Demand Forecasting

A forecast is prediction or estimation of a future situation, under given

conditions. The more realistic the forecasts, the more effective
decisions can be made for tomorrow. Forecasting helps a firm to access
the demand for its products and plan its production accordingly.
Forecasting reduces the uncertainty and makes the organization more
confident of coping with the external environment.
Demand forecasting is very popular in industrial advanced countries
where demand conditions are always more uncertain than the supply
conditions. In Developing countries supply is often the limiting factor
rather than the demand. There is a lot of difference between demand
forecasting and demand estimation. Demand forecasting predicts future
trend of sales while demand estimation tries to find out expected
present sales level. Forecasts can be both physical as well as financial
in Nature, and are used for planning purposes.
Forecasts can be classified into two categories.
1. Passive Forecasts
2. Active Forecasts
1. Passive Forecasting:-
If the firm extrapolates the demand of previous years to yield the
likely imitated demand for the coming year. It is an example of a
passive forecast. (Prediction is based on the Assumption that No
change informs action.

2. Active Forecasting:-
If the firm tries to manipulate demand by changing price, product
quality, promotional effort etc., It is the example of Active forecast.
Prediction is based on the Assumption that there is change is the
Action of the firm.
“The company forecast is the expected level of company sales based on
a chosen marketing plan and assumed marketing environment”.
 Philip Kotler
Features of Demand Forecasting

1. Demand forecasting explains potential demand for commodities.

2. Demand forecasting is only a prediction.
3. It is based on Historical data.
4. Demand forecasting may be physical or Monotony forecasting.
5. Demand forecasting is not free from constraints (Physical or
Managerial Capabilities) of the business firm.
6. Demand forecasting may be done at firm level as well as industry
level.
7. Statistical tools are used for Demand forecasting
8. Demand forecasting is largely influenced by socio. Eco. &
political environment.
9. Demand forecasting is based on part achievements.
10. Demand forecasting is based on experience based
conjectures.

Criteria for a good Demand Forecasting Method

1. Demand forecasting technique must be within the comprehension

of the management.
2. Method of Demand forecasting should be accurate
3. Demand forecasting method should not be expensive
4. The method should be simple.
5. The method for demand forecasting should be simple and
flexible.
6. Techniques should give quick results and useful
7. Forecast of the firm should consistent with the forecast at the level
of industry of on National level
Significance-
1. Demand forecasts help the producers to take up production
planning.
2. Sale forecasting is based on demand forecasting
3. Demand forecasting induced the producers to maintain sufficient
inventory of the products.
4. Scale of production depends on forecasting estimate
5. Demand forecast helps the management to formulate the price
policy.
6. It is very Imp in the area of marketing of a firm
7. Manpower planning is based on potential demand estimates for
the future.
8. It is necessary for determining the growth rate of the firm and
long run planning.
9. It is helpful in research and development.
10. At Macro level, Demand forecasting is of a great
importance which is helpful.

Criteria for a good Demand Forecasting

1. Accuracy
2. Economic
3. Simplicity
4. Availability
5. Durability
6. Flexibility
7. Consistency

Steps of demand forecasting

 (1) Identification of objective

(2) Nature of the product

(3) Determinants of demand

(4) Determining scope of Demand forecasting

(5) Choice of Technique

(6) Interpretation of Result

(7) Testing Accuracy

Objectives

Objectives of Demand forecasting as regard to time can be divided into

two parts.
Objectives

Short Run Long Run

1. Production Program
2. Suitable Purchase Policy
3. Price Policy
4. Fix Sale Targets
5. Short Run Financial Planning
1. Business Planning
2. Input Planning
3. Manpower Planning
4. Financial Planning
5.Profitable Investment
6. Other Objectives

Methods of Forecasting Demand

There are many techniques for forecasting the demand. fundamentally

there are two approaches open to the forecasting of demand.
Approaches
 Short run Long run
approach approach

To obtain information about To use the post experience

the intention of consumers by as a guide and by
means of market research, extrapolating part trends, to
research, survey, economic estimate the level of future
intelligence etc. demand.

Methods of Demand Forecasting

Survey Method Statistical Method

Consumer Collection Expert Market Control Time series Economic

survey opinion opinion survey experience analysis Indicator
method method method method method

Census Sample End use Graphic Semi Moving Least

method method method method average average square
method method method

Survey Method
(1) Consumer survey Method:-
This method is considered as a short term forecasting method. In this
method the consumers have to fill up the questionnaires about their
perception intentions as a plan about their potentiality to buy the
product at various prices of the product at various prices of the
production near future. The survey method can be classified into (1)
Census Method, (2) Sample survey method, (3) End use method.

Census Method:-
All the consumers of a product are interviewed about the product
whose demand to be forecasted.

n = Consumer
Di = Individual demand

Sample Method:-
Few consumers are selected on a random basis. They are interviewed
about the demand of the product on the basis of the information, the
probable demand is estimated.

N1 = No of consumers in group i
n1 + n2 + n3 + n50 = 1000

If all consumers are alike, the selection may be done on the basis of
random and total demand will be given by

Merits
Less costly and less data error but case should be taken choosing a
sample size which should not be too small or too big.

End Use Method –

This method is used to forecast the demand for a product which is
used as an input in producing other goods as well as that good is for
direct consumption. For example sugar & milk.
It does not require any historical data. This method is convenient if
the number of end users of products is limited. This method is
feasible for national planning organizations.

Expert Opinion Method-

In this method executive or sales manager or experts from outside
may be requested to make a demand forecast for the future product.
under this method each expert predicts the sales by the response
collected. This process continues till the final forecast is reached.
This technique is known as Delphi Technique because this
technique is based on the assumption that collective Judgment of
knowledgeable persons may serve as the important source of
information. This method aids individual panel members in
assessing their forecast.

Collection Opinion Method-

This method is called the section survey method. In this method the
salesmen are asked to estimate the future demand of the product.
Salesmen are closed to customers and they estimate the future
demand. The opinion collected by each salesman is consolidated.
Final forecast has been estimated after examining the change in
price, design, competition, income & advertisement etc. This
method is simple, this method is only restricted to short term
forecasting.

Market Experiment Method-

It has two types
I.Test Marketing:-
It is for a new product, it is based on actual consumer
behaviour not on their plan. This method is costly and
time consuming.

II. Controlled Experiment:-

 In this method few consumers are selected and given to
them token money to purchase various products or
brands of products particular brand purchases are
recorded. This method provides a more accurate result.

Statistical Methods

In the statistical method of demand forecasting, historical data are taken

into account for demand forecasting. It is used for making long term
forecasting statistical methods that can be classified up to two parts. (1)
Time Series, (2) Economic Indicator.

1. Time Series Analysis-

It is an important statistical technique used in forecasting demand. It
is based on Historical data which is used for long term forecasting.
This method is based on the assumption that future events will
continue according to the past. so historical data is used for
predictions. There are four components of time series.
1. Secular Trend (T)
2. Cyclical Variation (C)
3. Seasonal Variation (S)
4. Random fluctuation (R)
Types of time series
1. Graphic Method
2. Semi Average Method
3. Moving Average Method
4. Least Square Method

(2) Economic Indicator

It may be possible that in certain cases the demand may not be based
on time series but may be based on economic indicators.
1. Personal income can be used to forecast the demand of consumer
goods.
 2. Agriculture income can be used to forecast the demand of
agricultural inputs.
3. Automobile registration to forecast the demand of automobiles
accessories, petrol etc.

The managerial economist collects such information, attempts to

establish a relationship between the demand for a product and a
particular economic indicator through the method of least squares and
decides the regression equations.

Limitations
1. Lack of Past sale data
2. change in fashion
3. It is High cost phenomenon
4. Lack of Experts
5. Psychological Factors
Scope of Demand Forecasting
Scope of Demand Forecasting is increasing day by day. It is essential
for firms. It is an important aid in effective and efficient planning. It is
helpful in Management in seeking uncertainty (1) Micro level, (2)
Industry level,
(3) firm level