Demand Forecasting

• Demand forecasting involves predicting the future

demand of a good.
• Once the demand forecast is done then the manager will
have to plan for the raw material which will be required,
and labour and the machinery which will be needed to be
installed. The necessary finances will also be arranged.
• Forecasting is one the most important tasks that need to
be done by the managers in any business organization.
• A good forecast will avoid uncertainties and smoothen the
supply of the products in the market without shortages.
• A good forecast simplifies planning process
including the organization of production,
advertising and related expenditures and also
the organizational sales.
• Thus, it is very important for an organization
to have a prior knowledge of the market and
its size.
 The demand forecast for a good may involve the forecast of the
following:
i. Aggregate Demand for the Good: This involves a forecasting of
the total demand for the output of the good in the economy in
the future. It depends upon the level of gross GDP of the nation.
ii. Total Industry Demand for the Good: This depends on how some
of the major sectors in the economy perform and also overall
economic activity.
iii. An individual Firm’s Demand for the Good: This depends on the
forecast of the aggregate industry demand for the good and the
share of the firm in the industry’s output for the good.
 Demand forecasts can be the following:
a. Short– term forecasts which may usually be of one month or even for a
year. They are generally made for the established products. Produced
by a firm regarding the impact of Government policies and changes in
the firm’s own policies on the demand for the good.
b. Long-term forecasts which usually for a year or more than a year. These
may be for 5 years or even for 10 years. They are usually made for the
newly introduced products and the firm is required to do a careful long
term planning for the demand forecasting of newly launched product.

c. Demand forecasting is an important exercise for both the firms and the
industry and based on demand forecast, the future of the industry is
decided.
 Methods of Demand Forecasting
• Consumer Survey Methods
a) Direct Interview: In this method, a selected group of users or the potential users is
directly asked about their future plans for the good. This survey may be conducted in a
number of cities. The consumers may be asked about their demand for the product at
different prices and thus their willingness to buy the product at different prices.
b) Complete Enumeration: In this method, all consumers are required to give their
estimation of quantity demanded in future if there is an increase in the prices of the
product. The quantity specifies by the consumers are analyzed and calculated to
determine the total demand for the good.
Thus, D = D1 + D2 + D3 + D4 + …… Dn
c) Sample Survey: In this method, only a few consumers are selected from the relevant
market for the good. Their selection may be on random basis or through a sampling
method.
The consumers may be surveyed either through mailed questionnaire or direct interviews.
The questions asked may be related to their income, the demand and price of the product
whose demand is forecasted and the price of other competing goods.
 Expert Opinion Survey
a) Sales Force Survey : Assumption that sales
executives are in touch with the market and
they are familiar with the pulse of it.
b) Delphi Technique or Jury of Executive
Opinion: In this, an opinion of a group of
experts is taken about the future demand for
the products. Their views are put forward to
them and they are being asked to revise their
opinions till the consensus is arrived at.
 Market Experiments Method
• Controlled Experiments involving Customers who visit a Shop with
different brands of the good to make purchase by giving them a
particular amount of money to purchase.
• Their preferences are recorded in a questionnaire filled in by them.
• Test Marketing - selection of test area which represents market where
the new product is to be introduced. It may be in the form of few towns
or cities.
• The new product is introduced and the response is assessed.
• Different models of the new good may be introduced in different areas.
• The response in these different areas can be compared before taking final
decision about the demand forecasting of the good.
• Drawbacks: a) Expensive b) Time Consuming c) selection of area
d) Competitor response once good is enters the market
 Time Series Analysis
In this method, in the forecasting of demand for a good, a pattern emerges over a period a time. The data used to
predict the future demand for the good is primarily past data relating to the variable. This is b’coz the underlying
assumption is that the past behaviour of the variable influences the future behavior of the variable. However.
Some components bring about a change in the variable under consideration. They are:
I) Trends: These bring about an increase or decrease in the long term values of time series of a variable. For. E.g. a
change in tastes will influence the long term demand of the good.
II) Seasonal Variations : These occur due to changes in the seasons during the year., which bring about changes
in the long term values of the time series of a variable.
III) Cyclical variations: These involve substantial changes, which lead to expansion or contraction in the
variable. They are generally for more than a year and generally do not occur consistently every year.
IV) Random Fluctuations : after taking in to consideration trends, seasonal variations and cyclical variations, in
the time series analysis of a particular variable, changes which occur can be attributed to to random changes.
V) Econometric Methods: In econometric methods, statistical methods and economic theory are used in
conjunction to find a relationship between the economic variables.
First, using mathematical model relating the economic variable is arrived at. Then, with the help of statistical
tools, the estimates of the different parameters in the model are calculated and thus the demand forecasting is
arrived at.
Advantages: a) Impact of different strategies on variable can be evaluated. B) Different elasticities of demand
including price elasticity and advertising elasticity can be measured,.