DEMAND FORECASTING

Meaning:
Demand Forecasting refers to predicting the possible demand for a firms product for a future period of time It is one of the most important functions of a manager

WHY IS IT NECESSARY?
1. Future is unknown and uncertain but managers have to make plans for future levels of production in the present 2. Functions such as ordering and installation of machinery, employment of skilled labour, arrangement of funds can be done efficiently only when future demand is known

3. Good forecasting of Demand reduces the uncertainty of environment in which business decisions are made
Forecasting is required by big established firms in order to meet the market demand for their product. It is also required by new firms to get a better understanding of the market

4. One of the most important reasons for Demand Forecasting is to calculate the rate of return on capital investment Capital investment yields returns over a period of time. It is by comparing the rate of return on capital investment with the current rate of interest that decisions regarding capital investment can be taken

TYPES OF DEMAND FORECASTING

1. Short Term Forecasting:

This is usually done for a period of up to one year. They are usually made in order to know the effect of the current policies of a firm relating to relative price, advertising outlay, product model and of changes in governments fiscal or monetary polices etc

For this purpose, the opinion of experienced and well informed persons may play a very important role
Short term forecasts of demand are usually made for the established products of the firm

2. Long Term Forecasting:

Long Term forecasts are for a period of more than a year. They may range for a period between 2 to 20 years. They are usually made when a new product is to be launched

The introduction of new products requires a large amount of capital investment and hence, in order to calculate the returns on capital investments more accurate forecasts are needed.

Therefore in long term demand forecasting, more sophisticated techniques such as statistical and econometric models are used

METHODS OF DEMAND FORECASTING

1. Consumer Survey Method

This is a direct method of obtaining data about future demand for goods Usually used for short term forecasting Surveys usually involve conducting consumer interviews, or sending mailed questionnaires to consumers and collecting data

A survey indicates intentions of consumers about their future spending on consumer goods
Generally surveys are made by firms when they wish to launch new products in the market There are two types of surveys:

a) Complete Enumeration:
Just like in population census, in this method, ALL consumers of a product are asked questions about quantity of a product they would buy in future in case of any changes in its price or other properties Questions are asked to see consumers reactions to changes of any kind in a firs product

MERITS:
A very accurate method of forecasting No place for bias or prejudice as universe itself is the sample Demerits: Very Expensive and Time consuming Method Extremely complicated and cumbersome

b) Sample Survey Method:

Only a few consumers are selected and data is collected with the help of interviews or questionnaires The data collected is applied to the entire universe

Merits:

Saves time, energy and money

Demerits: May not give very accurate results Process of sample selection is very difficult Scope for personal bias and prejudice

2. Expert Opinion Method:

a)Delphi Technique Opinion of a number of experts is taken separately. Then reviews are exchanged and revisions are made till a single prediction is obtained.

Merits: Does make use of the experience and knowledge of people in the field
Demerits: Time consuming Expensive Cumbersome Ego Clashes between experts

b)Survey by sales force:

An alternate method for sample survey Sales people are closest to the market and therefore the consumers Hence opinion of consumers can be easily obtained

Merits:
Saves time and Money Can be done easily without extra cost Can be used for increasing self motivation of sales personnel by setting targets for them

Demerits:

Sales representatives may not provide accurate forecasts as they are not trained for research Element of bias and prejudice
May give too optimistic forecasts to impress the management or too pessimistic forecasts to get higher payments for exceeding the targets

3. Market Experiments:
a) Test Marketing: First step is to select a test market area which accurately represents the whole market Then the product can be introduced in that area and reactions of consumers can be recorded. Finally based on this decisions regarding production sales etc.. Can be taken

Merit:

This method is based on actual consumer behavior and not on their intentions and hence has an edge over survey method

Demerits:
Choice of test market very crucial Time and energy and money consuming technique Consumers may end up behaving differently from what they have at the time of the experiment

b) Controlled Experiments:
This is an alternative method to test marketing A group of consumers are taken to a store where various brands of a product are offered for sale They are asked how much of which brand they would buy at different prices and their responses are recorded

Then they are provided with advertising material

After this they are given a fixed amount of money and asked to make purchases

Their behavior is then recorded again and they are asked to justify their decisions

Merit: Likely to provide more accurate results than survey method

Demerits: Consumers may not respond accurately if they come to know that they are part of an experiment Time consuming and expensive

4. Time Series Analysis:

a) b) c) d) Trends Seasonal Variations Cyclical Variations Random Variations