Demand Forecasting

It is a technique for estimation of probable demand for a product or

services in the future. 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, we can say that after gathering information

about various aspect of the market and demand based on past, an
attempt may be made to estimate future demand. This concept is called
forecasting of demand.

For example, suppose we sold 200, 250, 300 units of product X in the
month of January, February and March respectively. Now we can say
that there will be a demand of 250 units approx. of product X in
the month of April, if the market condition remains the same.

Companies use market demand analysis to understand how much consumer demand exists for
a product or service. This analysis helps management determine if they can successfully enter a
market and generate enough profits to advance their business operations.

Forecasting provides an estimate of future demand and the basis for planning and sound
business decisions. Since all organizations deal with an unknown future, some error between a
forecast and actual demand is to be expected. Thus, the goal of a good forecasting technique is
to minimize the deviation between actual demand and forecast. Since a forecast is a prediction
of the future, factors that influence demand, the impact of these factors, and whether these
factors will continue influence future demands must be considered in developing an accurate
forecast. 
Usefulness of Demand Forecasting

Demand plays a vital role in decision making of a business. In

competitive market conditions, there is a need to take correct decision
and make planning for future events related to business like sale,
production etc. The effectiveness of a decision taken by business
managers depends upon the accuracy of the decision taken by them.

Demand is a most important aspect for a business for achieving its

objectives. Many decisions of business depend on demand like
production, sales, staff requirement etc. Forecasting is the necessity of
business at an international level as well as domestic level.

Demand forecasting reduces risk related to business activities and helps

it to take efficient decisions. For firms having production at the mass
level, the importance of forecasting had increased more. A good
forecasting helps a firm in better planning related to business goals.

There is a huge role of forecasting in functional areas of accounting.

Good forecast helps in appropriate production planning, process
selection, capacity planning, facility layout planning, and inventory
management etc. Demand forecasting provides a reasonable data for the
organization’s capital investment and expansion decision. It also
provides a way for the formulation of suitable pricing and advertisement
strategies.

Following is the significance of Demand Forecasting:

 Fulfilling objectives of the business

 Preparing the budget
 Taking management decision
 Evaluating performance etc.
Moreover, forecasting is not completely full proof and correct. It thus
helps in evaluating various factors which affect demand and enables
management staff to know about various forces relevant to the study of
demand behavior.

The Scope of Demand Forecasting

The scope of demand forecasting depends upon the operated area of the
firm, present as well as what is proposed in the future. Forecasting can
be at international level if the area of operation is international. If the
firm supplies its products and services in the local market then
forecasting will be at local level.

The scope should be decided considering time and cost involved in

relation to the benefit of the information acquired through the study of
demand. Cost of forecasting and benefit flows from such forecasting
should be in a balanced manner.

Types of Forecasting
There are two types of forecasting:

 Based on Economy
 Based on the time period
1. Based on Economy

There are three type of forecasting based on the economy:

i. Macro-level forecasting: It deals with the general economic

environment relating to the economy as measured by the Index of
Industrial Production(IIP), national income and general level of
employment etc.
ii. Industry level forecasting: Industry level forecasting deals with the
demand for industry’s products as a whole. For example demand for
cement in India, demand for clothes in India etc.
iii. Firm-level forecasting: It means forecasting the demand for a
particular firm’s product. For example, demand for Birla cement,
demand for Raymond clothes etc.
2. Based on the Time Period

Forecasting based on time may be short-term forecasting and long-term

forecasting

i. Short-term forecasting:  It covers a short period of time,

depending upon nature of the industry. It is done generally for six
months or less than one year. Short-term forecasting is generally
useful in tactical decisions.
ii. Long-term forecasting casting: Long-term forecasts are for a
longer period of time say, two to five years or more. It gives
information for major strategic decisions of the firm. For example,
expansion of plant capacity, opening a new unit of business etc.

Imp of demand analysis

The analysis of demand theory is very much important in the business decision. Demand analysis
helps firm forecast the market which is of importance in the modern business activities. It helps to
design the appropriate pricing policy.

In the present global market, it is not at all possible for a firm to exist without adequate knowledge
on consumer behavior. Consumer behaviour informs determines demand for a commodity in the
market. The importance of demand analysis is below.

1)   Pricing Policy:

            The importance of demand analysis in business decision is that it helps firms design their
pricing policy. Firm can choose either to lower or raise a product’s price by observing trend of
consumer demand for that product. Producers can’t fix price for their products without first
understanding the market demand for them.
2)   Investment Policy:
            Demand analysis helps firm adopt appropriate investment policy. Based on the nature of
demand for a particular product in a particular market, firms can make their investment decisions.
3)   Market forecast:
            Demand analysis helps business firms in their investment decisions, based on the prevailing
response of consumers towards a particular commodity, firm can foresee the demand. This in turn
helps them in investing on an appropriate industry.

The demand analysis and the demand theory are of crucial importance to the business enterprises.They
are the source of many useful insights for business decision making.The success of failure of business
firms depend primarily on its ability to generate resources by satisfying the demand of consumers.The
firms unable to attract consumers are soon forced out from the market.

The analysis of demand theory is very much important in the business decision. Demand analysis
helps firm forecast the market which is of importance in the modern business activities. It helps to
design the appropriate pricing policy.

In the present global market, it is not at all possible for a firm to exist without adequate knowledge
on consumer behavior. Consumer behaviour informs determines demand for a commodity in the
market. The importance of demand analysis is below.

1)   Pricing Policy:

            The importance of demand analysis in business decision is that it helps firms design their
pricing policy. Firm can choose either to lower or raise a product’s price by observing trend of
consumer demand for that product. Producers can’t fix price for their products without first
understanding the market demand for them.
2)   Investment Policy:
            Demand analysis helps firm adopt appropriate investment policy. Based on the nature of
demand for a particular product in a particular market, firms can make their investment decisions.
3)   Market forecast:
            Demand analysis helps business firms in their investment decisions, based on the prevailing
response of consumers towards a particular commodity, firm can foresee the demand. This in turn
helps them in investing on an appropriate industry.

 
 The demand analysis and the demand theory are of crucial importance to the business enterprises.They
are the source of many useful insights for business decision making.The success of failure of business
firms depend primarily on its ability to generate resources by satisfying the demand of consumers.The
firms unable to attract consumers are soon forced out from the market Make Google view image button
visible again: https://goo.gl/DYGbub

Make Google view image button visible again: https://goo.gl/DYGbub

Simply put, it refers to making estimations about future customer demand

using historical data and other information. Proper demand forecasting
gives businesses valuable information about their potential in their
current market and other markets, so that managers can make informed
decisions about pricing, business growth strategies, and market potential.

Without demand forecasting, businesses risk making poor decisions

about their products and target markets – and ill-informed decisions can
have far-reaching negative effects on inventory holding costs, customer
satisfaction, supply chain management, and profitability.

There are a number of reasons why demand forecasting is an important

process for businesses:

 It allows businesses to more effectively optimize inventory,

increasing turnover rates and reducing holding costs.
 It provides an insight into upcoming cash flow, meaning
businesses can more accurately budget to pay suppliers and other
operational costs, and invest in the growth of the business
 Anticipating demand means knowing when to increase staff and
other resources to keep operations running smoothly during peak
periods.
Types of demand forecasting

Most traditional demand forecasting techniques fall into one of three

basic categories:

Qualitative forecasting

Qualitative forecasting techniques are used when there isn’t a lot of data
available to work with, such as for a relatively new business or when a
product is introduced to the market. In this instance, other information
such as expert opinions, market research, and comparative analyses are
used to form quantitative estimates about demand.

This approach is often used in areas like technology, where new products
may be unprecedented, and customer interest is difficult to gauge ahead
of time.

Time series analysis

When historical data is available for a product or product line and trends
are clear, businesses tend to use the time series analysis approach to
demand forecasting. A time series analysis is useful for identifying
seasonal fluctuations in demand, cyclical patterns, and key sales trends.

The time series analysis approach is most effectively used by well-

established businesses who have several years’ worth of data to work
from and relatively stable trend patterns.
 Causal models

The causal model is the most sophisticated and complex forecasting tool
for businesses because it uses specific information about relationships
between variables affecting demand in the market, such as competitors,
economic forces, and other socioeconomic factors. As with time series
analyses, historical data is key to creating a causal model forecast.

For example, an ice cream business could create a causal model

forecast by looking at factors such as their historical sales data,
marketing budget, promotional activities, any new ice cream stores in
their area, their competitors’ prices, the weather, overall demand for ice
cream in their area, and even their local unemployment rate.

Forecasting seasonality and trends together

While seasonality refers to variations in demand that occur during

specific times on a periodic basis (such as the holiday season), trends
can occur at any time and signal an overall shift in behavior (such as a
specific product growing in popularity).

When it comes to demand forecasting, you should factor in estimates of

trends and estimates of seasonality to accurately plan your inventory
management strategy, marketing efforts, and operational processes.

Successful demand forecasting isn’t a one-and-done task. It’s an ongoing

process of testing and learning that should involve:

 Actively shaping demand by optimizing your customer experience,

product offering, sales channels, etc.
 Driving an intelligent and agile response to demand by harnessing
and applying advanced analytics
 Working to reduce bias and error over time

Essentially, demand forecasting is a good way to anticipate what

customers are going to want from your business in the future, so you can
prepare inventory and resources to meet that demand.

By forecasting demand, you’ll be able to cut down on holding costs and

other operational expenses when they’re not needed while ensuring
you’re equipped to handle peak periods when they happen.

Automated demand forecasting: taking the guesswork out of

growth

The traditional methods of manually manipulating and interpreting data to

forecast demand simply aren’t practical for businesses that are beholden
to fast-changing customer expectations and markets. For businesses to
have a truly agile and up-to-date data informed approach to decision-
making, demand forecasting needs to happen in real time – and that
means utilizing technology to do the hard work for you.