Demand forecasting

Definition
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Demand forecasting is an estimation of

demand for the product for a future period. Demand forecasting is the scientific and analytical estimation of demand for a product (service) for a particular period of time. It is the process of determining how much of what products is needed, when and where.

Categorization of demand forecasting

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Firm(Micro) Level: Forecasting of demand for its product by an individual firm Decision related to production and marketing Industry level: For an product in an industry as a whole Insight in growth pattern of the industry In identifying the lifecycle stage of the product Relative contribution of the industry in national income.

Economy(macro) level: Forecasting of aggregate demand(output) in the economy as a whole. Helps in policy making

Importance of demand forecasting 5

1) Production planning

2) Sales forecasting
3) Inventory control 4) Growth and long term investment

programme 5) Stability 6) Economic planning and policy making

Short term forecasting

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1) Sales policy
2) Price policy 3) Purchase policy

4) Sales target
5) Short term financial planning

Long term Forecasting

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1) Business planning 2) Manpower planning

3)Long term financial planning

Components of demand forecasting

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1) Nature of forecasts
2) Nature of product 3) Determinants of demand

4) Identifying relevant data

5) Choice of method 6) Testing accuracy

7) Evaluation of forecast

Choice of forecasting technique

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1) Imminent objective of forecast: Whether it is

for a new product or to gauge impact of a new advertising. 2) Cost involved: Cost of forecasting should not be more than its benefits 3) Time perspective: Whether the forecasts is meant for the short run or the long run. 4) Complexity of the technique: Method involved in forecasting 5) Nature and quality of available data:

Techniques of demand forecasting

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Survey method: Surveys are conducted to collect

information about consumers intentions and their future purchase plans. This includes i) survey of potential consumers Ii) Opinion polling of experts

Consumer survey method

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Buyers are asked about future buying intentions of products, brand preferences and quantities of purchase, response to an increase in the price or an implied comparison with competitors product Census method: Involves contacting each and every buyer. Sample method: Involves only representative sample of buyers.

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Merits:

Simple to administer and comprehend Suitable for short term decision regarding product and promotion Suitable when no past data is available Demerits: Expensive both in terms of resource and time. Buyers may give incorrect responses Investigators bias regarding choice of sample and questions cannot be fully eliminated

Sales force opinion survey

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Sales

persons are in direct contact with the customers , salespersons are asked about estimated sales targets in their respective sales territories in a given period of time. Merits: Cost effect as no addition cost is incurred on collection of data. Estimated figures are more reliable as they are based on the opinion of salespersons on direct contact with the customers.

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Demerits: Results may be conditioned by the bias of salespersons Salespersons may be unaware of the economic environment of the business and make wrong estimates.

Expert-Opinion method
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It is one of the most widely used forecasting technique where the opinion and intuition of management is utilized. Outside experts are consulted . i) Group discussion: Decisions may be taken with the help of brainstorming session or by structured discussions. ii) Delphi technique: Developed by the Rand corporation at the beginning of the cold war to forecast impact of technology on warfare.

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Way of getting repeated opinion of experts without their face to face interaction Consolidated opinion of experts is sent for revised views till conclusions converge on a point Merits: Decisions are enriched with the experience of competent experts Firm need not spend time, resources in collection of data for survey.

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Very useful when products are absolutely new to all markets. Demerits: Experts may involve some amount of bias. With external experts, risk of loss of confidential information to rival firms.

Market Simulation
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Market simulation: Firms create Artificial markets, consumers are instructed to shop with some money. Labotary experiments ascertains consumers reaction to changes in price, packaging and even location of the product of the shop. Merits: Market experiments provide information in consumer behavior regarding change in any determinant of demand Experiments are useful in case of new product Demerits: People behave differently when they are being observed.

Test Marketing
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Involves real markets in which consumers actually

buy a product without the conscious of being observed. Product is actually sold in certain segments of the market, regarded as the test market Choice and no of test markets are very crucial to the success of the results.

Test Marketing
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Merits: Most reliable among qualitative methods Very suitable for new products Considered less risky than launching the product across a wide region Demerits: Very costly as it requires actual production of the product and in event of failure of the product the entire cost is sunk. Time consuming to observe the actual buying pattern of consumers

Statistical methods
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They are based on the assumption that future patterns tend to be extension of past ones and that one can make useful prediction studying the past behavior. The sales data can be used to make useful predictions.

Graphical Method
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Past values of the variable on vertical axis and time

on horizontal axis and line is plotted Movement of the series is assessed and future values are forecasted Simple but provides a general indication and fails to predict future value of demand

Solve
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Year

1995

1996 1997 70 72

1998 69

1999 54

2000 2001 54 37

Deman 75 d(in 1000 units

Barometric methods
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Barometric techniques alerts business to change in

overall economic conditions

Helps in predicting future trends on the basis of

index of relevant economic indicators especially when the past data do not show a clear tendency of movement in a particular direction

Simple or bivariate regression analysis

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Deals with a single independent variable that

determines the value of the dependent variable Demand function: D=a+bP where b is negative

Least square method

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The basic assumption is that the relationship between the various factors remain unchanged in future period. Y=a+bX where a=intercept, b=slope Least square estimates of a and b are given by normal equations y=na+bx xy=ax+bX2

Limitations of demand forecasting

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Change in fashion: Results of demand forecasting

have short lasting impacts especially in dynamic business environment Consumers psychology: Results of forecasting depend largely on consumers psychology, understanding which itself is difficult. Lack of past data: Requires past data sales, which may not be correctly available . Typical problem in case of a new product

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Uneconomical: May be too expensive for small

firms to afford. May be too time consuming

Lack of experienced experts: Forecasting by less

experienced individuals may lead to erroneous results