|




It is an estimation of a situation in future. Business enterprises are
interested in sales forecasts to make plans for the future. Since
future is uncertain, no forecasts can be cent percent correct.

Meaning
Demand forecasting means estimation of projected demand and
production of the goods in question on the forecast period.
Forecasting at different levels
1. Macro level : Concerned with the whole economy. E.g. national
income, agriculture production, industrial production for the
whole economy.
2. Industry level : It is carried out by the industrial associations.
E.g. demand for different cars or total demand for the cars for
the country as a whole.
3. Firm level : It is carried out by the firms for their products.
 Forecasting steps

1. Identifying the objective : Demand forecasts are attempted to

achieve certain objectives. E.g. change in fashion, taste, rival¶s
policy , change in Population, change in composition of population,
etc.
2. Type of forecasting : It is essential to determine whether micro level,
macro level, short term, long term , active or passive forecasting to
be undertaken.
3. Demand patterns : Different goods have different demand pattern.
E.g. consumer goods, durable goods and non durable goods.
4. Determinants of Demand : To determine the price of the product,
price of the related product, consumer¶s income, demographic,
social and psychological factors etc.
5. Selection of correct method of forecasting : Appropriate method of
forecasting is essential for efficient forecasting. E.g. methods of data
collection, market research, period of forecast etc.
6. Analysis of results : Research analysis, data analysis and their
evaluation are important steps in demand forecasting.
7. Testing accuracy : It helps to reduce the margin of error and
improve validity for the purpose of decision making. Statistical and
Econometric methods are used.
 Types of Demand Forecasting

± Passive and Active Forecasts : Passive forecasts try to

predict the future situation with the existing actions or policies of the
firms. E.g. Electrolux Refrigerator wants to find out
demand for its product in the future i.e. in 2009,2010 in
the context of existing policies. If the forecasted sales given by
passive forecasts are low, the company may take new actions such as
advt. promotional campaigns etc.
On the other hand if a company¶s forecast is based upon new actions or
policies, it is called active forecast. E.g. a firm is trying to
manipulate demand by changing price, product quality
etc. Both are important but active is more useful.
 Forecasts for total Market and for Market
Segments.
± Planning commission or car manufacturer¶s
Association may forecast the total demand for all
cars in the county as well as demand for different
cars such as Zen, Indica etc. it is the demand for
total market.
While forecast carried out for international, state,
local and regional level is demand forecasting for
segments.
 Forecasts for firm and Industry demand

± Example ; Planning commission or cement

manufacturer¶s Association forecasting the
demand for cement is industry demand.
While forecasting demand for cement
produced by different companies is firm
demand.
 Short term and long term Demand Forecasting

± Monthly, quarterly, Half yearly or yearly forecast

to avoid over production or underproduction is
short term forecast. It helps the firm in decision
making within the limited resources and available
capacity.
On the other hand long term forecasts are
undertaken to find out the viability of establishing
a new unit or expansion of existing business. It
also helps in the introduction of improved
technology or machines.
 Macro level and Micro level Forecasts

± Macro level forecasting is used to find out the

demand for essential commodities like sugar,
edible oil etc. for the economy as a whole. It helps
the Govt. to keep the price and production under
check. Also National Income, Investment, general
price level etc. Example: Minimum Support Price
for agricultural commodities.
On the other hand Micro level forecasting is
undertaken by firms and industries for
managerial decisions. Example: Demand for
different variety of crackers during Diwali.
 2
 
   |

 
 

± Production Scheduling ° Once the future demand is

estimated, the firms will have enough time to plan and execute the
production to meet that demand. If production is short of demand or
exceeded the demand, firms may not be able to attain their objectives.
For this purpose firms have to plan and maintain proper production
schedule to meet expected sales.
± Planning future needs ° Future planning for the requirements
of raw materials, equipments, machinery, manpower, buildings etc.
helps in reducing cost of production. It also helps in better planning
and allocation of resources.
± Price Policy : It helps in determining an appropriate price policy.
The firm can avoid fluctuations in prices by accurate forecasting.
 Contd«..

± Sales promotion Programmes : Suitable advertising and

promotion Programmes helps in evaluating the performance of
salesmen and other sales promotion measures. Hence planning of sales
promotion programmes enhance the sales of the product.
± Financial requirement : Sales forecasts help in planning and
arranging the future requirements of finance. Also helps in availing
the finance on reasonable terms.
± Planning of a new unit : It is helpful when a new plant is set
up or when new production has a long gestation period. In such cases
short term review of events from time to time is necessary.
± Reduces uncertainty : The working of the firm is affected by
number of uncertainties about the future, hence forecasting is a good
means to plan production.
± Investment Planning : When a firm wants to make long term
investments on the projects, investment planning is very essential.
 Methods of Demand Forecasting

There are two approaches to demand forecasting,

namely survey method and statistical method.
Survey methods are known as qualitative methods
which are largely subjective. On the other hand
statistical methods provide more analytical and
accurate results. The survey methods or direct
method is more suitable for short term forecasts.
On the other hand statistical method or indirect
method is suitable for long term forecasts.
 |

   


I. Survey Method II.Statistical

or or
Direct Method Indirect method
a. Consumer Survey a. Time series
(I)Moving average method
(i) Complete Enumeration (ii) Least Square method
(ii) Sample Survey

b) Expert Opinion b)Econometric Models

(i) Simple or weighted average
(ii) Delphi method
C) Market Experimentation method.
 Experimentation in Laboratory.
 Test Marketing.
Survey Method :
a. Consumer Survey : This is the direct method of
estimating demand in the short term. On this basis
intentions of the consumers regarding their future
plans, buying habits, their preferences, attitudes
towards substitute products, effectiveness of sales
promotion measures and many other questions
pertaining to market research and demand forecasts
are collected. The information is collected through
questionnaires. Sometimes personal interview method
is also used to collect the information. On the basis of
the information collected management of the firm can
take help of experts and economists to construct
demand functions and determine the variables
influencing the demand.
2 
  
  


   


  

 
 
     

  
 
 
    



  
     

   
 





 !  "
 

 
   
 

 
 

"

  
 
II. Sample Survey : Under this method only a few selected
consumers are approached for enquiry. The sampling
technique reduces expenses and facilitates the
researcher to tabulate and analyze data in scientific
manner.
b. Expert Opinion : It involves seeking the opinion of
experts on the subject matter. These experts are the sales
force and salesmen. These people are knowledgeable
persons about market behavior. The wholesalers and
retailers provide their information regarding consumers,
their repeat purchases and their reactions at the time of
buying the product and its substitutes. Under this method
the salesmen, wholesalers and retailers are requested to
report the head office regarding their expected sales in their
territories. Generalizations are made on the basis of this
information collected. The result is based on the collective
wisdom of the top sales executives, marketing manager and
the economists.
This method is relatively cheaper and easy to handle as the
number of persons involved in the method are less and
reliable. It is less time consuming too.
 (I) Simple or weighted average : When the number of
respondents are more the simple or weighted average
of the numbers assigned by experts will be used. This
is called simple and weighted average method. The
results are to be supplemented by the executive¶s
opinion and judgment.
(II) Delphi Method : In this method participant¶s views
are obtained through questions. The participants are
not on a common platform, therefore one is not
influenced by others. The experts are given
opportunity to present their views and react to the
opinion of others. However opinions of the experts may
influence the forecasting and the result may not be
scientific.
C) Market Experimentation method :
± Experimentation in Laboratories : This is also called clinic method.
Consumers are given some amount of money and asked to buy certain
items. On the basis of their buying behavior inferences are drawn.
This is an expensive and time consuming method.
± Test marketing : Under this method market experiment is made based
on the actual market conditions. The market is selected and
segregated from others. The business firm conducts experiment in
this target market under controlled environment by varying the
important determinants like price of the product, packaging and
advertisement etc. This enables the marketing manager or the
researcher to assess the effectiveness of these changes on the consumer
from their buying behavior.
This method can be more effective when market experiments are
conducted on a large scale. However this method is expensive. Also,
consumers may show different reactions to the changing market
conditions.
O
 


  

a. Time series : It is a simple and widely used method used to
project future demand and sales. It serves the purpose of
determining the future sales by plotting the visual data on a
graph showing time along the X-axis and the variable like sales
along Y-axis.
2    
# 

    
 


 

  
    
   "  
  

 
 
       


  
$  
22 % 

 
# 

     




    

    
 


   &' 
     ('
 
    
()*&"  &
   
 (
    +   
 



 
  

 



 

  
 


 
 b)Econometric Models
K  
 






 

 
 
 


 
 K