Demand forecasting

Topics to be covered
 Definition  Factors  Purposes of Forecasting  Criteria for a good forecasting  Methods of demand forecasting

Definition
 Is a process by which an individual or a firm predicts future demand for product or products  Accurate forecasting-enables these firms to produce required quantities at the right time and arrange well in advance for the various factors of production  Better planning and allocation of national resources.

Factors Influencing DF
 How far ahead?
 Short term  Long- term

 Should forecast be general or specific  Problems and methods  Classification of goods - consumer - durable - consumer goods and services

Factors
 Forecasting at different levels
Macro Industrial Firm-level

Purposes of forecasting
 Purposes of short-term forecasting  Purposes of long term forecasting

Short-term forecasting
 Production scheduling  Reducing cost of purchasing raw materials  Determining appropriate price policy  Setting sales targets and establishing controls and incentives  Evolving a suitable advertising and promotion programme  Forecasting short-term financial

Long-term forecasting
 Planning of a new unit or expansion of an existing unit  Planning of long-term financial requirements  Planning of man-power requirements

Criteria for a good forecasting

 Accuracy  Plausibility  Simplicity  Economy  Availability  Durability

Methods of demand forecasting

 Survey or buyers intention  Delphi method  Expert opinion  Collective opinion  Nave models  Smoothing techniques  Analysis of time series and trend projections  Use of economic indicators  Controlled experiments  Judgmental approach

Survey or buyers method

 Direct method of estimating sales in the near future  Asking customers what the buyers are planning to buy Known as opinion survey  The burden of forecasting goes to buyer  Method is best when bulk of sales is made.  Customers may misjudge or mislead or may be uncertain about quantity  Not useful in case of house old customers  Does not measure and expose the variables under managements control

Methods of demand forecasting

 Survey methods - experts opinion - consumer survey - complete enumeration - sample survey - end- use - Delphi method

Methods of demand forecasting

- market experimentation - stimulated market method - actual market method  Statistical method - trend analysis - heading indicator analysis - regression method - simultaneous equation

Survey Methods
 conducted by sales agencies  a direct method of addressing people  helps in gaining first hand information

Experts opinion
 business firm prefers to depend on survey of experts  Experts are those who have the feel about the product  opinion poll is conducted among experts  Sometimes this method is also called the hunch method

Advantages
 This method is very easy and less costly to carry out.  This method produces quick results  When a firm intends to bring a new product, this method is very useful to elicit the opinion of experts on its marketing plans

Disadvantage
 The experts must have wide knowledge and experience otherwise their opinion may be personal based on guess work.  Experts opinion may be biased for a number of reasons.

Consumer survey
 interviewing the consumers directly to get information about their purchase plans at a number of possible prices over a particular period of time.  information collected through questionnaire  The data will have to be classified and tabulated for systematic presentation and analysis.

Complete enumeration method/ census method:

 All consumers of a product are contacted and they are interviewed to know their probable demand for the forecast period.  This individual probable demand is added to ascertain the demand forecast for the firms product.  For example there are N consumers, each demanding commodity X, then the total demand forecast would be EN * n. where n=1.

Advantages
 This method simply records the data and aggregates; it does not introduce any value judgment of his own.  The demand forecast through this method is likely to be more accurate than many other methods.

Disadvantages
 It is time consuming and costly method  There can be large number of errors in the data collection, as it is a tedious and cumbersome process.

Sample survey
 Only few consumers are selected by using some appropriate sampling technique.  They are interviewed to ascertain their probable demands for the product for the forecast period.  Their average demand is then calculated.  This average demand for the sample is multiplied by the total number of consumers to obtain the aggregate demand forecast for the product in question.

Advantages
 It is a direct method of collecting data from consumers. The information obtained is first hand, it is more reliable.  This method saves time, cost and energy. It is economical, if information is collected by postal questionnaire.

Disadvantages
 There may be sampling error. The smaller the size of the sample, the larger the sampling error.  This method provides scope for errors. The consumer may not understand the significance of the questions asked, they may be dishonest, reluctant or shy to reply or they may be either vague or imaginary replies. This reduces the usefulness of information collected.

End-use Method
 the demand for a product is forecasted through a survey of its users.  A product may be used for final consumption by house old sector and government and as an intermediate product by different industries as well as may be exported and imported.  purposes can be obtained through a survey of all or selected consumers, exporters and importers and industries using it as an input thus the total demand forecast can be obtained as the sum of the demand forecast of all three components.

Advantages
 It provides use-wise or sector-wise demand forecasts.  This method is used now as a standard tool in economic analysis and are extensively used by governmental and no-governmental agencies.

Disadvantages
 This method assumes that technical structure of production remains unchanged overtime, which is not true. Because with economic development technical innovations continue to take place and lead to technological changes in the industrial structure.  This method needs extensive information on the probable demands of the final goods sector. No company how so ever large can hope to possess this information.

Delphi method
 In this method an attempt is made to arrive at a consensus in an uncertain area by questioning a group of experts repeatedly until some sort of unanimity is arrived among all experts.  These meetings help to narrow down different views of experts.

Advantages
 In this method it is possible to pose the problem to experts directly  It generates a reasonable opinion in place of unstructured opinion.  It is a cheap method, save time and resources.

Disadvantages
 The success of this method depends upon wide knowledge and experience of experts.  It could be tedious and costly method if the experts are not too large and are cooperative and forecaster has the necessary funds and ability to perform the task.

Statistical method
 Time series data: Refers to data collected over a period of time recording historical changes in variables like price, income, etc. that influenced demand for a commodity Time series analysis relate to determination of change in variable in relation to time.

Statistical method
 Cross sectional :Is undertaken to determine the effect of changes in variables like price, income, etc. on demand for a commodity at a point of item. In cross sectional analysis, different levels of sales among different income groups may be compared at a specific point of time and income elasticity is then estimated on the basis of these differences.

Statistical methods
 Trend analysis: A firm which has been in existence for a long time will have accumulated data on sales pertaining to different time periods.  When such data is arranged, chronologically it is know as Time Series.  A typical time series has four components, trend, cyclical fluctuations, seasonal variations and random or irregular fluctuations.  This method is highly subjective and considerably depends on the bias of the person drawing the curve.  The main advantage of this method is that it does not require the formal knowledge of economic theory and the market, it only needs the time series data.

Regression method
 involves a study of the dependence of one variable on the other variables.  In demand forecasting demand is estimated with the help of a regression equation where in demand is the dependent variable and price, advertising expenditure, consumers income, etc is the independent variable.