Demand Forecasting

Demand Forecasting

• Forecasting – is predicting what will happen in future.

• Forecast is of three types-1. Short term forecast2. Medium term forecast3. Long term forecast.

Demand Forecasting

• Short term forecast – helps in production scheduling, raw material procurement and inventorying. It is done for few months.

• Medium term forecast – is done for a year & is used for budgeting.

• Long term forecast – is done for more than a year & used for business strategy.

Demand Forecasting

• It is a process of estimating the future demand or sales pattern of a firm by taking into account the past information, opinion of industry observers & evolving consumption pattern for a desired time period.

Role of DF in managerial decision making

• Short term forecasting may cover a period of few months depending on the nature of the business. It is useful in following ways-

a) Appropriate production scheduling – the firm can avoid the problem of overproduction & the problem of short supply by estimating seasonal variation in demand.

b) Suitable purchase policy – it helps in reducing the cost of purchasing raw material & controlling inventory by determining it’s future resource requirement.


c) Appropriate price policy – it can be determined depending upon the anticipation of market demand condition. It can also avoid an increase or reduction in price.

d) Setting realistic sales target for sales person – If targets are too high, it discourages the salesperson, if it’s too low ,target can be easily achieved & incentives given will be meaningless.

e) Forecasting financial requirement – cash requirement depend on demand level & production operations.e.g.productiton & advertisement.


• Long term forecasting – covers a period of more than one year. it includes –

a) Business planning – starting of a new unit or expansion of an existing unit of production requires an analysis of the long term demand potential.

b) Financial planning – long term DF are quite essential to assess long term financial requirements for purchasing machinery, raw material,R&D Program.

c) Planning manpower requirements – Training & personnel development are long term propositions ,taking considerable time to complete.

Measures of market demand• Market demand– The marketers first step in evaluating marketing

opportunity is to estimate total market demand– Market demand for the product is the total volume that

would be bought by target group of customers in a target geographical area in a specific time period

• Market forecast– Only the minimum level of industry marketing

expenditure and efforts will actually occur– The market demand corresponding to this level is call

the market forecast

Measures of market demand

• Market potential– It is the highest limit approached by market

demand as industry marketing expenditure approach infinity for a given marketing environment

Measures of market demand..

• Company demand– It is the company’s estimated share of market demand at

alternative levels of company marketing efforts in a given time period. This share will depend on how its products, services, prices, communications are perceived by consumers relative to the competitors

• Company sales forecast• Related to company sales forecast, there are two additional

concepts involved. First is sales quota which is the sales goal for a product line, company division or sales officer. Sales quota are slightly higher than estimated sales to stretch the sales force efforts.

Measures of market demand..

• Second is the sales budget which is the conservative estimate of the expected volume of sales and is used for making current purchasing, production and cash flows decision. Sales budget are generally set slightly lower than the sales forecast

• Company sales potential– This is the sales limit approached by company’s demand as

the company’s marketing efforts increases relative to that of competitors.

Characteristics of good demand forecasting methods

• Eight major characteristics can be identified with forecasting methods to identify key characteristics of good demand forecasting methods

1. Time horizon – the length of time over which a decision is being made has a baring on the appropriate technique to use depending on the time i.e. short and long DF can be measured

2. Level of details – The level of detail needed should match the focus of decision making unit in the forecast

3. Stability – Forecasting in situations that are relatively stable over time requires less attention than those that are in constant flux


4. Pattern of data – As different forecasting methods vary in their ability to identify different patterns it is useful to make the pattern in the data fit with the method that suits it the most

5. Type of model – Other assumptions are also made in each forecasting technique that must fit the situation under consideration

6. Cost – Several costs are associated with adapting forecasting procedure within an organization like managerial development, storage, operation and opportunity in terms of other techniques that might have been applied


7. Accuracy – It is measured by the degree of deviation between past forecast and current actual performance or present forecast and future performance

8. Ease of application – Models must be chosen within the abilities of the user to understand them and within the time allowed for using them

Steps in demand forecasting• Demand forecasting is a scientific exercise. It has to go through a

number of steps. These steps present a systematic way of initiating, designing and implementing a forecasting system.

1. Identification of objective – Depending on the type of forecast i.e. short and long, objective can be identified

2. Nature of the product and market – Whether the product is consumer good or producer good, perishable or durable, analyzing the demand for finished goods, demand for corresponding raw material and intermediate goods should also be analyzed.

Steps in demand forecasting

Perishable commodities such as fresh vegetables and fruits can only be sold over a limited period of time

3. Determinants of demand – It depends on demographic , psychological factors

Steps in demand forecasting…

4. Analysis of factors – Statistical demand function is classified into four factors.

a. Trend factorb. Cyclical factorc. Seasonal factord. Random factor

5. Choice of method – The economist has to choose a particular technique from among the various techniques of demand forecasting depending upon the nature of product

6. Testing accuracy – The testing is needed to avoid the margin of forecasting error and thereby to improve decision making

Methods of demand forecasting

Forecasting method

Survey Method Statistical Method

ConsumerCollective opinion method

Delphi method

Market experiment

method

Time series analysis

Regression analysis

Graphical method

Semi average method

Moving average method

Least square method


• Survey method – Under this approach surveys are conducted about the intention of consumers, opinion of experts or of markets

• These methods are usually suitable for short term forecast due to the nature of consumer intention

• By using this method, a firm can ask consumers what and how much they are planning to buy at various prices of the product for the forthcoming prices usually a year


• Merits– It is a direct method of assessing information from

the primary sources– It is a simple method as it is not based on past

historical records– It saves time and cost by conducting surveys– It does not introduce any bias or value judgment

particularly in the census method


• Demerits– Many a times consumers are not answering to the

questionnaire– It becomes difficult for a firm to ascertain number

of consumers that intend to buy from that firm– Utility of these estimates is limited to a period of

about one year– There may be sampling error if the sample is not

properly chosen

• Collective opinion method – Under this method salesman or experts are

required to estimate expected future demand of the product in their respective territories and sections

• Merits– The method is simple and does not involve the use of statistical techniques– The forecast are based on the knowledge of salesman and are directly

connected with sales– The method may prove quite useful in forecasting sales of a new product

• Demerits– Completely a subjective and can influence the forecast– Restricted to short term forecast– Salesman may be unaware of the broader economic changes likely to have an

impact under future demand


• Delphi method – It also uses opinion of the experts to come to a logical conclusion regarding future demand

• Merits– It facilitates the maintenance of respondents identity throughout

the discussion– This method renders it possible to pose the problem to the

experts at one time and have their response– This technique saves time and other resources

• Demerits– It is a tedious method– Too conceptualized for discussion, generate considerable

thinking and stimulate dialogue


• Market experiment method – Under this method the main determinants of demand of a product like price, advertising, packaging, quality are identified

• Here the market divisions must be homogeneous with regard to income, population, caste, religion, sex, age, tastes, preference

• Merits– It is a carefully carried out exercise which helps researcher to

come out with a demand function indicating quantities– This method can be used to check the results of demand

forecasting obtained from other methods


• Demerits– These methods are expensive and time consuming– These methods are risky as they might send wrong

signals to the consumers, dealers and competitors– It is difficult to satisfy the conditions of

homogeneity



• Statistical method – These methods make use of historical data as a basis for quantitative relationship to arrive at future demand patterns and trends

• These are useful for long term forecasting– Time series analysis – Most of the variables in business,

economics and commerce be it a series related to price, production, consumption, national income, foreign trade, foreign exchange reserves, investment, sales are all the time series data spread over a long period of time

a. Trend – Population, capital, technologyb. Seasonal variation – Short term, cyclic fluctuations


c. Cyclical variations – The length of the cycle is generally longer than one year. Cyclical variations are affected by swings in general economic activity where in recovery and boom are followed by recession and depression

d. Residual variation – These are disturbances due to unforeseen future events such as weather conditions, illness, strikes, transport breakdown etc

• Depending on nature, complexities and extent of the analysis required, there are various types of models to describe time series data


• Graphical methods – This method gives the basic method of series to grow, decline or remain steady over a period of time.

• This method is useful in forecasting India's population, demand for cement, textiles, steel, paper where the future is not too much different from the average of past. This period of time in the trend analysis is always a long time period


• Semi average method – According to this method the data is divided into two

parts preferably with the same number of years. The average of the first and the second part are calculated separately. These averages are called as semi averages

• Moving average method – When time series analysis does not reveal a significant

trend of any kind, the moving average method may be used to smoothen the series

– This is very simple and flexible method for measuring trend


• Least square method – The principle of least square provides an analytical tool to obtain an objective fit to the trend of the given time series

• Regression analysis – It is perhaps the most popular method of

forecasting. – It is mathematical analysis of the average relation

between two or more variables in terms of the original units of data

Demand forecasting of a new product

• Projecting demand for a new product is different from those of established products

• This requires an intensive study of an economic and competitive characteristics of product

• Forecasting methods need to be tailored to a particular product1. Product lifecycle analysis – Many products generally have a

characteristics known as perishable distinctiveness. This means that a product is distinct when it degenerates over the years into a common product. This innovation of new product and its degeneration into a common product is termed as the life cycle of the product

Demand forecasting of a new product

2. Introduction 3. Growth4. Maturity5. Saturation6. Decline

Demand Forecasting

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