Real options approach-based demand forecasting method for a range of products with highly volatile and correlated demand

To achieve a competitive edge needed for marketing highly competitive products, modern enterprises have actively sought to provide the marketplace with an expansive range of products with high random volatility of demand and correlations between demands of product. Consequently, traditional forecasting methods for separately forecasting demand for these products are likely to yield significant deviations. Therefore, this study develops a real options approach-based forecasting model to accurately predict future demand for a given range of products With highly volatile and correlated demand. Additionally, this study also proposes using Monte Carlo simulation to solve the demand forecasting model. The real options approach associated with Monte Carlo simulation not only deals effectively with random variation involving a particular demand stochastic diffusion process, but can handle the correlations in product demand. (C) 2008 Elsevier B.V. All rights reserved.