HOW TO FORECAST DEMAND
1
Market Research
1.
1 Target specific products. 
Instead of focusing on a complete product line,
identify the particular products you want to track.
Doing this makes it easier to organize past data and
forecast demand. For example, if you have an existing
line of winter garments, focus specifically on gloves
first instead of the entire line.
 Focus on your products that earn you the
most income. For example, many
entrepreneurs adhere to the 80/20 rule,
which states that 20% of products or
services offered by a business generally
make up 80% of its revenue.[2] Identify
these products and track the demand for
them.
 You may have to forecast demand for every
product in your inventory, but it will be
easier and more accurate if you do a few
similar products at a time such as gloves,
boots and winter hats.
 Consider creating a Sales and Operations
Planning group that includes representatives
from each department and task them with
preparing a demand forecast.
2.
2 for a reason, and a smart businessman or
Review your marketing plans. Any marketing
campaigns or sales promotions may increase the
demand of your product. Look at the past data and see
what was successful. See if there were special
discounts or holiday sales that increased demand for
your product. You want to take all of this into
consideration when forecasting demand, particularly if
you plan to repeat similar sales strategies.
3.
3
Review key indicators. Find out what’s behind the
fluctuation in your customers' demand. Key indicators
include demographics and environmental factors.
Demographics include age, gender, location, and any
other set of identifying characteristics. Identifying the
demand of key demographic groups helps to narrow
the data pool for the forecast. Environmental factors
affect demand as well. For example, a severe winter
might cause a decrease in sales.
4.
4
Look at your marketplace. Analyze what
competitors, customers, bankers, and other people in
your marketplace are saying and doing. See if your
competitors are running major sales or promotions.[3]
5.
5
Look at the previous months. Look at both recent
months and annual sales variances such as holiday
time. This will help you determine annual and seasonal
fluctuations. When looking at the past months, analyze
the driving patterns behind the demand. Look at any
price adjustments or any marketing campaigns that led
to a rise in new customers. Business always increases
businesswoman will find out why. For example, you
may have run a "buy one, get one free sale" in August
for back to school shopping. If you choose to replicate
these factors, consider that in your forecast.[4]
6.
6
Determine your lead time. Lead time is the time
between the initiation of an order and the delivery of a
product. Knowing this will help you forecast demand.
This will help you determine how fast you can make
your product and meet demand.
 If you are purchasing your products from
another company, the lead time is the time
between placing your order and when it
arrives on your doorstep.
 You can also determine lead time by
examining the raw materials and
components. Knowing your required
production time will help you make a more
accurate forecast demand. Focusing on a
particular item helps to predict how much
material you will need and the production
time to make your product.
 When you have your production quantities
estimated, look at the component demand
of each item. For example, if you are
manufacturing pencils, you will need to
know how much wood, rubber, and lead to
order based on your forecast.
AD
Part2
Approach Options
1.
1 historical demand record. This approach takes the
Figure out which approach to use. There are four
general approaches to forecasting demand. They
include judgmental, experimental, relational/causal,
and time series. Choose the best approach based on the
history of your product. The experimental approach,
for instance, is used mostly for new products that have
no history data in the marketplace. These approaches
are how you will gather most of your data.
 You can combine the approaches to create a
more accurate demand forecast.
2.
2
Consider judgmental approaches. This method
draws upon the collective market insights observed by
your sales team and managers to determine demand.
These people can provide somewhat or, in some cases,
very accurate demand forecasts based on their own
personal knowledge and experience. However, the data
you gather from them might be unreliable, as it relies
on your experts' own personal views. For this reason,
data derived from judgmental approaches are best used
to make short term demand forecasts.
 There are several different ways of going
about this, depending mainly on who you
use for your panel. However, you don't
need to use them all for a proper judgmental
approach. You may choose or any
combination of them to achieve your goals,
depending on which groups you think
would provide the most accurate judgment.
3.
3
Determine if you need to use an experimental
approach. This approach works best for new products,
and it is not useful for existing products that have a
results from a small number of customers and
extrapolates the findings to a large number of
customers. For example, if you contact 500 people at
random in a particular city and 25% say they will buy
your product within 6 months, you can assume this
percentage applies to 5,000 people.[5]
 If a small group of targeted customers loves
a new technology and responds well to the
test marketing, you can extrapolate that
number to also forecast national demand.
The problem with this approach is that it
often collects more information about the
 customer’s preference towards your product
rather than demand data.
4.
4 downside is that these projections are based on the
Consider using a relational/casual approach. This
approach attempts to find out why people buy your
product. The idea being that if you can understand why
people buy your product, then you can create a demand
forecast based on that reason. For example, if you sell
snow boots, then you know the demand for your
product is weather related. If the weather forecast
predicts a heavy winter, you know that there will be a
higher demand for your snow boots.[6]
 These approaches include life cycle and
simulation models.
5.
5 salesperson may inflate the numbers to help ensure his
Calculate demand using time series
approaches. Time series approaches attempt to
mathematically calculate demand using past figures
and trends as a guide. Specifically, you can use
moving averages, weighted moving averages, and/or
exponential smoothing to attempt to accurately predict
your demand. These approaches will give you harder
numbers than other approaches, but must be combined
with other, subjective approximations to account for
the effects of future changes in the market or business
plan.
Part3
Judgmental Approach
1.
1
Form a jury of executive opinions. Gather a small
group of high-level managers in your company and
have them estimate demand. Each member of this
group can provide valuable insight based on their
experience with the market. They can also help in
selecting quality material vendors and marketing
campaigns. This approach is inexpensive and not as
time consuming as other judgmental approaches. The
opinions of the experts who may be biased and
pushing their own agendas.[7]
2.
2
Create a sales force composite. Ask each salesperson
to project their sales. The sales team is closest to the
marketplace and is knowledgeable about the desires of
the customer. Combine these projections at each level
of sales by city, state, and region. The upside to this
approach is its low cost and the ease of collecting data.
The downside to this approach is that it’s based on
consumer opinions, which can easily change. Also, the
or her job security.
3.
3
Hire individual market experts. Market experts
watch for industry trends and consult with your sales
force to predict demand. These could include trade
magazine writers, economists, bankers, and
professional consultants. An individual can only gather
a limited amount information, however, so it is
recommended that you assemble a team of market
experts to gather as much data as possible.
 These individuals can provide you with
insight about the markets that is at a higher
level than your own sales team may be able
to provide. However, being outsiders to
your company, they have less of a grasp on
the demand for your individual products.
You should use these people to forecast
 market demand and then estimate how well
your company may fare within that market
using internal judgments.
4.
4 Use test marketing. Use this during the early stages of
Use the Delphi Method. First, create a panel of
experts. This can include a group of managers, selected
employees, or industry experts. Ask them individually
for their estimate of demand. Have them answer
questionnaires in two or more rounds. After each
round, present the findings of the previous round
anonymously. Encourage the experts to revise their
answers with the previous findings in mind. The goal
is that the group will eventually start to agree on the
forecast.
 Use a pre-defined stopping place such as a
certain number of rounds, consensus, or
stability in results.
Part4
Experimental Approach
1.
1
Survey your customers. You can collect information
from them in several ways: telephone or e-mail
surveys, statistical reviews of customer order history,
and market trends. Ask them about their purchasing
plans and projected buying behavior. Use a large pool
to help generalize results. Ask them how likely they
are to buy your products and tally the results.[8]
 Customers are in the best position to know
the demand for a product. The danger from
surveys is that they often overestimate
actual demand. While a customer may show
interest in your product, actually buying it
is a different thing altogether.
 Keep in mind that conducting surveys can
be expensive, difficult, and time
consuming. Surveys rarely form the base of
a successful demand forecast.
2.
2
your product development. Find a small, isolated, area
that has your targeted demographic. Roll out every
stage of your marketing plan including advertising,
promotion, and distribution plans. Measure product
awareness, penetration, market share and total sales.
Fine tune your market strategy based on the
information you receive so that you will run into fewer
problems when you launch your product nationally.[9]
3.
3
Host consumer panels. Gather a small group of
potential customers in a room and let them use your
product and discuss it. The customers are usually paid
a small amount for participating. Panels are similar to
surveys in that they are more useful to analyze the
product rather than forming the basis for a demand
forecast.[10]
4.
4
Use scanner panel data. Find a large set of household
customers to agree to participate in an ongoing study
of their buying habits at grocery stores, for example.
Have these customers agree to submit information
such as the size of their households, their ages, their
household income, and any other information you find
relevant to your product. Whenever they buy groceries,
their purchases are recorded and analyzed. This data
can be collected when they use their store grocery
card. This creates a rich database to create statistical
models and see relationships in data.[11]
  As with other types of experimental
approaches, it can be difficult to apply these
results to demand forecasts. 3
Part5
Create a life cycle model. A life cycle refers to the
Relational/Causal Approach
1. "life" of your products, between when it was first
introduced and the present day. Look at the sales of
your product at various stages. Examine the nature of
customers who buy the your product during these
1
stages. For example, you will have early adopters
Examine previous years' sales for monthly or
(those who love the latest technology), mainstream
seasonal trends. Look over sales figures for past years
buyers (people who wait for product reviews and
to determine which times in the year account for the
referrals), laggards (they only buy when the product
higher percentage of your sales. Are they constant? Do
has been out for a long time), and other types of
you experience higher sales in winter or summer?
consumers. This will help you determine your
Measure the increase or decrease in sales during these
product’s life cycle trends and the demand patterns for
times. Was the change higher or lower in certain
your product.[12]
years? Then, think about why this might be the case.
 The industries that use this model the most
Use what you've learned and apply it to the current
include high technology, fashion, and
year's forecast.
products facing short life cycles. What
 For example, if you sell snow boots, you
makes this approach unique is that the
might have experienced a particularly large
cause of the demand is directly linked to the
boost in sales in a cold winter. If this year is
product’s life cycle.
forecasted to be a similarly cold winter, you
4.
should increase your demand forecast
accordingly.
2.
4
Use a simulation model. Create a model that
simulates the flow of components into manufacturing
2
plants based on your material requirement planning
Look for customer reactions. This refers to situations
schedules and the distribution flow of your finished
where a change in your product or its market resulted
goods. For example, calculate the lead time to receive
in higher or lower sales. Create charts of your
each component including shipping time no matter
historical sales for the product and mark important
where it is sourced in the world. This will give you
dates, for example a price increase or the introduction
insight on how fast you can make your product to meet
of a competing product. This can also be broader, like
the demand.[13]
a reaction to the shifting economy or changes in
 These models are known to be difficult and
consumer spending. Read relevant trade journals and
cumbersome to create and maintain.
newspaper articles to gather this information. Having
Part6
all of this data at hand can give you a better idea of Time Series Approach
what might affect your future demand. 1.
3.
 seasonal pattern (holiday time) instead of random
1 changes.
Use the moving averages method. This is a  Find the prior periods' forecast. This will be
mathematical technique used if there are little to no represented as (Ft) in the formula. Then,
trends present in your data. This method will provide find the actual demand for product during
an overall impression of data over time. Find out the that time period. This will be represented as
actual demand for the previous three months. Once (At-1) in the formula.
your have the total, divide that by four (accounting for  Determine the weight being assigned to it.
the next month). The formula will be F4 = (D1 + D2 This will be represented as (W) in the
+D3) ÷ 4. In this equation ‘F’ represents the forecast formula.This ranges between 1 and 10.
and ‘D’ correlates with the month.This equation works Assign the lower number for older data.
well for steady demand.  Put your data into the formula Ft = Ft-1 +
 For example, forecast = 4,000 (Jan.) + W * (At-1 – Ft-1) or for example, Ft = 500
6,000 (Feb.) + 8,000 (March) /4 = 4,500. + 4(W) * (590 - 500) = 504 * 90 = 45,360.
2. Part7
Data Analysis
1.

2
Determine the weighted moving average (WMA). If
you have fluctuating demand, use this formula,which 1

takes variation into consideration. The formula is Compile your results. Once you have collected your

WMA 4 = (W * D1) + (W * D2) +(W * D3). The ‘D’ data, create a chart or graph that shows the demand

stands for demand and the number correlates with the forecast. Do this by crossing your product demand

month. ‘W’ is the weighted constant, which is quantity with the upcoming months. For example, if

normally a number between 1 and 10 and is based on you create a line graph, put the months on the

past history.[14] horizontal axis and product demand quantity on the

 For example, WMA = (4 * 100) + (4 * 250) vertical axis. If you forecasted that you will need 600

+ (4 * 300) = 2,600. units in October and 800 in November, then place

 Use a greater weighted constant number for those points on the graph. Draw a line between the

more recent data and a lesser number for points. You can also plot past data on the graph to

older data. This is because more recent data compare your research data with historical data.
2.
has a stronger influence over the forecast.
3.

3 Analyze your results. You now have your results

Determine exponential smoothing. This technique is tabulated or displayed in an easy to read form, but

an averaging method that considers recent changes in what do they mean? Look for trends, like growing or

demand by applying a smoothing constant to the most declining demand, and cyclicality, like busy seasons or

recent data. This is a useful technique if the recent months. Compare your data to that of previous years

fluctuations are the result of an actual change such as a and see how it stacks up as far as volume and pattern.
Look for evidence in the data that your marketing
plans are working or have worked in the past.
 Additionally, go back and determine how
exact you believe your forecast to be. Have
you been optimistic with your forecast?
How large of a margin of error do you
expect?
3.

3
Display and discuss your forecast. Show your
forecast to the appropriate people in your company and
discuss it with them. Gather input from sales and
marketing, finance, production, and all other managers
and then revise your forecast. When everyone agrees
on the forecast, they can plan a better business
strategy.
4.

4
Monitor and modify your forecast. As you gather
new data, modify the forecast to reflect this. You want
to use all information as it comes to you. If you do not
constantly monitor and update your forecast, you can
make costly mistakes and it will affect your financial
sustainability.