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Chapter VI

Demand Forecasting

Dr. Gopalakrishna B.V,


Faculty in MBA,
SDM College,
Introduction
Demand forecasting is the backbone of any
business. Demand forecasting means the
estimation or prediction of future demand for
goods and services.
Accurate demand forecasting is essential for a
firm to produced required quantities at the right
time & arrange well in advance for the various
factors of production viz., raw-materials,
equipment, machine accessories, labour and
building etc.
Some firms may as a policy produce to order
but, generally, firms produce in anticipation of
future demand.
Forecasting is an important aid in effective and
efficient planning.
Demand forecasting is also helpful in better
planning and allocation of natural resources.
Demand forecasting is very popular in
industrially advanced countries where demand
conditions are always more uncertain than
supply conditions.
Developing economy, instead of the demand,
supply is often the limited factor – due to high
prices and block markets – supply bottlenecks.
In India supply forecasting seems to be more
important than demand forecasting.
The impact of New Economic Policy – relaxation
of industrial Licensing regulations and economic
liberalisation – increasing competition, change
the situation in India as well.
The level of demand forecasting
1. Micro level – demand forecasting by
individual business firm for forecasting the
demand for its product.
2. Industrial level – demand estimate for the
product of the industry – it obviously,
undertaken by Industrial or Trade
Association.
3. Macro level – aggregate demand forecasting
for industrial output at the national level – it
is based on the national income/aggregate
expenditure of the country.
Types of Demand Forecasting

Demand Forecasting

Short term forecasting Long term forecasting


Types of Demand Forecasting
1. Short term forecasting
 short term demand forecasting refers to a period
of one year not exceeding a year.
 When the demand for its products is changing
very frequently.
2. Long term forecasting
 refers to the forecasts prepared for long period
during which, the firms scale of production
capacity may be expanded/reduced.
 Long term forecasting, normally for the periods
exceeding a year or 3-4 years or even a decade or
more than 10 year & above.
Purposes of short term forecasting
1. Appropriate production schedule
 to avoid the problem of over production &
under production.
 Every firm has to produce goods according to
a pre-estimated production plan.
2. Reducing cost of purchasing raw-materials
 Firm purchasing raw-material at cheaper rates
& controlling inventory.
3. Determining appropriate price policy
 Fix the price as per the market condition.
 Price does not fluctuate so much during the period of
inflation.
4. To evolve a proper advertising policy
 It is only through accurate demand estimation
 Effective and economical advertisement can be planned by a
firm.
5. To forecast short term financial requirements
 Financial requirement depends on sales level & volume of
production.
 If the demand is likely to go up in the near future – financial
facilities are also increases and vice-versa.
Purposes of long-term forecasting
1. Planning of a new unit or expansion of an
existing unit
 If the demand is likely to go up in next 10-15 years
expansion of the existing units or set up new units.
2. To plan for man-power requirement
 Training and personnel developments are long term
programmes – long time requirement.
3. To plan for long term financial requirements
 Big investments projects require a large amount of
finance – 10 -15 -20 years – infrastructure
development.
 Before understanding such projects it becomes
necessary to assess the long term demand
conditions.
Factors determines demand forecasting

1. Time factor
2. Level of forecasting
3. General or Specific forecasting
4. Problems & methods of forecasting
5. Classification of goods
6. Knowledge of different market conditions
7. Other factors
1. Time factor
 Demand forecasting has to be made for both short
and long periods.
 It all depends on the nature of the commodity – Ice-
creams, umbrellas etc – short period, while, in the
case of cement, iron & steel etc long period
forecasting is desirable.
2. Level of Forecasting
 Demand forecasting may be undertaken at three
levels firm level, industry level and macro level
 Firm level – concerned with particular firm
 Industry level – different industry/ trade association
 Macro level – forecasting of business conditions in
the entire economy.
3. General or Specific forecasting
 If the forecasting is undertaken generally or
total by a firm – general forecasting
 If the firms requires commodity wise or area
wise forecasting – specific forecasting.
4. Problems and methods of forecasting
 Methods & problems of forecasting the demand
for new products are different from old or
established products.
 The old/established product is not at all so
difficult to estimate future demand.
 While – it is very difficult to forecast the
demand for new product.
5. Classification of Goods
 Demand forecasting are depends on the nature of goods –
producer goods & consumer good – durable & non-durable goods
etc.
6. Knowledge of different market conditions
 Demand forecasting is different under different market conditions
 Monopoly market – forecasting is easy, since there are no
substitutes or competitors
 Monopolistic competition – firm has to face much risk as there are
many substitutes.
7. Other factors
 There are some special factors which must also be taken into
account
 For example – political factors (elections) sociological factors,
psychology of consumers & pattern of income distribution etc.
 Forecasting differs from product to product, time to time & place to
place.
Methods of Demand Forecasting

 Demand forecasting is a difficult exercise, making


estimates for future under the changing conditions is a
Herculean task.
 Consumer’s behaviour is the most unpredictable-
because it is motivated & influenced by a multiplicity of
forces.
 There is no easy method or a simple formula which
enables the manager to predict the future.
 Economists and statisticians have developed several
methods of demand forecasting.
 Each of there methods have its relative advantages &
disadvantages.
 Selection of the right method is essential to make
demand forecasting accurate.
 In demand forecasting a judicious combination of
statistical skills & rational judgment needed.
Chart
Survey Method
The survey method are also called as direct
method, the information obtain - future demand
for goods - through a survey method.
Survey are important technique for short term
forecasts.
This is especially in the case when a firm
introduce new product into the market.
Survey method generally involve use of
conducting consumer interview/sending mailed
questionnaires asks consumer about their
intentions of demand for goods.
Generally individual firms/manager make survey
when they are introducing a new product in their
existing product.
Opinion Polling Method

This method is also known as sales-force-


composite method/collective opinion method.
Under this method, the salesmen have to report to
the head office their estimates of expectations of
sales in their territories.
Such information can also be obtained from
retailers and wholesalers by the company.
The average value judgment & collective wisdom of
top sales executives, marketing manager,
business//managerial economists all together.
Export Opinion

Apart from salesmen & consumers,


distributors or outside experts may also
be used for forecasting.
In USA – automobile companies get sales
estimates directly from their dealers.
Firms in advanced countries make use of
outside experts for estimating future
demand.
Delphi Method
Olaf Helmer originated the Delphi method in the
late 1940s.
A variant of the opinion poll & survey method is
called Delphi method.
It is a highly sophisticated statistical method.
Under this method, a group of experts &
repeatedly questioned for their
opinion/comments on some issues & their
agreements & disagreements are clearly
identified.
It is a time saving device
The heterogeneous group of experts with
different backgrounds
D. Consumers Interview method
In this method the consumers are contacted
personally to know about their plans &
preferences regarding the consumption of the
product.
A list of all potential buyers would be drawn &
each buyers will be approached & asked how
much he plans to buy the listed product in
future.
This method seems to be the most ideal
method for forecasting demand – This method
gives first hand information – it is three types
1. Complete Enumeration Method
2. Sample Survey
3. End – Use Method
1. Complete Enumeration Method
 all the consumers of the product are interviewed &
are asked to inform about future plan of purchasing
that product.
2. Sample Survey method
 A sample of consumers is selected for interview.
 The sample may be random sampling or stratified
sampling.
 This method is easy, less costly & also highly
useful.
3. End – Use Method
 Information about the end use of the product is
collected from industrial users & others from
different sectors of the economy.
 Such as industries, final consumption, export &
imports etc.
Statistical Method
Statistical method is used for long run
forecasting.
Statistical & mathematical techniques are used
to forecast demand.
Statistical methods has been used to explain
time-series & cross-section data for estimating
long-term demand.
Statistical methods are considered to be
superior techniques of demand estimation.
The important statistical methods are –
1. Trend Projection method/time series
2. Barometric methods
3. Econometric method
1. Trend project method
Trend project method are also called as time
series method – therefore, it is also known as
time series analysis.
The data relating to sales over a period of time
is known as time series data (10 – 20 yrs).
On the basis of the past trend in demand,
forecasting the future demand trend is possible.
Trend project method classified into 3 types –
1. Graphical method
2. Fitting trend equation/least square method &
3. Box – Jenkins method
1. Graphical Method
 Annual data on sales are plotted on a graph paper & a
line is drawn through the plotted points.
 This method is very simple & less expensive.
2. Fitting Trend Equation
 A trend line (curve) is fitting to the time-series sales data
with the aid of statistical techniques.
3. Box Jenkins Method
 This method of forecasting is used only for short-term
predictions.
 This method is suitable for forecasting demand with only
stationary time series sales data.
 Stationary time-series is one which does not reveal a log
term trend.
2. Barometric Method
 Barometric method is an improvement over
trend projection method.
 Under barometric method, present events are
used to predict the directions of change in
future.
 This method done with the help of economic &
statistical indicators.
 This method is also known as Economic
Indicators Methods. Under barometric
method, present events are used to predict
the directions of change in future.
3. Econometric Methods
The econometric methods combine statistical
tools with economic theories to estimate
economic variables & to forecast economic
events.
Demand forecasting made through econometric
methods are much more reliable than those
made through any other method.
The econometric methods are of two types –
1. Regression Method
2. Simultaneous Equations Methods
1. Regression method –
 Refers to those methods by which the relationship
between quantity demanded & one or more independent
variable (like – income, price of commodity &
advertisement cost) is estimated.
 It consists 2 methods –
1. Simple Regression Analysis – used when the
quantity demanded is estimated as a function of a
single independent variable such as price.
2. Multiple Regression Analysis – used to estimate
demand as a function of two or more independent
variables
2. Simultaneous Equation Method
 This method is also known as the complete system
approach.
 It involves simultaneous considerations of all variables.