Demand forecasting

DEMAND FORECASTING
Prof. Shampa Nandi

Meaning & Definition of Demand
Forecasting
Demand forecasting is a systematic process that
involves anticipating the demand for the product
and services of an organization in future under a
set of uncontrollable and competitive forces.
Accurate demand forecasting is essential for a
firm to enable it to produce the required
quantities at the right time and arrange well in
advance for various inputs.

Meaning & Definition of Demand
Forecasting
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.”
Demand forecasting enables an organization to take
various business decisions, such as planning the
production process, purchasing raw materials, managing
funds, and deciding the price of the product. An
organization can forecast demand by making own
estimates called guess estimate or taking the help of
specialized consultants or market research agencies.

A) Qualitative Techniques/ Opinion
Polling Method
- In this method, the opinion of the buyers, sales
force and expert could be gathered to determine
the emerging trend in the market.
- Suited for short term demand forecasting.
-Demand forecasting for new product can b made
by qualitative techniques.
The opinion polling methods of demand
forecasting are of following kinds:
1) Consumer Survey Method
2) Sales Force Opinion Method
3) Delphi Method

Survey method is one of the most common and direct
methods of forecasting demand in the short term. This
method encompasses the future purchase plans of
consumers and their intentions. 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.
Survey method include:
a) Complete Enumeration Survey
b) Sample Survey and Test Marketing
c) End Use

a) Complete Enumeration Survey:
In this method records the data & aggregates of
consumers
If the data is wrongly recorded than Demand Forecasting
going wrong, than this method will be totally useless.
b) Sample Survey & Test Marketing:
Only few customers selected and their views collected.
Based on the assumption that the sample truly
represents the population.
This method is simple and does not cost much
The main disadvantage is that the sample may not be a
true representation of the entire population.

c) End Use Method:
This method Focuses on Forecasting the demand for
intermediary Goods.
Under this method, the sales of a Product are projected
through a survey of its end users.
Example:
Milk is a commodity which can be used as an
intermediary good for the production of ice cream, and
other dairy products.

2) Sales Force Opinion Method
- In this method , instead of consumers, the opinion of the
opinion of salesman is sought.
- It is also referred as the “grass root approach” as it is a
bottom- up method that requires each sales person in the
company to make an individual forecast for his or her
particular sales territory.
- The composite of all forecasts then constitutes the sales
forecast for the organisation.
- The main advantage is that the collecting data from its own
employees is easier for a firm than to do it from external
parties.
- The main disadvantage is that the sales force may give biased
views as the projected demand affects their future job
prospects.

3) Delphi Technique
This method is also known as expert opinion method.
In this method seeks the opinion of groups of Expert through mail
about the expected level of Demand.
The identity of expert is kept secret.
These opinion exchanged among the various experts and their
reactions are sought and analyzed.
The process goes on until some sort of unanimity is arrived at
among all the experts.
The advantage is that the forecast is reliable as it is based on the
opinion of people who know the product very well.
The disadvantage is that the method is subjective and not based
on scientific analysis.

B) Quantitative Techniques/
Statistical or Analytical Methods
These are forecasting techniques that make use of
historical quantitative data.
A statistical concept is applied to the existing data in order
to generate the predicted demand in the forecast period.
The statistical methods, which are frequently used, for
making demand projection are:
1) Trend Projection Method
2) Barometric Method
3) Regression Method
4) Econometric Method

-An old firm can use its own data of past years regarding sales
in past years.
-These data are known as time series of sales.
-Assumes that past trend will continue in future.
-Past trend is extrapolated (generalised).
The trend can be estimated by using any one of the following
methods:
a) Graphical Method
b) Least Square Method
c) Time Series Data
d) Moving Average Method
e) Exponential Smoothing

a) Graphical Method:
A trend line can be fitted through a series graphically.
The direction of curve shows the trend.
The main drawback of this method is that it may show the
trend but not measure it.
b) Least Square Method:

c) Time Series Data:
Data collected over a period of time recording historical
changes in price, income, and other relevant variables
influencing demand for a commodity.
Time series analysis relates to the determination of changes in
a variable in relation to time.
d) Moving Average Method:
The moving average of the sales of the past years is computed.
The computed moving average is taken as forecast for the next
year or period.
This is based on the assumption that future sales are the
average of the past sales.

e) Exponential Smoothing:
It uses a weighted average of past data as the basis for a
forecast.
The procedure gives heaviest weight to more recent
information and smaller weights to observations in the more
distant past.
The reason for this is that the future is more dependent on the
recent past than on the distant past.

2) Barometric Method
In barometric method, demand is predicted on the basis of
past events or key variables occurring in the present.
This method is also used to predict various economic
indicators, such as saving, investment, and income.
This method was introduced by Harvard Economic Service in
1920 and further revised by National Bureau of Economic
Research (NBER) in 1930s.
This technique helps in determining the general trend of
business activities.
For example, suppose government allots land to the XYZ
society for constructing buildings. This indicates that there
would be high demand for cement, bricks, and steel.
The main advantage of this method is that it is applicable even
in the absence of past data.

3) Regression Method
This method is undertake to measure the relationship
between two variables where correlation appears to exist.
E.g. The age of the air condition machine and the annual repair
expenses.
This method is purely based on the statistical data.

4) Econometric Method
It is assumed that demand is determined by one or more
variables. E.g. income, population, etc.
Demand is forecast on the basis of systematic analysis of
economic relations by combining economic theory with
mathematical and statistical tools.

Importance of Demand Forecasting
1) Production Planning:
Expansion of output of the firm should be abased on the
estimates of likely demand, otherwise there may be
overproduction and consequent losses may have to be faced.
2) Sales Forecasting:
Sales forecasting is based on the demand forecasting.
Promotional efforts of the firm should be based on the sales
forcasting

3) Control of Business:
For controlling the business, it is essential to have a well
conceived budgeting of costs and profits that is based on the
forecast of annual demand.
4) Inventory Control:
A satisfactory control of business inventories, raw materials,
intermediate goods, finished product, etc. requires satisfactory
estimates of the future requirements which can be traced
through demand forecasting.

5) Economic Planning and Policy Making:
The government can determine its import and export policies
in view of the long-term demand forecasting for various goods
in the country.
6) Growth and Long- term Investment Programs:
Demand forecasting is necessary for determining the growth
rate of the firm and its long-term investment programs and
planning.

Demand forecasting

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