UNIT-4

DEMAND FORECASTING
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Contents
• Meaning of Demand Forecasting .
• Objectives/Purpose of Demand Forecasting.
• Importance of Demand Forecasting.
• Steps involved in Demand Forecasting.
• Factors involved in Demand Forecasting.
• Criteria of a good forecasting Method.
• Methods or Techniques of Demand Forecasting.
• Demand Forecasting for New Products.
1.Meaning of Demand forecasting
 Introduction 4
Demand Supply

❑ Demand forecasting is a combination of two words; the first one is Demand

and another 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.
❑ The formulation of appropriate and useful production policy is an important
aspect for an enterprise. This involves determination of level of production,
manpower requirements, equipment and inventory levels etc. All these
decisions are basically related to the size of production, which in turn can be
determined from potential demand for the product.
❑ Thus the starting point of all decisions related to production strategy is the
product demand forecast for a specified period. To know what a business
should perform we must know its future sales.
 Meaning Demand Supply
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▪ Demand forecasting is a process of predicting the demand for an
organisation’s products or services in a specified time period in the future.
Demand forecasting is helpful for both new as well as existing organizations
in the market.
▪ Demand forecasting is comprised of a series of steps that involves the
anticipation of demand for a product in future under both controllable and
non-controllable factors.
▪ It is an ‘objective assessment of the future course of demand”.
▪ It is based on the analysis of past demand for that product or service in
the present market condition.
▪ 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.
 Definition's Demand Supply
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According To Cundiff And Still,
“Demand Forecasting is an estimate of sales during a specified future
period based on the proposed marketing plan and a set of particular
uncontrollable and competitive forces.”
According To Evan J. Douglas ,
“Demand Forecasting may be defined as a process of finding values for
demand in future.”
Note:✓ Demand forecasting is the method of using historical sales data to evaluate
future customer demand. It is essential to distinguish between forecasts of
demand and forecasts of sales. Sales forecast is important for estimating
revenue cash requirements and expenses. Demand forecasts relate to
production, inventory control, timing, reliability of forecast etc. However, there is
not much difference between these two terms.
2.Objectives/Purpose of Demand forecasting
Objectives/Purpose Demand Supply
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The purpose of forecasting differ according to types of forecasting:

This is limited to short period not

exceeding one year. It concerns
with policies relating to sales,
purchases, pricing and finances. Short-Term
It is with reference to the existing Forecasting
production capacity of the firm.

Long-term forecasting involves

Long-Term
the study of technological
developments, economic trends
Forecasting
and consumer preferences and
man-power planning, Long-term
forecasting enables to take major
strategic business decisions.
 Purpose of Short-Term Forecasting Demand Supply
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1. Formulating production policy: Helps in covering the gap between the demand
and supply of the product. The demand forecasting helps in estimating the
requirement of raw material in future, so that the regular supply of raw
material can be maintained. It further helps in maximum utilization of
resources as operations are planned according to forecasts. Similarly, human
resource requirements are easily met with the help of demand forecasting.
2. Formulating price policy: An organization sets prices of its products according
to their demand. For example, if an economy enters into depression or
recession phase, the demand for products falls. In such a case, the
organization sets low prices of its products.
3. Evolving a suitable advertising and promotion programme.
 Purpose of Short-Term Forecasting Demand Supply
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4. Controlling sales: Helps in setting sales targets, which act as a basis for
evaluating sales performance. An organization make demand forecasts for
different regions and fix sales targets for each region accordingly.
5. Arranging finance: Implies that the financial requirements of the enterprise
are estimated with the help of demand forecasting. This helps in ensuring
proper liquidity within the organization.

Note: Short-term demand forecasting is useful in taking adhoc

decisions concerning the day-to-day working of the concern.
 Purpose of Long-Term Forecasting Demand Supply
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1. Deciding the production capacity: Implies that with the help of demand
forecasting, an organization can determine the size of the plant required for
production. The size of the plant should conform to the sales requirement of
the organization.
2. Planning long-term activities: Implies that demand forecasting helps in
planning for long term. For example, if the forecasted demand for the
organization’s products is high, then it may plan to invest in various expansion
and development projects in the long term.
3. Planning man-power requirements: Training and personnel development are
long-term propositions, taking considerable time to complete.
 Purpose of Long-Term Forecasting Demand Supply
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4. Planning long term financial requirements: Long run forecasts are essential
to assess long term financial requirements. When the funds required for
expansion, modernization and diversification are large, it takes time to make
necessary arrangements for raising sufficient resources through long term
loans and the issue of shares and debentures.
Note: Long-term forecasting involves the study of technological
developments, economic trends and consumer preferences and
man-power planning, Long-term forecasting enables to take
major strategic business decisions.
When forecasts covering long periods are made, the probability
of error may be high. Hence, quality and competent forecasting
are essential requirements for this type.
3.IMPORTANCE of Demand forecasting
 Importance Demand Supply
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Demand plays a crucial role in the management of every business. It helps an

organization to reduce risks involved in business activities and make important
business decisions. Apart from this, demand forecasting provides an insight into
the organization’s capital investment and expansion decisions.
I. Fulfilling objectives: 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.
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II. Preparing the budget: 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 10, 00, 00 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: 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 labor to fulfill the increased
demand.
 Importance Demand Supply
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IV. Expanding organizations: 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.
V. Taking Management Decisions: Helps in making critical decisions, such as
deciding the plant capacity, determining the requirement of raw material, and
ensuring the availability of labor and capital.
VI. Evaluating Performance: Helps in making corrections. 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.
4. STEPS INVOLVED IN Demand forecasting
Steps/Stages in demand forecasting Demand Supply
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Demand forecasting is a scientific exercise. It has to go through a number of
steps. At each step, critical considerations are required to be made.
Identification of Estimation and
Objective Choice of Method interpretation of results
1 3 5

2 4

Determining the time Collection of Data and

perspective Data Adjustment
 Steps/Stages in demand forecasting Demand Supply
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1. The objective or the purpose of demand forecasting must be clearly specified.
The objective may be specified in terms of;
(a) short-term or long-term demand,
(b) the overall demand for a product or for a firm’s own product,
(c) the whole or only a segment of the market for its product,
(d) firm’s market share.
The objective of demand forecasting must be determined before the process of forecast is started.
2. Depending on the firm’s objective, demand may be forecast for a short period, that
is, for the next 2 to 3 years, or for a long period. In demand forecasting for a short
period, 2 to 3 years, many of the demand determinants can be taken to remain
constant or not to change significantly. In the long-run, however, demand
determinants may change significantly. Therefore, the time perspective of demand
forecasting must be specified.
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3. Choice of Method: The method of demand forecasting differs from

organization to organization depending on the purpose of forecasting, time
frame, and data requirement and its availability. Selecting the suitable
method is necessary for saving time and cost and ensuring the reliability of
the data.
4. Collection of Data and Data Adjustment: Once method of demand forecasting is
decided on, the next step is to collect the required data, primary or secondary or
both. The required data is often not available in the required type/ form. In that
case, data needs to be adjusted – even messaged, if necessary – with the purpose
of building data series consistent with data requirement. Sometimes the required
data has to be generated from the secondary sources.
 Steps/Stages in demand forecasting Demand Supply
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5. Estimation and interpretation of results: Once the required data are

collected and the demand forecasting method is finalized, the final step is to
estimate the demand for the predefined years of the period. Usually, the
estimates appear in the form of equations, and the result is interpreted and
presented in the easy and usable form.
5. FACTORS INVOLVED IN Demand forecasting
 Factors involved in demand forecasting Demand Supply
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1. Types of goods The kind of commodity, its features and usability determines the
customer base it is going to cater. The demand for existing goods
can be easily estimated by following the previous sales trend,
competitors’ analysis and substitutes available. Whereas, the
demand for a new product on the market is difficult to predict.
Demand estimation is highly dependent on the price of goods or
2. Price of Goods
services. The pricing policy and fluctuation in the present price can
give an idea of change in demand for that particular commodity.
3.
Competition A market consists of several organisations offering similar products.
Level This gives rise to competition in the market, which affects demand
forecasted by organisations. For example, reduction in trade barriers
increases the number of new entrants in a market, which affects the
demand for products and services of existing organisations.
 Factors involved in demand forecasting Demand Supply
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Level of Demand forecasting may be undertaken at three different levels:
4.
Forecasts

• At macro level, forecasts are undertaken for general economic conditions, such as
industrial production and allocation of national income.
• At the industry level, forecasts are prepared by trade associations and based on
the statistical data. Moreover, at the industry level, forecasts deal with products
whose sales are dependent on the specific policy of a particular industry.
• On the other hand, at the firm level, forecasts are done to estimate the demand of
those products whose sales depends on the specific policy of a particular firm. A
firm considers various factors, such as changes in income, consumer’s tastes and
preferences, technology, and competitive strategies, while forecasting demand for
its products.
 Factors involved in demand forecasting Demand Supply
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Psychological Psychological factors, such as changes in consumer attitude,
5.
Conditions habits, fashion, lifestyle, perception, cultural and religious
beliefs, etc. affect demand forecast of an organisation to a
large extent.
6.
Economic Play a crucial role in obtaining demand forecasts. For example,
viewpoint if there is a positive development in an economy, such as
globalization and high level of investment, the demand forecasts
of organizations would also be positive.
7. As far as the new products are concerned, methods and problems for forecasting
are quite different from products already established in the market as sales
trends are known better and the competitive nature is well known. Thus, the
methods and problems should be studied accordingly.
6. CRITERIA OF A GOOD FORECASTING METHOD
 Criteria of a good forecasting method Demand
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Supply
1. Accuracy: It is necessary to check the accuracy of past forecasts against
present performance and of present forecasts against future performance.
Some comparisons of the model with what actually happens and of the
assumptions with what is borne out in practice are more desirable.
The accuracy of the forecast is measured by –
a) the degree of deviations between forecasts and actual .
b) the extent of success in forecasting directional changes.
2. Simplicity and Ease of Comprehension: Management must be able to
understand and have confidence in the techniques used. Understanding is also
needed for a proper interpretation of the results. Elaborate mathematical
and econometric procedures may be judged less desirable if management does
not really understand what the forecaster is doing and fails to understand
the procedure.
 Criteria of a good forecasting method Demand
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Supply

3. Economy: Costs must be weighed against the importance of the forecast to

the operations of the business. A question may arise – How much money and
managerial effort should be allocated to obtain a high level of forecasting
accuracy? The criterion here is the economic consideration of balancing the
benefits from increased accuracy against the extra cost of providing the
improved forecasting.

4. Availability: The techniques employed should be able to produce meaningful

results quickly; techniques which take a long time to work out may produce
useful information too late for effective management decisions.
 Criteria of a good forecasting method Demand Supply
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5. Maintenance of Timeliness: The forecast should be capable of being

maintained on an up-to-date basis. This has three aspects:
a) The relationships underlying the procedure should be stable so that they will
carry into the future for a significant amount of time.
b) Current data required to use these underlying relationships should be
available on timely basis.
c) The forecasting procedure should permit changes to be made in the
relationships as they occur.