Demand Forecasting

Demand Forecasting
• Forecasting – is predicting what will
happen in future.
• Forecast is of three types-
1.Short term forecast
2.Medium term forecast
3.Long term forecast.
 Demand Forecasting
• Short term forecast – helps in
production scheduling, raw material
procurement and inventorying. It is
done for few months.
• Medium term forecast – is done for a
year & is used for budgeting.
• Long term forecast – is done for more
than a year & used for business
strategy.
 Demand Forecasting
• It is a process of estimating the
future demand or sales pattern of a
firm by taking into account the past
information, opinion of industry
observers & evolving consumption
pattern for a desired time period.
Role of DF in managerial
decision making
 Role of DF in managerial
decision making
c) Appropriate price policy – it can be determined
depending upon the anticipation of market demand
condition. It can also avoid an increase or reduction
in price.
d) Setting realistic sales target for sales person – If
targets are too high, it discourages the salesperson,
if it’s too low ,target can be easily achieved &
incentives given will be meaningless.
e) Forecasting financial requirement – cash
requirement depend on demand level & production
operations.e.g.productiton & advertisement.
 Role of DF in managerial
decision making
• Long term forecasting – covers a period of more than
one year. it includes –
a)Business planning – starting of a new unit or expansion
of an existing unit of production requires an analysis of
the long term demand potential.
b)Financial planning – long term DF are quite essential to
assess long term financial requirements for purchasing
machinery, raw material,R&D Program.
c)Planning manpower requirements – Training &
personnel development are long term propositions
,taking considerable time to complete.
 Measures of market
demand
• Market demand
– The marketers first step in evaluating
marketing opportunity is to estimate total
market demand
– Market demand for the product is the total
volume that would be bought by target group of
customers in a target geographical area in a
specific time period
• Market forecast
– Only the minimum level of industry marketing
expenditure and efforts will actually occur
– The market demand corresponding to this level
is call the market forecast
 Measures of market
demand
• Market potential
– It is the highest limit approached by
market demand as industry marketing
expenditure approach infinity for a given
marketing environment
 Measures of market
demand..
• Company demand
– It is the company’s estimated share of market demand at
alternative levels of company marketing efforts in a given
time period. This share will depend on how its products,
services, prices, communications are perceived by
consumers relative to the competitors
• Company sales forecast
• Related to company sales forecast, there are two additional
concepts involved. First is sales quota which is the sales
goal for a product line, company division or sales officer.
Sales quota are slightly higher than estimated sales to
stretch the sales force efforts.
 Measures of market
demand..
• Second is the sales budget which is the
conservative estimate of the expected volume
of sales and is used for making current
purchasing, production and cash flows
decision. Sales budget are generally set
slightly lower than the sales forecast
• Company sales potential
– This is the sales limit approached by company’s
demand as the company’s marketing efforts
increases relative to that of competitors.
 Characteristics of good
demand forecasting methods
• Eight major characteristics can be identified with
forecasting methods to identify key
characteristics of good demand forecasting
methods
1. Time horizon – the length of time over which a
decision is being made has a baring on the
appropriate technique to use depending on the
time i.e. short and long DF can be measured
2. Level of details – The level of detail needed
should match the focus of decision making unit
in the forecast
3. Stability – Forecasting in situations that are
relatively stable over time requires less attention
than those that are in constant flux
 Characteristics of good
demand forecasting methods
4. Pattern of data – As different forecasting
methods vary in their ability to identify
different patterns it is useful to make the
pattern in the data fit with the method that
suits it the most
5. Type of model – Other assumptions are also
made in each forecasting technique that must
fit the situation under consideration
6. Cost – Several costs are associated with
adapting forecasting procedure within an
organization like managerial development,
storage, operation and opportunity in terms of
other techniques that might have been applied
 Characteristics of good
demand forecasting methods
7. Accuracy –
It is measured by the degree of deviation
between past forecast and current actual
performance or present forecast and future
performance
8. Ease of application –
Models must be chosen within the abilities of the
user to understand them and within the time
allowed for using them
 Steps in demand
forecasting
• Demand forecasting is a scientific exercise. It has to go
through a number of steps. These steps present a
systematic way of initiating, designing and implementing
a forecasting system.

1. Identification of objective – Depending on the type

of forecast i.e. short and long, objective can be identified

2.Nature of the product and market –

Whether the product is consumer good or producer
good, perishable or durable, analyzing the demand for
finished goods, demand for corresponding raw material
and intermediate goods should also be analyzed.
 Steps in demand
forecasting
Perishable commodities such as
fresh vegetables and fruits can only
be sold over a limited period of time

3.Determinants of demand – It
depends on demographic ,
psychological factors
 Steps in demand
forecasting…
4. Analysis of factors – Statistical demand function is
classified into four factors.
a. Trend factor
b. Cyclical factor
c. Seasonal factor
d. Random factor
4. Choice of method – The economist has to choose
a particular technique from among the various
techniques of demand forecasting depending
upon the nature of product
5. Testing accuracy – The testing is needed to avoid
the margin of forecasting error and thereby to
improve decision making
 Methods of demand
forecasting
Forecasting method

Survey Method
Statistical Method
Collectiv Delphi Market Time
e metho experime Regressio
sumer series
opinion d nt n analysis
analysis
method method
Semi Moving
Graphic Least
averag averag
al square
e e
method method
method method
 Methods of demand
forecasting
• Survey method – Under this approach surveys are
conducted about the intention of consumers, opinion of
experts or of markets
• These methods are usually suitable for short term
forecast due to the nature of consumer intention
• By using this method, a firm can ask consumers what and
how much they are planning to buy at various prices of
the product for the forthcoming prices usually a year
 Methods of demand
forecasting
Merits
• It is a direct method of assessing information from the primary sources
– It is a simple method as it is not based on past historical records
– It saves time and cost by conducting surveys
– It does not introduce any bias or value judgment particularly in the census method
–
 Methods of demand
forecasting
• Demerits
– Many a times consumers are not answering
to the questionnaire
– It becomes difficult for a firm to ascertain
number of consumers that intend to buy
from that firm
– Utility of these estimates is limited to a
period of about one year
– There may be sampling error if the sample is
not properly chosen
 Methods of demand
forecasting
• Collective opinion method Under this method salesman or
–

experts are required to estimate expected future demand of the

product in their respective territories and sections
• Merits
– The method is simple and does not involve the use of statistical
techniques
– The forecast are based on the knowledge of salesman and are
directly connected with sales
– The method may prove quite useful in forecasting sales of a new
product

• Demerits
– Completely a subjective and can influence the forecast
– Restricted to short term forecast
– Salesman may be unaware of the broader economic changes
likely to have an impact under future demand
 Methods of demand
forecasting
• Delphi method – It also uses opinion of the
experts to come to a logical conclusion
regarding future demand
• Merits
– It facilitates the maintenance of respondents
identity throughout the discussion
– This method renders it possible to pose the problem
to the experts at one time and have their response
– This technique saves time and other resources
• Demerits
– It is a tedious method
– Too conceptualized for discussion, generate
considerable thinking and stimulate dialogue
 Methods of demand
forecasting
• Market experiment method – Under this method the main
determinants of demand of a product like price,
advertising, packaging, quality are identified
• Here the market divisions must be homogeneous with
regard to income, population, caste, religion, sex, age,
tastes, preference
• Merits
– It is a carefully carried out exercise which helps researcher to
come out with a demand function indicating quantities
– This method can be used to check the results of demand
forecasting obtained from other methods
 Methods of demand
forecasting
• Demerits
– These methods are expensive and time
consuming
– These methods are risky as they might
send wrong signals to the consumers,
dealers and competitors
– It is difficult to satisfy the conditions of
homogeneity
 Methods of demand
forecasting
• Statistical method – These methods make use of historical
data as a basis for quantitative relationship to arrive at
future demand patterns and trends
• These are useful for long term forecasting
– Time series analysis – Most of the variables in business,
economics and commerce be it a series related to price,
production, consumption, national income, foreign trade, foreign
exchange reserves, investment, sales are all the time series
data spread over a long period of time
a.Trend – Population, capital, technology
b.Seasonal variation – Short term, cyclic fluctuations
 Methods of demand
forecasting
c. Cyclical variations – The length of the cycle is generally
longer than one year. Cyclical variations are affected by
swings in general economic activity where in recovery and
boom are followed by recession and depression
d. Residual variation – These are disturbances due to
unforeseen future events such as weather conditions,
illness, strikes, transport breakdown etc
• Depending on nature, complexities and extent of the
analysis required, there are various types of models to
describe time series data
 Methods of demand
forecasting
• Graphical methods – This method gives
the basic method of series to grow,
decline or remain steady over a period of
time.
• This method is useful in forecasting
India's population, demand for cement,
textiles, steel, paper where the future is
not too much different from the average
of past. This period of time in the trend
analysis is always a long time period
 Methods of demand
forecasting
• Semi average method
– According to this method the data is divided into
two parts preferably with the same number of
years. The average of the first and the second part
are calculated separately. These averages are
called as semi averages
• Moving average method
– When time series analysis does not reveal a
significant trend of any kind, the moving average
method may be used to smoothen the series
– This is very simple and flexible method for
measuring trend
 Methods of demand
forecasting
• Least square method – The principle of
least square provides an analytical tool
to obtain an objective fit to the trend of
the given time series
• Regression analysis
– It is perhaps the most popular method of
forecasting.
– It is mathematical analysis of the average
relation between two or more variables in
terms of the original units of data
 Demand forecasting of a new
product
• Projecting demand for a new product is different
from those of established products
• This requires an intensive study of an economic
and competitive characteristics of product
• Forecasting methods need to be tailored to a
particular product
1. Product lifecycle analysis – Many products generally
have a characteristics known as perishable
distinctiveness. This means that a product is distinct
when it degenerates over the years into a common
product.
This innovation of new product and its degeneration
into a common product is termed as the life cycle of
the product
 Demand forecasting of a new
product
2. Introduction
3. Growth
4. Maturity
5. Saturation
6. Decline