Demand forecasting

Topics to be covered

 Definition

 Factors

 Purposes of Forecasting

 Criteria for a good forecasting

 Methods of demand forecasting

 Definition
 Is a process by which an individual or a firm
predicts future demand for product or products

 Accurate forecasting-enables these firms to

produce required quantities at the right time and
arrange well in advance for the various factors
of production

 Better planning and allocation of national

resources.
 Factors Influencing DF
 How far ahead?

 Short term
 Long- term

 Should forecast be general or specific

 Problems and methods

 Classification of goods
- consumer
- durable
- consumer goods and services
 Factors
 Forecasting at different levels

– Macro

– Industrial

– Firm-level
 Purposes of forecasting

 Purposes of short-term forecasting

 Purposes of long –term forecasting

 Short-term forecasting
 Production scheduling

 Reducing cost of purchasing raw materials

 Determining appropriate price policy

 Setting sales targets and establishing controls and

incentives

 Evolving a suitable advertising and promotion

programme

 Forecasting short-term financial

 Long-term forecasting

 Planning of a new unit or expansion of an

existing unit

 Planning of long-term financial requirements

 Planning of man-power requirements

 Criteria for a good forecasting
 Accuracy

 Plausibility

 Simplicity

 Economy

 Availability

 Durability
 Methods of demand forecasting
 Survey or buyer’s  Smoothing techniques
intention
 Analysis of time series
 Delphi method and trend projections

 Expert opinion  Use of economic

indicators

 Collective opinion
 Controlled experiments

 Naïve models
 Judgmental approach
Survey or buyers method
 Direct method of estimating sales in the near future

 Asking customers what the buyer’s are planning to buy

Known as opinion survey

 The burden of forecasting goes to buyer

 Method is best when bulk of sales is made.

 Customers may misjudge or mislead or may be uncertain

about quantity

 Not useful in case of house old customers

 Does not measure and expose the variables under

managements control
Methods of demand forecasting
 Survey methods
- experts opinion
- consumer survey
- complete enumeration
- sample survey
- end- use
- Delphi method
Methods of demand forecasting
- market experimentation
- stimulated market method
- actual market method

 Statistical method
- trend analysis
- heading indicator analysis
- regression method
- simultaneous equation
 Survey Methods

 conducted by sales agencies

 a direct method of addressing people

 helps in gaining first hand information

 Expert’s opinion
 business firm prefers to depend on survey of
experts

 Experts are those who have the feel about the

product

 opinion poll is conducted among experts

 Sometimes this method is also called the

“hunch method”
 Advantages

 This method is very easy and less costly to

carry out.

 This method produces quick results

 When a firm intends to bring a new product, this

method is very useful to elicit the opinion of
experts on its marketing plans
 Disadvantage
 The experts must have wide knowledge and
experience otherwise their opinion may be
personal based on guess work.

 Experts opinion may be biased for a number

of reasons.
 Consumer survey
 interviewing the consumers directly to get
information about their purchase plans at a
number of possible prices over a particular
period of time.

 information collected through questionnaire

 The data will have to be classified and tabulated

for systematic presentation and analysis.
 Complete enumeration method/
census method:
 All consumers of a product are contacted and
they are interviewed to know their probable
demand for the forecast period.

 This individual probable demand is added to

ascertain the demand forecast for the firm’s
product.

 For example there are N consumers, each

demanding commodity X, then the total demand
forecast would be EN * n. where n=1.
 Advantages
 This method simply records the data and
aggregates; it does not introduce any value
judgment of his own.

 The demand forecast through this method is

likely to be more accurate than many other
methods.
 Disadvantages

 It is time consuming and costly method

 There can be large number of errors in the

data collection, as it is a tedious and
cumbersome process.
 Sample survey
 Only few consumers are selected by using some
appropriate sampling technique.

 They are interviewed to ascertain their probable

demands for the product for the forecast period.

 Their average demand is then calculated.

 This average demand for the sample is multiplied by

the total number of consumers to obtain the aggregate
demand forecast for the product in question.
 Advantages

 It is a direct method of collecting data from

consumers. The information obtained is first
hand, it is more reliable.

 This method saves time, cost and energy. It is

economical, if information is collected by postal
questionnaire.
 Disadvantages
 There may be sampling error. The smaller the
size of the sample, the larger the sampling
error.

 This method provides scope for errors. The

consumer may not understand the significance
of the questions asked, they may be dishonest,
reluctant or shy to reply or they may be either
vague or imaginary replies. This reduces the
usefulness of information collected.
 End-use Method
 the demand for a product is forecasted through a
survey of its users.

 A product may be used for final consumption by house

old sector and government and as an intermediate
product by different industries as well as may be
exported and imported.

 purposes can be obtained through a survey of all or

selected consumers, exporters and importers and
industries using it as an input thus the total demand
forecast can be obtained as the sum of the demand
forecast of all three components.
 Advantages
 It provides use-wise or sector-wise demand
forecasts.

 This method is used now as a standard tool in

economic analysis and are extensively used by
governmental and no-governmental agencies.
 Disadvantages
 This method assumes that technical structure
of production remains unchanged overtime,
which is not true. Because with economic
development technical innovations continue to
take place and lead to technological changes in
the industrial structure.

 This method needs extensive information on

the probable demands of the final goods sector.
No company how so ever large can hope to
possess this information.
 Delphi method

 In this method an attempt is made to arrive at a

consensus in an uncertain area by questioning
a group of experts repeatedly until some sort of
unanimity is arrived among all experts.

 These meetings help to narrow down different

views of experts.
 Advantages

 In this method it is possible to pose the problem

to experts directly

 It generates a reasonable opinion in place of

unstructured opinion.

 It is a cheap method, save time and resources.

 Disadvantages

 The success of this method depends upon wide

knowledge and experience of experts.

 It could be tedious and costly method if the

experts are not too large and are cooperative
and forecaster has the necessary funds and
ability to perform the task.
 Statistical method

 Time series data: Refers to data collected

over a period of time recording historical
changes in variables like price, income, etc.
that influenced demand for a commodity
Time series analysis relate to determination
of change in variable in relation to time.
 Statistical method
 Cross sectional :Is undertaken to determine
the effect of changes in variables like price,
income, etc. on demand for a commodity at a
point of item. In cross sectional analysis,
different levels of sales among different income
groups may be compared at a specific point of
time and income elasticity is then estimated on
the basis of these differences.
 Statistical methods
 Trend analysis: A firm which has been in existence
for a long time will have accumulated data on
sales pertaining to different time periods.
 When such data is arranged, chronologically it is
know as “Time Series”.
 A typical time series has four components, trend,
cyclical fluctuations, seasonal variations and
random or irregular fluctuations.
 This method is highly subjective and considerably
depends on the bias of the person drawing the
curve.
 The main advantage of this method is that it does
not require the formal knowledge of economic
theory and the market, it only needs the time
series data.
 Regression method
 involves a study of the dependence of one
variable on the other variables.

 In demand forecasting demand is estimated

with the help of a regression equation where in
demand is the dependent variable and price,
advertising expenditure, consumer’s income,
etc is the independent variable.