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
• Short term forecasting may cover a
period of few months depending on
the nature of the business. It is useful
in following ways-
a)Appropriate production scheduling – the
firm can avoid the problem of
overproduction & the problem of
short supply by estimating seasonal
variation in demand.
b)Suitable purchase policy – it helps in
reducing the cost of purchasing raw
material & controlling inventory by
determining it’s future resource
requirement.
 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 &
 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
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
 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.
2. 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
5. 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
6. 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


n su m Collective
er opinion
Delphi method
Market Time series analysis Regression analy
experiment method

method



Graphical method
Semi average method
Moving average method
Least square me
 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
 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
 M e th o d s o f d e m a n d
fo re ca stin g
• 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


 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
 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
 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
 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
 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
 Demand forecasting of a new
product
2.Introduction
3.Growth
4.Maturity
5.Saturation
6.Decline
7.