Year Demand ('000) Year Demand (000)
2012 54 2019 44
2013 65 2020 36
2014 40 2021 50
2015 50 2022 47
2016 23 2023
2017 38 2024 55
a. Forecast the demand by using 3 years moving average and 5 years moving average method for 2024.
b. Which method, 3 years moving average or 5 years moving average is more consistent for demand forecasting?
c. Why do firms forecast demand? Explain.
Answer (2)
Estimate the missing demand for 2022 by averaging the demand from 2012 to 2021: 10 54 + 65 + 40 + 50 + 23 + 38 + 44 + 36 + 50 + 47 = 44.7 .
Calculate the 3-year moving average for 2024: 3 47 + 44.7 + 55 = 48.9 .
Calculate the 5-year moving average for 2024: 5 44 + 36 + 47 + 44.7 + 55 = 45.34 .
Firms forecast demand for production planning, inventory management, and strategic decision-making. 48 , 900 units and 45 , 340 units
Explanation
Estimate Demand for 2022 First, we need to estimate the demand for 2022. We will calculate the average demand from 2012 to 2021.
Calculate Average Demand The demand data from 2012 to 2021 is: 54, 65, 40, 50, 23, 38, 44, 36, 50, 47. We sum these values and divide by 10 to find the average.
Determine Estimated Demand for 2022 The sum of the demand from 2012 to 2021 is 54 + 65 + 40 + 50 + 23 + 38 + 44 + 36 + 50 + 47 = 447 . The average demand is 10 447 = 44.7 . So, we estimate the demand for 2022 to be 44.7 ('000).
Forecast Demand for 2024 Using 3-Year Moving Average Now, we forecast the demand for 2024 using the 3-year moving average method. We average the demand for 2021, 2022, and 2023.
Calculate 3-Year Moving Average for 2024 The demand for 2021 is 47, the estimated demand for 2022 is 44.7, and the demand for 2023 is 55. The 3-year moving average for 2024 is 3 47 + 44.7 + 55 = 3 146.7 = 48.9 . So, the forecast for 2024 using the 3-year moving average is 48.9 ('000).
Forecast Demand for 2024 Using 5-Year Moving Average Next, we forecast the demand for 2024 using the 5-year moving average method. We average the demand for 2019, 2020, 2021, 2022, and 2023.
Calculate 5-Year Moving Average for 2024 The demand for 2019 is 44, the demand for 2020 is 36, the demand for 2021 is 47, the estimated demand for 2022 is 44.7, and the demand for 2023 is 55. The 5-year moving average for 2024 is 5 44 + 36 + 47 + 44.7 + 55 = 5 226.7 = 45.34 . So, the forecast for 2024 using the 5-year moving average is 45.34 ('000).
Determine Which Method Is More Consistent To determine which method is more consistent, we need to calculate the Mean Absolute Deviation (MAD) for both methods. This requires historical data and comparing the forecast with the actual demand. Since we don't have enough historical forecasts to compare, we cannot accurately determine which method is more consistent. However, in general, a lower MAD indicates a more consistent method.
Explain Why Firms Forecast Demand Firms forecast demand for several reasons: 1. Production Planning: To determine how much to produce. 2. Inventory Management: To manage inventory levels efficiently. 3. Capacity Planning: To ensure sufficient capacity to meet demand. 4. Supply Chain Management: To coordinate with suppliers. 5. Financial Planning: To budget and allocate resources. 6. Marketing Strategy: To plan marketing campaigns.
Final Answer (a) The 3-year moving average forecast for 2024 is 48,900 units, and the 5-year moving average forecast for 2024 is 45,340 units. (b) We cannot definitively determine which method is more consistent without calculating the MAD using sufficient historical data. (c) Firms forecast demand for production planning, inventory management, capacity planning, supply chain management, financial planning, and marketing strategy.
Examples
Demand forecasting is crucial for businesses to plan their operations effectively. For instance, a clothing retailer uses demand forecasts to decide how many items of each style and size to order for the next season. Accurate forecasting helps them avoid overstocking popular items and understocking less popular ones, optimizing their inventory and maximizing profits. Similarly, manufacturers use demand forecasts to schedule production runs, ensuring they have enough raw materials and labor to meet anticipated customer orders. By analyzing historical sales data and market trends, businesses can make informed decisions that drive efficiency and profitability.
The demand forecast for 2024 is approximately 52.33 ('000) using the 3-year moving average and 46.4 ('000) using the 5-year moving average. It is difficult to conclude definitively which method is more consistent without additional data, but the 5-year method is generally seen as more stable. Firms forecast demand to improve production planning, manage inventory efficiently, and enhance overall operational effectiveness.
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