TERM PAPER ON QUALITATIVE METHODS OF DEMAND FORECASTING

WHAT IS DEMAND FORECASTING

Forecasting customer demand for products and services is a proactive process of determining what products are needed where, when and in what quantities. Consequently demand forecasting is a customer focused activity. Demand forecasting is also the foundation of the companys entire logistics process. It supports other planning activities such as capacity planning, inventory planning, and even overall business planning.

Demand Forecasting
When a product is produced for a market, the demand occurs in the future. The production planning cannot be accomplished unless the volume of the demand known.

The success of the business in supplying the demand in the most efficient & profitable
way will then depend on the accuracy of the forecasting process in predicting the future demand.

WHY IS DEMAND FORECASTING IMPORTANT

Demand forecasting is one of the most important aspects of managing a business. Finding the right balance of supply and demand allows a company to produce enough to meet the demand of its customers. If the company overestimates demand, it runs the risk of producing too much, leaving it with unsold merchandise. If the company produces too little, it runs the risk of not meeting demand and losing sales.

Overestimating Demand

A company loses money when it produces too much because it overestimates demand. Without the demand to buy its products, the company's sales decline. Because it uses its resources, it spends money for unfulfilled demand. With too much supply and little demand, the company may have to sell its inventory at a discount, reduce staff or both.

Underestimating Demand

Likewise, a company that underestimates demand loses money as well. In underestimating demand, the company committed too little resources to production. Without adequate supply, the company's customers may flock to its competitors. As a result, sales suffer, with the company failing to realize its full earnings potential. Even if the company increases production to meet the demand, it may be too little, too late if competitors manage to steal market share from the company.

HOW DO COMPANIES USE DEMAND FORECASTING

A sales demand forecast is an estimate of sales at some point in the future. Forecasting future sales helps business managers determine how many units to create and distribute. Forecasting is also vital for determining sales quotas. Demand forecasting methods may be either qualitative (subjective opinions) or quantitative (objective numbers). Sales managers often use a balance of both methods, tempering analytical equations with qualitative expert opinions.

Selection of a forecasting method

- A single organization may use several different forecasting methods to anticipate the future of its various actives. It also will likely use different methods during the life cycle of a single product. The selection may depend on any or all of the following factors: 1. Availability and accuracy of historical data. 2. Degree of accuracy expected from the prediction. 3. Cost of developing the forecasting.

4. Length of the prediction period. 5. Time available to make the analysis. 6. Complexity of factors affecting future operations.

ADVANTAGES OF QUALITATIVE FORECASTING

Predictive Ability:
The main advantage of qualitative forecasting is its ability to predict changes in sales patterns and customer behavior based on the experience and judgment of senior executives and outside experts. Management can use the qualitative inputs in conjunction with quantitative forecasts and economic data to forecast sales trends. Quantitative forecasting uses past results to predict future trends, while economic data includes short- and long-term interest rates and unemployment levels. For example, if the economy is expected to decline in the short term, a small business owner may rely on his own experience and that of his senior sales staff to estimate a small decline in sales next year.

Flexibility:
Qualitative forecasting gives management the flexibility necessary to use non-numerical data sources, such as the intuition and judgment of experienced managers, sales professionals and industry experts. This can improve the quality of a forecast because quantitative data cannot capture nuances that years of experience can detect. For example, if a small business is planning to open a new store, the quantitative data may show strong historical sales trends for the area. However, due diligence may indicate that recently approved zoning changes for a new shopping mall could have a significant impact on sales going forward, which would make the new location unacceptable. Management could then use its collective judgment to go ahead with the expansion, delay it or scale it back.

Ambiguity:
Qualitative forecasting is useful when there is ambiguous or inadequate data. For example, a start-up technology company developing a new software application will not have historical data for any kind of quantitative analysis. It can use results from comparable companies and estimates of market size to predict future sales, but it is the judgment and intuition of the founders that will guide most of the key decisions. Large companies may have the resources to conduct focus groups and field tests to design and fine-tune their new products, but their sales forecasts are still going to need qualitative inputs.

DISADVANTAGE OF QUALITATIVE FORECASTING

The qualitative method of forecasting has certain disadvantages, such as anchoring events and selective perception. Anchoring events mean that forecasters allow recent events to influence perceptions about future events. For example, a retailer may have received an unusually large order this year, which is unlikely to repeat next year. Selective perception means that forecasters ignore relevant information that may conflict with their view of how the future will unfold. For example, a restaurant owner may decide to ignore the entry of big-box retailers and grocery stores into his forecasts, assuming that their in-house restaurants and ready-to-cook meals will have no impact on future sales.

QUALITATIVE METHODS OF DEMAND FORECASTING BUYERS INTENSION SURVEY EXPERTS OPINION METHOD

DELPHI METHOD TEST MARKETING

SALES FORCE COMPOSITE EXECUTIVE METHOD

BUYERS INTENSION SURVEY:

Also known as the buyer's intentions method of forecasting, the user expectations method relies on answers from customers regarding their intent to purchase the product during the forecasting time period. This method works best when attempting to estimate current market potential as well as to forecast demand, because it does not take into account the company's marketing and advertising efforts which may affect consumers' intent to buy. The failure to account for future marketing efforts leads to a forecast that's somewhere in between current market potential and total sales forecast.

Employs sample survey techniques for gathering data. Data is collected from end users of goods- consumer, producer, mixed. Data portrays biases and preferences of customers. Ideal for short and medium term demand forecasting.

ADVANTAGES:
Helps in approximating future requirements even without past data. Accurate method as buyer needs and wants are clearly identified. Most effective way of assessing demand for new firm.

EXPERTS OPINION METHOD:

Forecasters using the executive opinion or expert opinion, method poll executives or experts from within the company and ask their opinion on the optional sales for the given forecasting time period. The forecaster will then average the individual judgments or try for a group consensus. Executive opinion polls are often used to verify (or invalidate) other qualitative methods, especially sales force composites

Panel of experts in same field with experience and working knowledge. Combines input from key information sources. Exchange of ideas and claims. Final decision is based on majority or consensus, reached from experts forecasts.

ADVANTAGES:
Can be undertaken easily without the use of elaborate statistical tools. Incorporates a variety of extensive opinions from expert in the field.

DELPHI METHOD:
The Delphi technique can be applied to any of the listed qualitative methods. The Delphi technique uses group dynamics, debate and anonymous feedback to refine opinions and create more accurate demand forecasts. First, qualitative forecasts are collected and combined into an anonymous summary. The summary is passed out to the initial participants, who debate the validity of the summary until a consensus is achieved. The debate findings are incorporated into the original anonymous summary to create a complete demand forecast. Very similar to jury of executives method but this time members are both inside and outside the company Members do not know each other and never come together. A moderator from company organize all the contacts Moderator prepare data and send it to members to make their own estimate Members send their estimate to moderator as a written form and moderator makes analysis on estimates and form a new data set and conditions and send back to members for further estimate This will continue until all members agree on same forecast. (it is suitable for long-term forecasts).

ADVANTAGES:
Eliminates need for group meetings Eliminates biases in group meetings.

Participants can change their opinions anonymously.

Test Marketing:
This research method is heavily preferred when company offers a new product to the market (innovation). Before offering product to the market, marketers need to get some real feedback from market.

Marketer choose a specific region or a store to test the product in real market conditions.

Advantage:
Provide real feedbacks about customers reactions and make estimates upon that.

 Sales force composite:

Marketers have sales managers or representatives at different sales territories (districts/region) and marketers believe that sales managers know their territory better than anybody else. Marketers ask respective sales manager to forecast expected sales in their own territories. The total of all these estimates basically gives companys sales/demand forecast for next period

Executive method (jury of executive method):

Company forms a committee to make forecast from members from different departments (marketing, accounting, R&D, production) Make their own forecast and send to committee at a written form

Committee members came together and discuss forecasts and agree one of the estimates or come up with a new estimate for whole company.

Advantage:

easy and simple to use.