DEMAND FORECASTING

Demand forecasting is, thus anestimation of future demand or sales of a commodity on

the basis of an analysis of the past data about the demand or sales of the same. It
depicts both the price of the product as well as its expected amount of Demand or
sales. Demand Forecasting is not purely imaginary, rather it is an estimation of future
demand for a specific period based upon the statistical analysis of the past data. Such
estimate are both for quantity as well as price. Some of the important definitions of
demand/ sale forecasting are as under:
1. “The company sales forecast is the expected level of company sale based on a
chosen marketing plan and assumed environmental conditions.”Philip Kotler

2. “Sales forecasting is the focus of integrative planning.” William Lazer It is quite

clear from the above definitions that a demand forecast an estimate based upon some
past information’s the prevailing market conditions and the future prospects such
estimates can either be of the total quantity ofdemand or its monetary value. Furthermore
such a forecast can be for a single product or a chain products; for an industry or a
single firm; for the whole market of a product or a segment of it; for the short- period
or thelong-period.

Characteristics of Demand Forecasting

1. The main characteristics of demand forecasting are:

2. Demand Forecasting is the foundation of planning
3. It is an estimate of future sales
4. It is made on the basis of past data and the present conditionsprevailing the
market
5. Demand Forecast can be in monetary terms or physical terms or in both.
6. Demand Forecast are for a define time or a period time
7. Demand Forecast is based upon two things
i. Marketing plan
ii. The economic and other factors (these factors are competition,tastes of the
consumers, the substitutes and their prices etc.)

Factors Involve in Demand Forecasting

1. Duration
2. Level
3. Method of Forecasting
4. General or specific Forecasting
5. Classification of Goods
6. Variables
 7. Position of commodity in the market
8. Nature of market
9. Specific Factors Relating to commodity and market
10. Information

Objectives of Demand Forecasting:

The objective of Demand forecasting can be divided into two categories:

Short Run Objective:

The forecasts that are made for a period rangingbetween a week and an year are
called as short-run forecasts. Such Forecasts are done by a business man of highly
dynamic nature. Theobjectives of such forecasts are as under:
1. Formulation of suitable Production Policy
2. Regular Supply of Raw material
3. Best utilization of Machine Capacity
4. Determination of Appropriate Price Policy
5. Regular Supply of Labor
6. Setting sales targets and establishing control and Incentives
7. Forecasting Short run and financial needs

Long Run Objective:

The prediction made for a period of more than one yearfor the purpose of long term
planning of business activities of a firm are termed as long term factor. There
objectives are as under:
1. Plant Capacity Planning
2. Man Power Planning
3. Long run Production Planning
4. Financial Planning
5. Organizational Planning

Role of Demand Forecasting

Demand forecasting is the art of estimating or predicting the future demand for the
product. Such forecasts can be for the total demand for the whole industry or a
particulars firm of the industry. Theuses of these forecast for a business firm are as
follows.
1. Basis for Future Plans
2. Production in conformity with demand
3. Identifications of forces influencing demand
4. Helpful in the projecting standards
5. Helpful in formulating suitable price policy
6. Helpful in determining suitable price policy
7. Useful in Estimating Financial Requirements
Essentials of Good Forecasting System
1. Accuracy
2. Simplicity
3. Plausibility
4. Practicability
5. Availability
6. Economy
7. Stability
8. Flexibility

Factors Effecting Demand Forecast

Sales forecasting is an important but a difficult process. There are so many factors which
influence the sales of an enterprise. These are categorized infive sections:
1. Internal Conditions of the firm
2. Conditions within the industry
3. Competitive Conditions
4. General Business Conditions
5. Socio-economic Conditions

Methods of Demand Forecasting

Demand forecasting seeks to investigate and measure the forces that determine sales for
existing and new products. Generally companies plan their business – production or sales in
anticipation of future demand. Hence forecasting future demand becomes important. The art
of successful business lies in avoiding or minimizing the risks involved as far as possible and
faces the uncertainties in a most befitting manner

Demand Forecasting Techniques

Demand forecasting is a highly complicated process as it deals with the estimation of future
demand. It requires the assistance and opinion of experts in the field of sales management.
Demand forecasting, to become more realistic should consider the two aspects in a balanced
manner. Application of commonsense is needed to follow a pragmatic approach in demand
forecasting.
Broadly speaking, there are two methods of demand forecasting:

1. Qualitative Method

2. Quantitative Method
Qualitative Methods:

1. Delphi Method:
This method of demand forecasting seeks the views of experts on the likely level of demand in
future. Experts are informed persons who know the products very well. They have been dealing
with the product or elated products for a long time. A specialized form of panel opinion is the
Delphi method. The method has been successfully used in the area of technological forecasting.
i.e., predicting technical changes.

Advantages:
 It is simple to conduct.
 Can be used where quantitative data is not possible.
 The forecast is reliable as it is based on the opinion of people who know the product very
well.
 It is inexpensive.
 It takes little time.

Disadvantage:
 The results are based on opinion of one or more persons and not on scientific analysis.
Hence, this method lacks reliability.
 The experts may be biased.
 The method is subjective and the forecast could be unfavorably influenced by persons
with vested interests.

2. Survey Method:

In this method, a survey is conducted to know the opinion of the buyers, sales force or experts to
determine the emerging trends in the market. The survey methods are of following four types:
a) Complete Enumeration Survey Method:

Under this method all the potential buyers of the product are contacted; their interviews are
conducted to find out the probable demand. Having ascertained the individual demand for the
product by complete enumerative method, these are added together to find out the probable
demand.
The main advantage of this method is that since all potential buyers are contacted, there is a
greater degree of accuracy. Besides, this method is useful when new products are introduced
by a firm.

But this method is expensive, time consuming and is of little use when the consumer are
spread over a large area.

b) Consumers Sample Survey:

In view of the limitations of the complete enumerative method, Sample survey method has
become more popular for forecasting the demand. Under this method, only a few customers
are selected from the potential buyers of the product; they are interviewed.

The chief merit of this method is that it is less costly and less time consuming.

But the efficiency and accuracy of this method depends upon the competence of field
investigators and experts. There is a relative shortage of such personnel in developing
countries. Besides, if there is no careful planning and proper procedure sample survey method
may lead to inaccurate and misleading results

c) Sales Force and Dealers Opinion:

Under this method, Salesmen are required to estimate expected sales in their respective
territories and sections. The advantage of this method is that salesman being the closest to the
customers are likely to have the most intimate idea of the market. i.e, customer reaction to the
products of the firm and their sales trend.

Advantages:
 This method is simple to understand.
 This method is free from the heavy costs of survey.
 It is also useful when a firm introduces a new product in the market.

Limitations:
 The opinion of the experts many a times may be biased.
 They may not aware of other demand determinants.
d) End Use Survey method:

Under this method, the sales of a product are projected through a survey of its end-users. A
product is used for final consumption or as an intermediate product in the production of other
goods in the domestic market, or it may be exported as well as imported. The demands for
final consumption and exports net of imports are estimated through some other forecasting
method, and its demand for intermediate use is estimated through a survey of its user
industries.

Advantages:
 The principal advantage at this method is that provides use wise or sector wise demand
forecast. In the process of obtaining the forecasts of aggregate demand, the forecaster
obtains separately the demand by the individual consumer industries, by final consumer
categories and by export and import sectors. This information may be useful in
manipulating future demand.
 As compare to other survey methods, this method does not require any historical data.

Limitations:
 The major weakness of this method is that it requires every industry to furnish its plan
of production correctly and well ahead of time.
 Consumer goods demands can’t easily forecasted through this method.
 The individual industry will have to rely on some other method to estimate the future
demand of its product for final consumption, export & imports, because the sum of
consumption, export net of import demand for any commodity is convenient for the
national planning organization. Thus only the intermediate demands or the input
demand can be predicted by the end- use method.