DEMAND FORECASTING

Demand forecasting is the art as well as the science of predicting

the likely demand for a product or service in the future. This prediction
is based on past behaviour patterns and the continuing trends in the
present. Hence, it is not simply guessing the future demand but is
estimating the demand scientifically and objectively. Thus, there are
various methods of demand forecasting which we will discuss here.

Methods of Demand Forecasting

There is no easy or simple formula to forecast the demand. Proper
judgment along with the scientific formula is needed to correctly
predict the future demand for a product or service. Some methods of
demand forecasting are discussed below:

1. Survey of Buyer’s Choice

When the demand needs to be forecasted in the short run, say a

year, then the most feasible method is to ask the customers directly that
what are they intending to buy in the forthcoming time period. Thus,
under this method, potential customers are directly interviewed.
This survey can be done in any of the following ways:

a. Complete Enumeration Method: Under this method, nearly all the

potential buyers are asked about their future purchase plans.
b. Sample Survey Method: Under this method, a sample of potential
buyers are chosen scientifically and only those chosen are
interviewed.
c. End-use Method: It is especially used for forecasting the demand
of the inputs. Under this method, the final users i.e. the consuming
industries and other sectors are identified. The desirable norms of
consumption of the product are fixed, the targeted output levels are
estimated and these norms are applied to forecast the future
demand of the inputs.
Hence, it can be said that under this method the burden of demand
forecasting is on the buyer. However, the judgments of the buyers are
not completely reliable and so the seller should take decisions in the
light of his judgment also.

The customer may misjudge their demands and may also change their
decisions in the future which in turn may mislead the survey. This
method is suitable when goods are supplied in bulk to industries but not
in the case of household customers.

2. Collective Opinion Method

Under this method, the salesperson of a firm predicts the estimated

future sales in their region. The individual estimates are aggregated to
calculate the total estimated future sales. These estimates are reviewed
in the light of factors like future changes in the selling price, product
designs, changes in competition, advertisement campaigns, the
purchasing power of the consumers, employment
opportunities, population, etc.

The principle underlying this method is that as the salesmen are closest
to the consumers they are more likely to understand the changes in their
needs and demands. They can also easily find out the reasons behind
the change in their tastes.

Therefore, a firm having good sales personnel can utilize their

experience to predict the demands. Hence, this method is also known as
Sales force opinion or Grassroots approach method. However, this
method depends on the personal opinions of the sales personnel and is
not purely scientific.

3. Barometric Method

This method is based on the past demands of the product and tries
to project the past into the future. The economic indicators are used to
predict the future trends of the business. Based on future trends, the
demand for the product is forecasted. An index of economic indicators
is formed. There are three types of economic indicators. leading
indicators, lagging indicators, and coincidental indicators.

The leading indicators are those that move up or down ahead of some
other series. The lagging indicators are those that follow a change after
some time lag. The coincidental indicators are those that move up and
down simultaneously with the level of economic activities.

4. Market Experiment Method

Another one of the methods of demand forecasting is the market

experiment method. Under this method, the demand is forecasted by
conducting market studies and experiments on consumer behavior
under actual but controlled, market conditions. Certain determinants of
demand that can be varied are changed and the experiments are done
keeping other factors constant. However, this method is very expensive
and time-consuming.

5. Expert Opinion Method

Usually, market experts have explicit knowledge about the

factors affecting demand. Their opinion can help in demand
forecasting. The Delphi technique, developed by Olaf Helmer is one
such method. Under this method, experts are given a series of carefully
designed questionnaires and are asked to forecast the demand. They are
also required to give the suitable reasons. The opinions are shared with
the experts to arrive at a conclusion. This is a fast and cheap technique.

6. Statistical Methods

The statistical method is one of the important methods of

demand forecasting. Statistical methods are scientific, reliable and free
from biases. The major statistical methods used for demand forecasting
are:
 A. Trend Projection Method: This method is useful where the
organization has a sufficient amount of accumulated past data of the
sales. This date is arranged chronologically to obtain a time series.
Thus, the time series depicts the past trend and on the basis of it, the
future market trend can be predicted. It is assumed that the past
trend will continue in the future. Thus, on the basis of the predicted
future trend, the demand for a product or service is forecasted.

B. Regression Analysis: This method establishes a relationship

between the dependent variable and the independent variables. In
our case, the quantity demanded is the dependent variable and
income, the price of goods, the price of related goods, the price of
substitute goods, etc. are independent variables. The regression
equation is derived assuming the relationship to be linear.
Regression Equation: Y = a + bx. Where Y is the forecasted
demand for a product or service.

TYPES OF FORECASTING:
From the point of view of “time span”, forecasting may be
classified into two.

1. Short-term demand forecasting; and

2. Long-term demand forecasting.

1. SHORT-TERM DEMAND FORECASTING

This is limited to short period not exceeding one year. It
concerns with policies relating to sales, purchases, pricing and
finances. It is with reference to the existing production capacity of the
firm.

Short-term demand forecasting is useful in taking adhoc decisions

concerning the day-to-day working of the concern. Many companies
use forecasting for setting sales targets and for establishing controls
and incentives. Knowledge of the short-term forecasting helps in
short-term planning.
2.LONG-TERM FORECASTING
Product and involves expansion of production units. A multi-
product firm must ascertain Long-term forecasting involves the
assessment of long term demand for the not only the total demand
situation, but also the demand for different items.
Long-term forecasting involves the study of technological
developments, economic trends and consumer preferences and man-
power planning, Long-term forecasting enables to take major strategic
business decisions.

When forecasts covering long periods are made, the probability of

error may be high. Hence, quality and competent forecasting are
essential requirements for this type.

FACTORS AFFECTING DEMAND

FORECASTING:
For making a good forecast, it is essential to consider the
various factors governing demand forecasting. These factors are
summarized as follows.

1. Prevailing business conditions: While preparing demand forecast it

becomes necessary to study the general economic conditions very
carefully. These include the price level changes, change in national
income, per-capita income, consumption pattern, savings and
investment habits, employment etc.

2. Conditions within the industry: Every business enterprise is only a

unit of a particular industry. Sales of that business enterprise are only
a part of the total sales of that industry. Therefore, while preparing
demand forecasts for a particular business enterprise, it becomes
necessary to study the changes in the demand of the whole industry,
number of units within the industry, design and quality of product,
price policy, competition within the industry etc.

3. Conditions within the firm: Internal factors of the firm also affect
the demand forecast. These factors include plant capacity of the firm,
quality of the product, price of the product, advertising and
distribution policies, production policies, financial policies etc.

4. Factors affecting export trade: If a firm is engaged in export trade

also it should consider the factors affecting the export trade. These
factors include import and export control, terms and conditions of
export, Exim policy, export conditions, export finance etc.

5. Market behaviour : While preparing demand forecast, it is required

to consider the market behaviour which brings about changes in
demand.

6. Sociological conditions: Sociological factors have their own impact

on demand forecast of the company. These conditions relate to size of
population, density, change in age groups, size of family, family life
cycle, level of education, family income, social awareness etc.

7. Psychological conditions: While estimating the demand for the

product, it becomes necessary to take into consideration such factors
as changes in consumer tastes, habits, fashions, likes and dislikes,
attitudes, perception, life styles, cultural and religious bents etc.

8. Competitive conditions: The competitive conditions within the

industry may change. Competitors may enter into market or go out of
market. A demand forecast prepared without considering the activities
of competitors may not be correct.
 EXAMPLE
FORECASTING THE PRODUCTION OF ELECTRIC FAN
IN INDIA