Estimating and forecasting Demand

What is a Demand?

When we market a product in our own business that product should fulfill 3
characteristics

1) Desire to have that product

2) Willingness to pay for that product
3) Ability to pay for that product

If this product meets all this characteristic then there is an effective demand for that
product, otherwise there is no demand.

Demand Forecasting

As an example if we try to market rice flour products, it is more convenient

than marketing wheat flour products. Because the consumption of rice flour products
has been increased in the recent past and it is still keep increasing at a higher rate.
Also consumption of wheat flour products keep decreasing this is because the rates of
the wheat flour products are growing up rapidly.
 Block diagram for demand forecasting

Length of forecasting

Depending on the period considered for forecasting there are 3 types

1) Short-term forecasts; short-term forecasts, involving a period up to twelve months.
2) Medium-term forecasts; medium-term forecasts, involving a period from one to two
years.
3) Long-term forecasts; long-term forecasts, involving a period of three to ten years.

Purpose of short term forecasting

 Appropriate production scheduling so as to avoid the problem of over-production &
the problem of short supply.
 Helping the firm to reducing costs of purchasing raw materials.
 Determining appropriate price policy.
 Setting sales targets & establishing controls & incentives.
 Evolving a suitable advertising & promotion programme.
 Forecasting short-term financial requirements

Short term forecasting is needed for company to schedule existing resources,

acquire additional resources and determine what resources are needed. As a example
determining how many employees does the company need, determining what kind of
machine do they need, determining which services are growing in the demand etc…

Purposes of Long term forecasting

 Planning of a new unit or expansion of an existing unit. A multi-product firm must
ascertain not only the total demand situation, but also the demand for different items
separately.
 Planning long-term financial requirements. As planning for raising funds requires
considerable advance notice, long –term sales forecasting are quite essential to assess
long-term financial requirements.
 Planning man-power requirements. Training & personnel development are long-term
propositions, taking considerable time to complete.
 Types of Forecasts
There are 2 types of forecasting. They are qualitative and quantitative.
1) The qualitative type is mainly based on experience, judgment and knowledge.
It is used when situation is vague & little data exist.
2) The quantitative type is mainly based on data and statistics. It is used when
situation is stable & historical data exist

Under qualitative type there are some techniques of forecasting, Some of them are

 Jury of executive opinion :- The opinions of a small group of high-level managers

are pooled and together they estimate demand. The group uses their managerial
experience, and in some cases, combines the results of statistical models.
 Game theory :- Game theory is a branch of applied mathematics that is used most
notably in economics, as well as in engineering, political science, international
relations, computer science, and philosophy. Game theory attempts to mathematically
capture behavior in strategic situations, or games, in which an individual's success in
making choices depends on the choices of others.

 Delphi method :- A panel of experts is identified where an expert could be a decision

maker, an ordinary employee, or an industry expert. Each of them will be asked
individually for their estimate of the demand. An iterative process is conducted until
the experts have reached a consensus.

 Consumer market survey :- The customers are asked about their purchasing plans
and their projected buying behavior. A large number of respondents is needed here to
be able to generalize certain results.

Under quantitative method there are some techniques used. Some of them are,

 Time series models :- A time series is a collection of observations of well-defined

data items obtained through repeated measurements over time.
  Causal models :- There is a reason why people buy our product. If we can understand
what that reason (or set of reasons) is, we can use that understanding to develop a
demand forecast
 Extrapolation :- This is the process of constructing new data points outside a discrete
set of known data points. It is similar to the process of interpolation, which constructs
new points between known points, but the results of extrapolations are often less
meaningful, and are subject to greater uncertainty. It may also mean extension of a
method, assuming similar methods will be applicable. Extrapolation may also apply to
human experience to project, extend, or expand known experience into an area not
known or previously experienced so as to arrive at a (usually conjectural) knowledge
of the unknown
 Data mining:- It is the process of extracting patterns from data. Data mining is seen as
an increasingly important tool by modern business to transform data into business
intelligence giving an informational advantage. It is currently used in a wide range of
profiling practices, such as marketing, surveillance, fraud detection, and scientific
discovery.
 Neural Nets :- Neural networks are computer intensive methods that use decision
processes analogous to those of the human brain. Like the brain, they have the
capability of learning as patterns change and updating their parameter estimates.
However, much data is needed in order to estimate neural network models and to
reduce the risk of over-fitting the data

As an example in the past radio was developed ( before the television) because it could
be used to listen to news, music etc from a far distance. That’s why it was so popular in that
time. But when the television came the demand for the radio was rapidly decreased because
television could be used to not only for listening but also for view things from a far distance.
So if we try to market a product we should learn what are the similar products already
available & the what are the reasons for them to be popular and enrich our product more with
those qualities such that there exists a demand for our product in the market.

As an example for qualitative method the surveys carried out by different different
companies can be observed. People from those come and write down the thoughts of people
about the products, what do they expect through a product etc. Then according to these they
can forecast the demand for their product.

Once adequate predictive models are found, these models can then be used to forecast
demand. A demand forecast model may actually be an ensemble of multiple models working
together. This technique of combining models often results in better predictive accuracy.
When one model gets off track, the ensemble as a whole counteracts.

As more data accumulate about consumer behavior, demand forecast models should be
updated. This will be a continual effort monitoring and modeling demand in order to be
constantly aware of changes. Failing to update forecast models and take advantage of all the
information available will likely prove to be a costly mistake.

For showing the importance of these forecasting, as an example relating to the electrical
field, the gestation period for power plants, which are set up to meet consumer demand,
typically varies between 7 to12 years in the case of thermal and hydro plants and 3 to 5 years
for gas-based plants. As a result, utilities must forecast demand for the long run (10 to 20
years), make plans to construct facilities and begin development well before the indices of
forecast growth reverse or slowdown. In manufacturing institutions and electric utilities there
are a number of factors that drive the forecast, including market share. The forecast further
drives various plans and decisions on investment, construction and conservation. Since
electric utilities are basically dedicated to the objective of serving consumer demands, in
general the consumer can place a reasonable demand on the system in terms of quantity of
power. With some built-in reserve capacity, the utilities may have to configure a system to
respond to these to the extent possible. In the process of making predictions, forecaster bears
in mind the feedback effects of pricing and other policy changes, and therefore, participates
in the process of designing ways and means to meet consumer demands.

When talking about short term demand forecasting it also takes place in process of
regulation. A precise estimate of demand is important for the purpose of setting tariffs. A
detailed consumer category-wise consumption forecast helps in the determination of a just
and reasonable tariff structure wherein no consumer pays less than the cost incurred by the
utility for supplying the power. Also, the utility can then plan the power purchase
requirements so as to meet the demand while maintaining the merit order dispatch to achieve
optimization in the use of their resources.

Recent trends of demand forecasting

Most of firms are giving importance to demand forecasting than a decade ago.
Better kinds of data & improved forecasting techniques have been developed. There is a
greater emphasis on sophisticated techniques such as using computers. New products
forecasting is still in infancy. Forecasts are usually broken down in monthly forecasts.
However, in spite of application of newer & modern techniques, demand forecasts are still
not too accurate.

A simple, but useful, way to identify major errors in demand forecasting is to compare
the results with those obtained for similar projects and/or apply standard values of price and
time cost elasticity. If major differences are found, the demand model must be revised to
avoid erroneous predictions. Nonetheless, we should bear in mind that the project’s impact on
demand will depend on the specific location of activities and population, as well as the
changes in transport costs. Therefore, the elasticity approach is not appropriate when
modeling major changes in the network.
By using demand forecasting we may have the ability to see ahead what a market may
grow and how it will perform with a product or service & able to be ready for upcoming
crises & take pre-actions for them. So it will help us to be a successful businessman in the
near future.