Professional Documents
Culture Documents
differences in them call for a demand analysis restricted to an individual market segment, which
in turn would help a firm to manipulate the total demand. Hence, a A company/ industry would
be interested in the both these demands. Risk and uncertainty are involved in every decisionmaking process. The producer, manager or any decision-making authority should be aware of the
existing level of demand for the products being produced, and estimate the gap between demand
and supply. In a growth-oriented decision-making process, the manager decision-maker is
expected to know the changes that are expected to take place in the future demand. Such
knowledge would help to determine the targets to be achieved to match the future demand with
the available supply. Thus, the manager decision-maker, whether a firm or a state planning
agency, must not only estimate the present level of demand, but should also forecast the future
demand (Barla 2000).
The extent of objectivity and precision with which demand for a product is estimated and
projected for the future would determine the ability of a decision-making agent in dealing with
further uncertainties. For example, if there is a possibility of rise in the prices of petroleum
products, the automobile producers may plan to switch over to the production of smaller cars.
Such switch-over decisions need to be made on the basis of accuracy of demand forecasts. Thus,
major decisions in business enterprises depend upon forecasts of one kind or the other.
Stages in forecasting demand
Based on the scope of demand forecasting for a commodity, the following sequence is generally
adopted in projecting demand: (1) Specification of objective(s): Specification of the purpose of demand forecasts is the
foremost task in forecasting demand.
(2) Selection of appropriate technique: Next, selection of appropriate technique for the purpose
is important. If it is proposed to use regression method, the model has to be specified properly by
identifying the necessary variables and the nature of relationship between X and Yj.
(3) Collection of appropriate data: Collection of quality and adequate data for the demand
forecasting would determine the quality and reliability of results. Hence, the data collected
should also be representative.
(4) Estimation and interpretation of results: The results obtained through the analysis of
collected data, either manually or with the help of computers, should be interpreted carefully in
correspondence with the objectives examined.
(5) Evaluation of the forecasts: A model used for demand forecasting with objectivity, would
yield good results. The results, however, need to be verified by persons possessing professional
acumen and expertise.
Data and techniques of demand forecasting
A good set of data is required for the estimation of present level of demand and forecasting the
future demand. A private sector forecasts demand on the basis of past experience and the data
collected from various sources. Similarly, a public sector uses data collected by different
government and research agencies for the purpose. The following are some of the techniques
adopted for estimating the existing and future demands.
Demand Forecasting is the method of predicting the future demand for the firms
product. It is guess or anticipation or prediction of what is likely to happen in the
future. Forecast can be done for several things. It is based on the experience.
Information of the established good is available so the forecast can be based on this information. Two
basic methods of demand forecasting for the established goods are:
Interview and Survey Approach (for short period forecast): Interview and Survey Approach
collects information in the different way. Depending upon how the information is collected, we
have different sub methods as follows:
Opinion-Polling Method: This method tries to collect information from the customer
directly or indirectly through market research department of the firm or through the
whole sellers or the retailers. Consumers are contacted through mails or phones or
Internet and information regarding their expected expenditure is collected. This
method is useful when consumers are small in number.
Limitations:
Collective Opinion Method: Large firms have organized sales department. The
salesman has the technical training as how to collect the information from the buyers.
This information is further used for forecasting the demand.
Limitations:
Sample Survey Method: The total number of consumers for the firms product is very
large called as population. It is practically not possible to contact all the consumers.
Only few of them are contacted and this forms the sample. The sample forecasts are
then generalized for the whole population through advanced statistical methods
available.
Limitations:
Panel of experts: Panel of experts consists of persons either from within the firm or
from outside the firm. These experts come together and forecast the demand for their
product that is purely based on the judgment of these experts so they are less
accurate. But if based on the scientific method the forecast would be accurate.
Composite management opinion: The opinions of the experienced person within the
firm are collected and manger analyses this information. This method is quick, easy
and saves time, but is not based on the scientific analysis and thus may not give very
accurate results.
Projection Approach(for long period forecast): In this method past experience is projected
into the future. This can be done with the help of statistical methods.
Correlation and Regression Analysis: Past data regarding the factors affecting the
demand can be collected. It is possible to express this on the graph. This is a scatter
diagram.
Example: If we collect the past data about the sales and advertising expenditure of the
firm,
it is possible to express in the form of scatter diagram as shown below:
* *
*
*
* *
*
*
* *
*
* *
A
Sales
X
O
Advertisement Expenditure
In the above diagram we get the functional relationship as line AA. Here
Advertisement Expenditure is the independent variable and Sales is the dependent
variable. The relationship between these variables is correlation and the technique of
establishing this relationship is regression. In simple correlation we establish
relationship between 2 variables and more than 2 variables in multiple correlation.
Limitations:
Time Series Analysis: Demand forecasts for a period of 2-3 years are based on time
series analysis. It is similar to the correlation analysis. It is based on the assumption
that the relationship between the dependent and the independent variable continues
to hold in the future.
Indirect methods of forecasting are used to estimate demand for new products. Following are the
methods suggested:
Evolutionary Method: Some new goods evolve from already established goods. Demand
forecast for such new good is based on already established good from which they are evolved.
For example Demand for the color TV can be calculated from Demand for the black and white
TV, from which it is actually evolved.
Limitations:
The product should have been evolved from the existing product.
It ignores the problem of how the new product differs from the old
product.
Substitution Method: Some new goods are substituted of already established goods. For
example VCR substituted with VCD player.
Limitations:
New product may have many uses and each use has different
substitutability
When the substitute is added is added into market existing firm may react
by changing the prices.
Opinion Polling Method: Expected buyers and the consumers are directly contacted and
opinion about the product is directly taken from them. If the population is large then sample is
selected and results are generalized for the population.
Limitations:
It is difficult and costly to contact all the customers
Sample Survey Method: New product are first introduced in the sample market and the results
seen in the sample market are generalized for the total market.
Limitations:
Indirect Opinion Polling Method: Opinion of the consumers is indirectly collected through the
dealers who are aware of the needs of the customers.
Limitatios:
Limited Scope
Description
Qualitative Approach
Applicability
Considerations
Causal models
Techniques
Delphi method
Consumer market survey
Qualitative Forecasting Methods
Your company may wish to try any of the qualitative forecasting methods below if you do not
have historical data on your products' sales.
Qualitative Method
Jury
of
opinion
Description
Delphi method
Consumer
market The customers are asked about their purchasing plans and
survey
Description
Time
Series
Forecasting
Method
Assumes that demand in the next period is the same as demand in most
Nave Approach recent period; demand pattern may not always be that stable
For example:
If July sales were 50, then Augusts sales will also be 50
Description
Time
Series
Forecasting
Method
Moving
(MA)
Where
F t + 1 = the forecast for the next period
D t = actual demand in the present period
F t = the previously determined forecast for the present period