UNIT IV

DEMAND FORECASTING
By,
Carol Peters Prabhu
I BBM
Mahesh College of Management
What is Demand Forecasting???
A forecast is a prediction or an estimation of a
future situation.

Demand forecasting means an estimation of the
level of demand that might be realized in the future
under given circumstances.

It is an objective assessment of the future course
of demand.

It minimizes the uncertainties of the unknown
future.

Demand forecasting is also called sales
forecasting or revenue forecasting
Objectives of Demand Forecasting
A study of the objectives of demand
forecasting could be undertaken under
two heads:

1. Objectives of short-run forecasting
and
2. Objectives of long- run forecasting.
Objectives of short-run forecasting:

1. To undertake Production Planning:
Necessary for the firm to have effective and efficient
production planning.
To avoid over production or under production.

2. To have Inventory Planning:
necessary to evolve suitable inventory policy.
necessary to control inventory by determining the future
resource requirements.
better inventory management.
3. To evolve Pricing Policy:
An appropriate price policy is important to ensure
stability in the price level.

4. To estimate short-run financial requirements:
to estimate the short-term financial requirements of
the firm.
the firm can make necessary arrangements for raising
financial resources.

5. To set sales target:
possible to evolve a suitable sales strategy.
This will help the firm to fix incentives to the sales
personnel
realistic sales targets can be fixed for salesman on the
basis of short-term demand forecasting.
6. To estimate short-run manpower requirements:
to assess the man-power requirements.
The objective here is to avoid either surplus or shortage
of man power.

7. To formulate advertisement policy:
necessary for a firm to evolve an effective and
appropriate advertising and promotion policy.
the firm can fix its advertisement outlay.
Objectives of long-run demand forecasting

1. To estimate long-run financial requirements: It can plan the
sources of long-term finance and mobilize these resources
accordingly.
2. To estimate long-run manpower requirements:
to evolve an appropriate man power planning.
training and personnel development take a long time to
complete.


3. To determine the productive capacity:
With the help of long-run demand forecasting it would
be possible for the firm to determine its production
capacity.
It can take decisions relating t o expansion of the size of
its plant.
It can also plan a new unit, if needed.
Evolutionary Approach
In this approach, the demand for the new product is projected as an outgrowth and
evolution of an existing product. For example, when the demand for LED and LCD
television sets in the demand for older versions of Television sets is off.
But, this approach is useful only when the new product is very close to the old
product.
Forecasting Demand for New Products
Joel Dean has suggested the following approaches to forecast demand for new
products:
Substitute Approach: This approach considers the new product as a substitute to
the old product. Since most of the new products are substitutes to old products,
demand for these products will have to be examined on a scientific basis.
Growth Curve Approach: The demand for new product can be estimated on the
basis of the pattern of growth of the old products. For example, by analyzing the
growth curves of all cars, an empirical law of market development applicable to a new
brand of car may be formulated.

Opinion Polling Approach: The approach consists of direct inquiry of the final
buyers, then blow up the sample to full scale. This is widely used approach.
Sales Experience Approach: In this approach, the new product is offered for
sales in a sample and there in the light of this experience, demand is estimated for a
fully developed market. Here what, is important is the selection of the sample
market.
Vicarious Approach: This approach seeks to study the reaction of the
consumers indirectly. Specialized dealers are contracted because they know the
pulse of the customers.
Plausibility:
The method chosen to forecast demand must be such that the executives who use it are
able to understand it. In addition, they must be willing to have confidence in the
techniques used.
Simplicity:
The method chosen to forecast demand should be simple enough for everyone to
understand and interpret. Use of sophisticated mathematical and econometric models,
though may be useful, tend to make things too complicated.
Criteria of a Good Forecasting Method
Economy:
Economy in the method of forecasting relates to costs which will have to be
incurred on undertaking forecasting. The method chosen should be economical
in the sense that the costs incurred should be minimum and should not exceed
the benefit. Of course, as far as possible, accuracy should be maintained.
Accuracy:
The method chosen to forecast demand should be closer to reality. It becomes
necessary to check the accuracy of past forecasts against present performance
and of present forecasts against future performance. It is desirable to have
comparisons of the model with what actually happens in reality.
Availability: Availability of relevant and adequate information and data is
another important criteria influencing effective demand forecasting. The
techniques used should be such as to yield quick and desired results. Delays may
not be appreciated by the management.
Maintenance of Timeliness: Due care should be exercised to maintain timeliness
in forecasting. The forecast should be up-to-date as far as possible. Delay in
forecasting demand may make the forecasts ineffective and meaningless.

Flexibility: Business plans must consider the element of uncertainty
that is attached to the future. Therefore, it must provide a degree of
flexibility in operation. This point has been stressed by Joel Dean.
Consistency: The forecaster has to deal with various elements which
are independent. There should be scope for consistency. For example,
the forecast level of Government expenditure must be consistent with
the total forecasts.
Thank You