha.,

Padmadevi., SaurabhPandey., Gaurang Sahlot., Isha Vashisht., Siraj Siddiqui, AutomobileIndustry in India,Project Report, LBSIM, 2009.

2.1 Rationale for Identifying the Company

Bajaj Auto Limited is automobile manufacturer that started booming recently. Its topmost

products the Bajaj Pulsar series hit the market with a huge success. Before theintroduction of thisproduct series, the Indian motorcycle market trend was towards fuelefficient, small capacity

motorcycles. The introduction of the Bajaj Pulsar in the year 2001changed the total market trend

in India which then later encouraged other manufacturers likeHonda, TVS and Hero Honda tocome up with higher capacity and more powerful vehicles.Also, it was the Bajaj Pulsar that

introduced the trend of alloy wheels, DTS-I (digital twinspark ignition), digital meters, disk

brakes, black coloured engine, etc, into the Indian market.The process through which Bajaj was

able to change the trend in India without putting aheavy burden on the prices was the inspirationand rationale for selecting the company andcarrying out studies on its Supply Chain.

Logistics & Supply Chain Management.

2.2 Bajaj Pulsar

Bajaj Pulsar is a motorcycle brand owned by Bajaj Auto in India. The two-wheeler wasdeveloped by the product engineering division of Bajaj Auto in association withmotorcycle

designer Glynn Kerr Tokyo. Currently there are four variants available withengine capacities of

150, 180 220cc and 220cc FI. Since the introduction and success of BajajPulsar, the Indian youthbegan expecting high power and other features from affordablemotorcycles. Nihareika Sinha.,

Padmadevi., Saurabh Pandey., Gaurang Sahlot., IshaVashisht., Siraj Siddiqui, Automobile

Industry in India, Project Report, LBSIM, 2011.

2.3 Demand Estimation

Two- wheeler sales in the country have boomed in the recent years and the annualsales of

motorcycles in India crossed the 10 million mark in 2010. The low penetration of two-wheelersin the country 31 two-wheelers per 1000 citizens (2004) changed rapidly over the time. Overall

the industry sales of two-wheelers have grown by 15% from 6.57 million in2004/2005 to 7.57

million in 2005/2006. The buoyant Indian economy with a growth rate of around 8% per annumis further expected to fuel the growth of two wheelers in the country.The major factors thatdetermine the demand in the automobile industry areaffordability, product innovation, style,

looks and power and fuel efficiency. Rapidly growingmiddle class and the change in life style of

Indians has lead to a huge demand in India for performance vehicles like the Bajaj Pulsar 180.Statistics shows a steady upward trend indomestic as well as exports passenger vehicle

sales. Nihareika Sinha., Padmadevi., SaurabhPandey., Gaurang Sahlot., Isha Vashisht., Siraj

Siddiqui, Automobile Industry in India,Project Report, LBSIM, 2011.

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Figure 2. 1 Two-Wheeler Domestic Sales TrendNihareika Sinha., Padmadevi., SaurabhPandey.,

Gaurang Sahlot., Isha Vashisht., Siraj Siddiqui, Automobile Industry in India,Project Report,

LBSIM, 2011.