Components of Demand
In most cases, the demand for products or services can be broken down into five components:
(a) average demand for the period, (b) trends, (c) seasonal influence, (d) cyclical elements, and (e) random variation. Exhibit 9.4 illustrates a plot of demand over a four-year period, showing the trend. cyclical, and seasonal components, and randomness (or error) around the smoothed demand curve. Cyclical factors are more difficult to determine wince either the time span or the cause of the cycle may not be known. For example, cyclical influence on demand may come from such occurrences as political elections war economic conditions or sociological pressures. Random variations are caused by chance events. Statistically when all the known causes for demand (average trend, seasonal, and cyclical) are subtracted from the total demand what remains is the unexplained portion of demand If one is unable to identify the cause of this remainder it is assumed to be purely random chance. This unexplained portion is often referred to a the error or noise in the forecast. In addition to these five components there is often auto correlation which denotes the persistence of occurrence. More specifically the demand expected at any point is highly
correlated with its on past values. For example, if demand has been high during December for the past to years then one would expect high demand during December for the coming year. When demand is random the demand from one time period to another may vary widely. Where high auto correlation exists the demand is not expected to change very much from one time period to the next. Trend lines are the usual starting point in developing a forecast. These trend lines are then adjusted for seasonal effects cyclical and any other expected events that may influence the final forecast.
Exhibit 9.5 shows four of the most common types of trends. A linear