Demand forecasting occupies a very important place in

business planning.
If any firm collects information for understanding/knowing

the current demand is known as demand estimation (within a year). known as demand forecasting (above one year/next five years/ten years/more).

Whereas, if the firm is interested to about the future demand is

Two types of Demand Forecasting exist: Passive - prediction without positive action. Active prediction with positive action.

Importance/Purpose of Demand Forecasting (DF)

Demand of the product is an important activity of the firm to avoid over production/underproduction.

Short Term: Helps to formulate appropriate production policy. To reduce the cost of raw materials and control inventories. To determined appropriate correct price policy and fix sales targets. To arrange for short-term financial requirements.

Long Term: Plan for a new unit/expansion of existing unit. Plan for product diversification (changes). To plan for long term financial requirements-equity capital bonds debentures, etc. To plan for manpower requirements.

Factors considered for DF:

Time period.
Level of DF: macro, industry / firm. Nature of DF. Nature of Product. Nature of competition. Selection of appropriate method. Interpretation of the results obtained.

Methods of DF:
Direct methods:
Consumer survey method. Experts opinion /collective opinion method.

Controlled Market Experiments method.

Indirect methods: Trend projection method.

Test marketing method.

Economic Indicator method.

Direct methods
Consumer survey method (CSM): Survey of buyers intentions-done through personal interviews, mail/postal survey, telephonic interviews. Questionnaires quality, design, packing, etc. Done through trained, reliable and experienced investigators. Simple and easy can explain the product and note down the opinion directly.

Sub-types of consumer survey are (CSM):

Complete enumeration survey : Aggregate of potential buyers-probable demand. Adv: All can be contacted-accuracy-useful for new products. Disadv: Expensive and time consuming when consumers are spread over large area. Sample survey: Popular in DF. Few customers selected randomlyinterviewed average of demand is calculated. Multiply the average with total consumers for aggregate demand. Adv: less costly and less time consuming- accuracy depends upon investigators and experts. Disadv: Very often inaccuracy results- developing countries-no

experts.

 Limitations of CSM:
Expensive and time consuming. No personal meeting-no explanation- though

costless in mail/postal-no correct information. No telephonic interview in UDCs/DCs. Not possible long questions. Only in producers goods, not in consumer. Goods.

Experts opinion /collective opinion method (EOM)

DF is based on expert opinion. Certain categories knowledge of the market and the

possible consumers response of the market contacted. Example: Sales man, Market Consultants, Professional experts, marketing managers, etc. Give information on changing trends-reactions to changes, prices, quality, etc. Data collected, compiled, tabulated, computerized and DF trends are drawn for the product-Use QT- accuracy.

 Adv of EOM:
simple- less costly-forecast the current demandshort run. Useful when introducing new productknowledge of experts will help. Disadv of EOM: Biased-no knowledge-incorrect information. Cannot predict about the changes of other factors of demand.

Controlled Experiments Method (CEM):

This includes study of only particular factor of demand. One factor-experiment is conducted-other factors

remaining

constant- consumer behavior. Example: price reduction-sales at different prices in different markets-response of buyers/ Advertisement campaign and sales in different markets Sales promotion schemes and sales in different markets, etc. Adv of CEM: Study of different market conduct. Limitations of CEM: Very expensive- time consuming- extended over a period of time-compelled to observe other impact (quality change/other variable)Risky-needs homogeneous market/areas (common background, tast, preferences, etc) Unpopular in UDCs, Less followed in DCs.

Indirect methods
This is also called as Statistical Methods.

Trend Projection Method (TPM):

Past data/information is used to project the future sales. Need for gathering past information-use of statistical

data-regular intervals (different points of time)-time series data. For sales, production, imports, exports, etc at least 5 years. New firms-similar data from other established firms in the same industry-project its sales.

 Adv of TPM: simple and easy- less expensive.

Limitations of TPM: Only predict the demand- not the

exact quantity- based on market experts opinion sales forecast may be false. Based on the assumption- past will be followed in future. Will consumer demand the same product? Not possible for new product. TPM is used only in well established companies who have a long record for remaining in the business.

Test Market Method (TMM):

Useful for DF that is demand potential of new product. Introduced in certain limited area/market/city responses and

reactions of the consumers. Positive and encouraging-launch in full scale.

Adv of TMM: Advance response of the product in the market help

in quality changes-knowledge of consumers taste and preferenceuseful for new products. Limitations of TMM: Expensive and time consuming-no immediate response-no guarantee that the same will prevail in all the marketsrival firms will not allow to do test market or establish the new product.

Economic Indicator Method (EIM):

An economic indicator is selected and then Demand is forecasted. Example: Percentage of old People/percentage of small babies/youths/females/in total population. Adv of EIM: Most reliable of DF. Limitations of EIM: Difficult for new productscorrect economic indicator is necessary.

CRITERIA for Good DF:

Accuracy (correctness).
Simplicity (simple). Economy (beneficial). Effective (meaningful results). Durability/Flexibility (Permit changes). Maintenance of timeliness.

Steps in Demand Estimation

Different forecasts (different products)

For New Products. For Non-durable products.

For Consumer Durables.

By Dr. Thirumagal Pillai