DEMAND FORECASTING

Que:- Explain the concept of Demand Forecasting with the help

of an example.
Ans:- Introduction:-

A Company faces several internal and external risks, such as high competition,
change in consumer taste and preference, failure of technology, labour unrest,
inflation, recession, and change in government laws. Therefore, most of the
business decisions of a company are made under the conditions of risk and
uncertainty.A company can lessen the adverse effects of risks by determining
the demand or sales prospects for its products and services in future.

So, Demand forecasting is a combination of two words; the first one is Demand
and another is forecasting. Demand means outside requirements of
a product or service. In general, Forecasting means making an estimation in the
present for a future occurring event.

Meaning:-
It is a technique for estimation of probable demand for a product or services in
the future by the customers. It is based on the analysis of past demand for that
product or service in the present market condition. Demand forecasting should
be done on a scientific basis and facts and events related to forecasting should
be considered.

Therefore, in simple words, it can be said that after gathering information about
various aspect of the market and demand based on the past, an attempt may be
made to estimate future demand. This concept is called forecasting of demand.

Defination:-
According to Evan J. Douglas, “Demand estimation (forecasting) may be
defined as a process of finding values for demand in future time periods”

Demand forecasting is very crucial because the knowledge of how demand will
fluctuate enables the supplier to keep the right amount of stock on hand.

 If the demand is under estimated, sales can be lost due to lack of supply
of goods.
  If the demand is over estimated, supplier is left with the surplus of the
stock.

Therefore, understanding demand makes a company more competitive in the

marketplace and ability to predict it is very imperative for efficient
manufacturer, suppliers and retailers.

Purpose/ Importance of Demand Forecasting:-

Fulfilling objectives Evaluating

Inventory Performance
management

Preparing Stabilizing
employmen
the t and
budget production

Helps in
Taking
avoiding
Managem
wastages
ent
Decrease of business of Helping Government
risk Decisions Expanding
resources organizations

i. Fulfilling objectives:
It Implies that every business unit starts with certain pre-decided objectives.
Demand forecasting helps in fulfilling these objectives. An organization
estimates the current demand for its products and services in the market and
move forward to achieve the set goals.

For example, an organization has set a target of selling 50, 000 units of its
products. In such a case, the organization would perform demand forecasting
for its products. If the demand for the organization’s products is low, the
organization would take corrective actions, so that the set objective can be
achieved.

ii. Preparing the budget:

Demand Forecasting plays a crucial role in making budget by estimating costs
and expected revenues.

For instance, An organization has forecasted that the demand for its product,
which is priced at Rs. 10, would be 1,00,000 units. In such a case, the total
expected revenue would be 10*100000 = Rs. 10,00,000. In this way, demand
forecasting enables organizations to prepare their budget.

iii. Stabilizing employment and production:

Demand Forecasting helps an organization to control its production and
recruitment activities. Producing according to the forecasted demand of
products helps in avoiding the wastage of the resources of an organization. This
further helps an organization to hire human resource according to requirement.

For example, If an organization expects a rise in the demand for its products, it
may opt for extra labour to fulfil the increased demand. Like in the umbrella
factory 50 workers are there and they produce suppose 500 umbrellas i.e. 10
umbrella per worker. While forecasting the demand company thinks demand
will rise by 500 more umbrella this year. Then to meet the demand more
resources and labour will be required.

iv. Decrease of business risk: 

Where there is business there is risk. Demand forecasting though does not
completely remove the business uncertainties, helps in reducing the risks and
uncertainties to a certain extent.

v. Taking Management Decisions:

Demand forecasting helps in making critical decisions such as

 Deciding the plant capacity

 Determining the requirement of raw material
 Ensuring the availability of labour and capital.
For example, Suppose McDonald’s launched new burger “ Mac Burger” .
Demand for this burger kept on rising so taking the increased demand in the
view management will decide the plant capacity, the raw material
required(buns, salads) etc to meet the increased demand and to manage all this
more fund and labour is also required.

vi. Evaluating Performance:

Demand forecasting also helps in making corrections in case of adverse or in
the negative situations.

For example, if the demand for an organization’s products is less, it may take
corrective actions and improve the level of demand by enhancing the quality of
its products or spending more on advertisements. Same in the case of “Maggie”
when its demand fell due to lead containment company took corrective action
by removing the harmful material and improve the quality.

vii. Helping Government:

Demand forecast enables the government to coordinate import and export
activities and plan international trade.

For example, Coca-Cola- The demand for this soft drink is global so demand
forecast encourage the company to sell the product internationally as well and in
this way with the assent of Government coca cola get into international trade
and become the global brand.

viii)Helps in avoiding wastages of resources:

Demand forecasting is not an option but compulsion in today’s competitive
environment. Imagine a firm that does not undertake demand forecasting. As a
result it will have no clue as to where its product stands in the market and how
is the future demand for the same. This may result in wastage of resources. So
in order to avoid wastages it is always beneficial to have a sense of future
demand for the products and services.
ix) Expanding organizations:
It implies that demand forecasting helps in deciding about the expansion of the
business of the organization.

 If the expected demand for products is higher, then the organization may
plan to expand further.
 On the other hand, if the demand for products is expected to fall, the
organization may cut down the investment in the business.

For example, Maggie- Though the demand for the packed food has shot up
globally due to working scenarios of everyone ,its demand rise and with the
increased demand Maggie decide to expand its business internationally as well.
But when everyone came to know about that it contains the harmful ingredient
i.e. Lead the demand falls and then had Maggie cut down its investment.

x) Inventory management:
Inventories is one of those aspects which is closely associated with demand.
This is because inventories are kept by the producers to meet the demand in the
coming times. Demand forecasting helps in devising appropriate inventory
management policies.

DEMAND FORECASTING METHODS USED BY APPLE

Apple is one of the largest technology company in the world .The company
develops consumer electronic gadgets such as smart phones, computers,
desktops, laptops, iPod and tablets. The company was formed in in 1976 by
Steve jobs with an intension of making computers but later it changed its focus
to include the manufacturing of consumer electronics.

Forecasting the demand for apple is one of the most important steps that the
company has undertaken. It is important for the suppliers, manufacturer and
retailer to conduct the forecast analysis of apples products in order to determine
the quantities that should be manufactured by the company. The company has
an estimated value of $626 billion listed in the New York exchange. This means
that market capitalization of the company is larger than that of its competitors.
Different approaches to Forecast Demand Apple Company forecasts the
demand in order to determine the quantity of the products it will
manufacture through a series of approaches:-

1) Judgmental approach: The importance of this strategy is to address

the forecasting subject by assuming that consumers are aware of high
quality of the company’s products and can recommend others to buy the
same products. While utilizing this approach the company gathers the
knowledge and opinions of the people .Therefore they become in a
positions where they would know the appropriate demand for their
products because of utilizing this strategy. In order to forecast the
demand for its product through Judgmental approach the company
carries out surveys as an approach which is called Bottom up approach
where everybody contributes his or her opinion that makes up their final
forecast. This strategy has enabled the company to introduced
innovations in cell phones, transportable music players and private
computers that has increased the demand.

Moreover the company uses consensus methods under the Judgmental

approaches to forecast its demand. This method uses just a few peoples to
make general forecasts for example a group of the company’s top managers
would meet and create general forecast of demand through debate and
discussions .

2) Tentative approach: Apple also uses tentative approaches to

forecasting in order to receive some estimation of the potential demand
rate for the product. The company uses customer surveys that are times
conducted with the use of phones, on the streets or at shops. The
company displays and describes its new product and potential client is
questioned if they would be interested in buying the one. Apple
Company also uses consumer panels during the early stages of
manufacturing the company’s product to assess the future performance
of the company’s product in the market while using this strategy small
groups of clients gather together in order to try the product and discuss
its features and qualities
 3) Test marketing Technique: Apple uses this technique to make a
forecast of the demand for its future products. This strategy helps in
testing the market, measures the product awareness as well as market
penetration. It also helps in fine tuning the common marketing program
and ensuring that no potential troubles or problems have been missed.
Being the most admired and accomplished phone maker in the world.
IPhone creates a huge demand from it admires for its products.

CONCLUSION:- Forecasts will never be always perfect and sometimes they

may not be even so good. But with demand forecasts one can minimise the risk
and gain a little confidence that its product will stand in the market. Accurate
demand forecasting requires knowledge about the product, customer and the
environment. With the help of the appropriate demand forecasting
method/technique company can sustain its position in the market and gain profit
alike Apple Company, its forecast demand strategies have encouraged the
company to grow and scoop high profits higher than competitors and
forecasting is the one of the success factor of this company.