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Demand
Forecasting

 An organization faces several internal and external risks, such as
high competition, failure of technology, labour unrest, inflation,
recession, and change in government laws
...

 An organization can lessen the adverse effects of risks by
determining the demand or sales prospects for its products and
services in future
...


Definitions of demand forecasting

 According to Evan J
...
”
 In the words of Cundiff and Still, “Demand forecasting is an estimate of sales
during a specified future period based on proposed marketing plan and a set of
particular uncontrollable and competitive forces
...
planning the production process,
B
...
managing funds, and
D
...

An organization can forecast demand by making own estimates called guess estimate
or taking the help of specialized consultants or market research agencies
...
Fulfilling objectives
ii
...
Stabilizing employment and production
iv
...
Taking Management Decisions
vi
...
Helping Government

Objectives of Demand Forecasting

The objectives of demand forecasting are discussed as follows:
i
...
Formulating production policy: Helps in covering the gap between the demand and
supply of the product
...
It further
helps in maximum utilization of resources as operations are planned according to forecasts
...


b
...
An organization sets prices of its products according to their demand
...
In such a case, the organization sets low prices of its products
...


Controlling sales: Helps in setting sales targets, which act as a basis for evaluating sales
performance
...


Arranging finance: Implies that the financial requirements of the enterprise are estimated
with the help of demand forecasting
...


ii
...
Deciding the production capacity: Implies that with the
help of demand forecasting, an organization can determine the
size of the plant required for production
...


b
...
For example, if the
forecasted demand for the organization’s products is high, then it
may plan to invest in various expansion and development
projects in the long term
...


Types of Goods: Affect the demand forecasting process to a larger extent
...
Apart from this, goods
can be established and new goods
...


ii
...
In a highly
competitive market, demand for products also depend on the number of
competitors existing in the market
...
In such a case, demand forecasting
becomes difficult and challenging
...
Price of Goods: Acts as a major factor that influences the demand forecasting
process
...
In such a scenario, it is difficult to estimate the exact
demand of products
...
Level of Technology: Constitutes an important factor in obtaining reliable
demand forecasts
...
For example, there is a high
decline in the demand of floppy disks with the introduction of compact disks
(CDs) and pen drives for saving data in computer
...


v
...
For
example, if there is a positive development in an economy, such as globalization
and high level of investment, the demand forecasts of organizations would also be
positive
...
Short Period Forecasts: Refer to the forecasts that are generally for one year
and based upon the judgment of the experienced staff
...


2
...
The forecasts help in
deciding about the introduction of a new product, expansion of the business, or
requirement of extra funds
...
Very Long Period Forecasts: Refer to the forecasts that are for a period of more
than 10 years
...
Among the aforementioned forecasts, short period
forecast deals with deviation in long period forecast
...


The steps involved in demand
forecasting

1
...
An organization needs to clearly state
the purpose of demand forecasting before initiating it
...
Deciding the time period of forecasting whether an organization
should opt for short-term forecasting or long-term forecasting
b
...
Deciding whether to forecast the demand for the whole market or
for the segment of the market

d
...
Determining Time Period: Involves deciding the time perspective for demand forecasting
...
In the short run, determinants of
demand may not change significantly or may remain constant, whereas in the long run, there
is a significant change in the determinants of demand
...


3
...
The
method of demand forecasting differs from organization to organization depending on the
purpose of forecasting, time frame, and data requirement and its availability
...

4
...
Primary’ data refers to the
data that is collected by researchers through observation, interviews, and questionnaires for a
particular research
...

5
...
The results should be easily interpreted and presented in a usable form
...

There is no particular method that enables organizations to anticipate risks and
uncertainties in future
...

The first approach involves forecasting demand by collecting information
regarding the buying behavior of consumers from experts or through conducting
surveys
...

The techniques of demand forecasting are divided into survey methods and
statistical methods
...


Survey Method

Survey method is one of the most common and direct methods of forecasting
demand in the short term
...

In this method, an organization conducts surveys with consumers to determine the
demand for their existing products and services and anticipate the future demand
accordingly
...
Experts’ Opinion Poll:
Refers to a method in which experts are requested to provide their opinion about the
product
...

Sales representatives are in close touch with consumers; therefore, they are well
aware of the consumers’ future purchase plans, their reactions to market change, and
their perceptions for other competing products
...

This method is quite simple and less expensive
...
Provides estimates that are dependent on the market skills of
experts and their experience
...
In this way, making exact demand forecasts
becomes difficult
...


Involves subjective judgment of the assessor, which may lead to
over or under-estimation
...
Depends on data provided by sales representatives who may
have inadequate information about the market
...


Ignores factors, such as change in Gross National Product,
availability of credit, and future prospects of the industry,
which may prove helpful in demand forecasting

ii
...


Questions are repeatedly asked until a consensus is obtained
...

So that he/she can revise his/her estimates with respect to others’ estimates
...

Every expert is allowed to react or provide suggestions on others’ estimates
...


iii
...


This method carries out the studies and experiments on consumer behavior under
actual market conditions
...

The market experiments are carried out with the help of changing prices and
expenditure, so that the resultant changes in the demand are recorded
...

There are various limitations of this method, which are as follows: a
...

Affects the results of experiments due to various social-economic conditions, such as
strikes, political instability, natural calamities

Statistical Methods

Demand Forecasting uses statistical methods
...


This method can be used for the long term forecasting for the
existing product
...

They are
1
...

3
...


Time series / Trend projection method
Method of moving averages
Regression method
Barometric method

Regression Method

Sales of commodity does not depend on time only
...


The nature of relationship between these factors can be used and
future sales can be forecast
...

1
...
Deviation squares 3
...


Year

Sales

Time
deviation
from
middle
year 2000

TD square

Product of
Time
deviation
and sales

n

y

x

x²

xy

1998

240

-2

4

- 480

1999

280

-1

1

-280

2000

240

0

0

0

2001

300

1

1

300

2002

340

2

4

680

a = ∑y/n = 1400/5=280
b = ∑xy/∑x² = 220/10 = 22
2003 = 280 +22(3) = Rs 346
2004 = 280 +22(4) = Rs 368
2005 = 280 +22(5) = Rs 390

Year

1999

2000

2001

2002

2003

2004

Sales

140

160

120

160

190

??????
????

Forecast the demand for the year 2004 from above data
...


Demand Forecasting for new Products:

Demand forecasting for new products is a
challenging task
...

Experiences of other firms also are not
available Therefore, firms introducing new
products will have to rely on new
techniques of demand forecasting
...
Test marketing : For test marketing, the product is either produced in small quantities , or
imported
...

2
...

3
...
In computers, the lap top is an evolution from
desk top and the tablet is an evolution is an evolution from lap top
...
Substitute approach: Substitute approach of demand forecasting is used when the new
products is a substitute for an existing products
...
Vicarious approach: Vicarious approach relies on gut feeling
...
Since dealers come into contact
with thousands of customers

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