Demand Forecasting - F.Y.Sem.1

KEY NOTES BUSINESS ECONOMICS (F.Y.SEM.
1)
Demand Forecasting
Why firm has to know demand of its product?
 To formulate price policy
 To avoid ‘Under production’ and ‘Over Production’
 To formulate Promotion and Advertisement decisions
 To take decision regarding Investment and Diversification
 To plan out capital requirement
 To arrange for Man Power (HR)
Meaning:
 Demand forecasting is a technique to predict, estimate, guess, calculate the future demand of the firm’s
product.
Importance of Demand forecasting:

 To decide ‘What to Produce’
 To decide the SCALE of production (How Much to produce)
 To arrange for the Finance and Human resources
Other points can be adopted from - why Demand forecasting?
Active and Passive Forecast:
1. Passive Forecast:
 Demand forecast without any action affecting demand is passive forecast….
Example:
 Sony Company estimates its demand of cell phones at 50000 pieces during diwali without any action to
boost sale.
2. Active Forecast:
 Demand forecast with any action affecting demand is active forecast….
Example:
 Sony Company estimates its demand of cell phones at 60000 pieces during diwali after making special demo
campaign to boost sale.
Objective of Demand Forecasting:
1. Short Term:
 To reduce cost of raw material and other inventories
 To formulate pricing policy
 To decide Advertisement and promotional activity
 To estimate Sales target
 To arrange short term finance and HR requirement
2. Long Term:
 To plan out for Expansion
 To plan out for Diversification
 To arrange Long term finance and HR requirement
14 Conceptual coaching for 11th, 12th, B.Com. Mo.78783-77885 | CMA. Nirav Shah
KEY NOTES BUSINESS ECONOMICS (F.Y.SEM.1)
Methods of Demand Forecasting:

1. Direct / Survey Methods
a) Consumer Surveys
b) Expert opinion Method
2. Indirect Method
a) Trend Projection Method
b) Regression Method
c) Leading Indicator Method
d) Simultaneous Equation Method
Direct Methods:
1. Consumer Survey Method:
 To know the intention of BUYERS…What they WANT TO BUY…
 Survey can be done by….
1. Personal Interview
2. Mail / Post Interview by Questionnaires
3. Telephonic Interview
1. Personal Interview:
Door to Door Survey
Interviewer has to visit home or office of prospective buyer.
Benefits:
Interviewer can explain matter to buyers
Personal Information can be taken
‘Non-verbal’ information can be taken
Limitation:
Expensive
Time Consuming
No good result if interviewer is not trained
2. Mail/Post Interview:
Sending questionnaires by post or e-mail
Prepaid reply envelopes must be sent
Benefits:
Less Cost and Time
Coverage of large geographical area
No trained staff required
Limitation:
Personal Information cannot be taken
No explanation to buyers
Half-filled or totally blank questionnaires
3. Telephonic Interview:
 Calling to buyers for getting responses
 Questions will be asked and answers will be recorded on telephone
Benefits:
 Less Cost and Time
 Coverage of large geographical area
 Personal Touch without face to face meeting
Limitation:
 Not for underdeveloped countries and regions
 No Long interview
 Large rejection rate
Two types of consumer survey:

1. Complete Enumeration Method
2. Sample Survey Method
1. Complete Enumeration Method:

 Under this method ALL THE POTENTIAL BUYERS are interviewed.
 Demand of all the buyers are added to get total demand.
Dx = X1 + X2 + X3 + X4…………Xn
Benefits:
 Great accuracy in results, since all buyers are interviewed.
 Best for new product survey
Limitations:
 No use if consumer is spread over large geographical area.
 More expensive and Time consuming
2. Sample Survey Method:

 Only FEW SELECTED consumers form all potential buyers are interviewed.
 Average of their demand will be taken as total demand.
Dx = X1 + X2 + X3 + X4…………X100 ÷ 100
Benefits:
 Less costly and Time consuming
 When there are no trained staff for work
Limitations:
 No proper result if sampling is defective
 Choice of sample is critical, careful planning is required
 Responder might not give TRUE answers or give diplomatic answers.
 Survey method is VERY EXPENSIVE compared to other methods.
 Skill full investigators and staff required for survey work.
 If questionnaires is poorly drafted then it leads to wrong results and interpretations.
Expert Opinion Method:

 There are certain persons who know / can estimate the response of consumers, prospective demand and
condition of market.
 Such as Market consultants, Salesman, Professional expert.
 Experts are in touch with changing trends of market so information can be taken from him and after
analysis of that information demand of product can be determined.
 These methods can be known as ‘Delphi Technique’
Limitation of Expert Opinion Method:

 Opinion may be BIASED.
 Estimation of different expert may be different and based on his/her personal judgment.
 Expensive- because expert charges HUGE FEES.
 Less experienced and knowledgeable expert can misguide.
Indirect Method of Forecasting:
Trend Projection Method:

 Increase and decrease in the demand over a period of long time creates tendency…..this tendency is
TREND.
 Firm can construct trend from the past years data of sales or demand. (This past data can be known as Time
Series)
 New firm who doesn't have past data can take the data of relative business firms for trend projection.
 Such data will be plotted on graph and trend of demand can be obtained.
Example:
Limitation:
 This method only give idea about INCREASE or DECREASE in sales…..doesn’t give actual figure of quantity
demand.
 If past data is defective then trend can misguide.
How to forecast the demand of a NEW PRODUCT?
1. Evolutionary approach:
 New product will grow as same as old product.
Example:
 Growth of smart phone in market can be as same as growth of basic phone.
Condition:
 New product must be SO CLOSED to old product.
 How to forecast the demand of a NEW PRODUCT?
2. Opinion approach:
 Estimation of Demand by direct inquiry form ultimate buyer.
Example:
 Demand estimation can be done by giving sample product to prospective buyer.
3. Sales experience approach:

 Estimation of Demand by launching product in sample (small) market.
Example:
 Nokia Company has launched new model of cell phone in his native country only….form the experience of
sales it can be decided to launch it worldwide.
4. Indirect / Vicarious approach:

 Estimation of Demand …form the information of dealers and sellers who keep touch with consumers and
know their reactions….
 Dealers have good idea about various product in market and consumer need and preferences so…
Criteria of Good Forecasting Method:
1. Accurate: gives accurate forecast result.

2. Simple: Technique must be easy and simply understandable.
3. Flexible: Should permit change whenever require.
4. Economical: Should not involve much money and efforts.
5. Durable: Technique must be useful in LONG RUN.
6. On time: Estimation should be on time and up to date basis.
Questions asked in past university papers:

1. Explain the meaning of demand forecasting. (Oct.2011, 2013, 2014)
2. What are the objective of long-term demand forecasting? (Apr.2008, 2012)
3. What is the difference between active and passive demand forecasting? (Apr. 2005. Oct.2008)
4. What are the criteria for good demand forecasting? (Apr.2006, 2007, 2011, 2012, 2013, 2015, Oct.2006)
5. Discuss the sample survey method for demand forecasting. (Apr.2006)
6. Explain the possible approach for demand forecasting of a new product. (Oct.2006, 2007, 2008, Apr.2008, 2009,
2010, 2012, 2014, 2015)
7. Explain trend projection method for demand forecasting. (Oct.2006, 2007)

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KEY NOTES BUSINESS ECONOMICS (F.Y.SEM.

Importance of Demand forecasting:

Other points can be adopted from - why Demand forecasting?

Active and Passive Forecast:

Objective of Demand Forecasting:

Methods of Demand Forecasting:

Two types of consumer survey:

1. Complete Enumeration Method:

2. Sample Survey Method:

Expert Opinion Method:

Limitation of Expert Opinion Method:

Trend Projection Method:

How to forecast the demand of a NEW PRODUCT?

 How to forecast the demand of a NEW PRODUCT?

3. Sales experience approach:

4. Indirect / Vicarious approach:

Criteria of Good Forecasting Method:

1. Accurate: gives accurate forecast result.

Questions asked in past university papers:

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