SARVAJANIK UNIVERSITY

FY BBA SEMESTER-II

MODULE:1
DEMAND ESTIMATION & DEMAND
FORECASTING

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INTRODUCTION ON DEMAND ESTIMATION
AND DEMAND FORECASTING

An organization faces several internal and external risks, such as high competition, failure of
technology, labor unrest, inflation, recession, and change in government laws.

Therefore, most of the business decisions of an organization are made under the conditions of risk
and uncertainty.

An organization can lessen the adverse effects of risks by determining the demand or sales prospects
for its products and services in future. 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.

DEMAND ESTIMATION and FORECASTING means predicting future demand for the
product under given conditions and help the manager in making decisions with regard to
production, sales, investment, expansion, employment of manpower etc., both in the short run
as well as in the long run.

DEMAND ESTIMATION
DEMAND ESTIMATION is a prediction focusing on future consumer behaviour. It predicts

demand for a business's products or services by applying a set of variables that show how, for
example, price changes, a competitor's pricing strategy or changes in consumer income levels will
affect product demand.

DEMAND FORECASTING

DEMAND FORECASTING is a field of predictive analytics which tries to understand and predict

customer demand to optimize supply decisions by corporate supply chain and business
management. Demand forecasting methods are divided in two major categories, QUALITATIVE and
QUANTITATIVE methods.

The cost should be controlled by producing correct level of goods in the firm and also according to the
demand for those goods in the market. For the estimation of demand, demand forecasting is to be
done by the firm.
✓ Forecasting = estimation of future situations.
✓ Forecasting reduces or minimizes the uncertainty.
✓ By forecasting effective decisions can be taken for tomorrow.

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 ✓ Demand forecasting is based on the determinants of the demand.
✓ Demand for goods increases and gives sales.
✓ Sales are the primary source of the income for a firm.

MEANING / DEFINITION OF DEMAND

FORECASTING

DEMAND FORECASTING is the activity of estimating the quantity of a product or service that

consumers will purchase. Demand forecasting involves techniques including both informal methods,
such as educated guesses, and quantitative methods, such as the use of historical sales data or
current data from test markets. Demand forecasting may be used in making pricing decisions, in
assessing future capacity requirements, or in making decisions on whether to enter a new market.

DEMAND FORECASTING is a process of predicting the demand for an organization’s products or

services in a specified time period in the future. Demand forecasting is helpful for both new as well as
existing organizations in the market.

For Example, for various needs for demand forecasting in business organizations, a new organization
needs to anticipate demand to expand its scale of production. On the other hand, an existing
organization requires demand forecasts to avoid problems, such as overproduction and
underproduction.

DEMAND FORECASTING enables an organization to arrange for the required inputs as per the
predicted demand, without any wastage of materials and time.

ORGANIZATIONS FORECAST DEMAND IN SHORT TERM OR LONG TERM

DEPENDING ON THEIR REQUIREMENTS.

SHORT-TERM FORECASTING is done for coordinating routine activities, such as scheduling production
activities, formulating pricing policy, and developing an appropriate sales strategy.

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On the contrary, LONG-TERM FORECASTING is performed for planning a new project, expansion, and
upgradation of production plant, etc.

There are a number of techniques for forecasting demand. Some of the popular techniques of
demand forecasting are SURVEY METHODS and STATISTICAL METHODS.

CONCEPT OF DEMAND FORECASTING

In order to mitigate risks, it is of paramount importance for organizations to determine the future
prospects of their products and services in the market. This knowledge of the future demand for a
product or service in the market is gained through the process of demand forecasting.

DEMAND FORECASTING can be defined as a process of predicting the future demand for an

organization’s goods or services.

It is also referred to as sales forecasting as it involves anticipating the future sales figures of an
organization.

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SOME OF THE POPULAR DEFINITIONS OF DEMAND FORECASTING ARE AS

FOLLOWS:

— According to CUNDIFF AND STILL, "Demand Forecasting is an estimate of Demand during a

specified period. Which estimate is tied to a proposed marketing plan and which assumes a particular
set of uncontrollable and competitive forces."

— In the words of PROF. PHILIP KOTLER, The company (sales) forecast is the expected level of
company sales based on a chosen marketing plan and assumed marketing environment"

— According to EVAN J. DOUGLAS, "Demand forecasting may be defined as the process of

finding values for demand in future time periods."

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.

Demand can be forecasted by organizations either internally by making estimates called GUESS
ESTIMATE or externally through specialized consultants or market research agencies.

COMPONENTS OF DEMAND FORECASTING

Let us discuss the basis COMPONENTS OF DEMAND FORECASTING in detail:

1. LEVEL OF FORECASTING
2. TIME PERIOD INVOLVED

3. NATURE O PRODUCTS

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 1. LEVEL OF FORECASTING
Demand forecasting can be done at the firm level, industry level, or economy level. At the firm level,
the demand is forecasted for the products and services of an individual organization in the future. At
the industry level, the collective demand for the products and services of all organizations in a
particular industry is forecasted. On the other hand, at the economy level, the aggregate demand for
products and services in the economy as a whole is anticipated.

2. TIME PERIOD INVOLVED

On the basis of the duration, demand is forecasted in the short run and long term, which is explained
as follows:

✓ SHORT-TERM FORECASTING: It involves anticipating demand for a period not

exceeding one year. It is focused on the short-term decisions (for example, arranging
finance, formulating production policy, making promotional strategies, etc.) of an
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 organisation.

✓ LONG-TERM FORECASTING: It involves predicting demand for a period of 5-7 years and
may extend for a period of 10 to 20 years. It is focused on the long-term decisions (for
example, deciding the production capacity, replacing machinery, etc.) of an organisation.

3. NATURE OF PRODUCTS
Products can be categorized into consumer goods or capital goods on the basis of their nature.
Demand forecasting differs for these two types of products, which is discussed as follows:

✓ CONSUMER GOODS: The goods that are meant for final consumption by end users are

called consumer goods. These goods have a direct demand. Generally, demand
forecasting for these goods is done while introducing a new product or replacing the
existing product with an improved one.

✓ CAPITAL GOODS: These goods are required to produce consumer goods; for example,

raw material. Thus, these goods have a derived demand. The demand forecasting of
capital goods depends on the demand for consumer goods. For example, prediction of
higher demand for consumer goods would result in the anticipation of higher demand for
capital goods too.

TYPES OF DEMAND FORCASTING

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Demand forecasting can be conducted in a number of ways; to achieve the most accurate, well-
rounded picture of future sales, you might even consider conducting more than one of these six types
of demand forecasting.

Your forecast may differ based on the forecasting model you use. Best practice is to do multiple
demand forecasts. This will give you a more well-rounded picture of your future sales. Using more
than one forecasting model can also highlight differences in predictions. Those differences can point
to a need for more research or better data inputs.

1. PASSIVE DEMAND FORECASTING

Passive demand forecasting is the simplest type. In this model, you use sales data from the past to predict the
future. You should use data from the same season to project sales in the future, so you compare apples to
apples. This is particularly true if your business has seasonal fluctuations.

Passive demand forecasting doesn’t require statistical methods or analysis of economic trends; it simply involves
using past sales data to predict future sales data. So, while this makes passive data forecasting fairly easy, it’s
really only useful for businesses that have a lot of historical data to pull from.

The passive forecasting model works well if you have solid sales data to build on. In addition, this is a good
model for businesses that aim for stability rather than growth. It’s an approach that assumes that this year’s sales
will be approximately the same as last year’s sales.

Because the passive model assumes this year’s sales data will be similar to last year’s sales data, it should only
be used by companies that aim for steady sales rather than rapid sales growth.

Passive demand forecasting is easier than other types because it doesn’t require you to use statistical methods
or study economic trends.

2. ACTIVE DEMAND FORECASTING

If your business is in a growth phase or if you’re just starting out, active demand forecasting is a good choice. An
active forecasting model takes into consideration your market research, marketing campaigns, and expansion
plans.

Active demand forecasting is typically used by startup businesses and companies that are growing rapidly. The
active approach takes into account aggressive growth plans such as marketing or product development and also
the general competitive environment of the industry, including the economic outlook, market growth projections,
and more.

Active projections will often factor in externals. Considerations can include the economic outlook, growth
projections for your market sector, and projected cost savings from supply chain efficiencies. Startups that have
less historical data to draw on will need to base their assumptions on external data.

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 3. SHORT-TERM DEMAND FORECASTING

Short-term demand forecasting looks just at the next three to 12 months. This is useful for managing your just-in-
time supply chain. Looking at short-term demand allows you to adjust your projections based on real-time sales
data. It helps you respond quickly to changes in customer demand.

Short-term demand forecasting looks at a small window of time in order to inform the day-to-day (e.g., it may be
used to look at inventory planning for a Black Friday promotion). It’s also useful for managing a just-in-time (JIT)
supply chain or a product lineup that changes frequently. However, most businesses will only use it in conjunction
with longer-term projections.

If you run a product lineup that changes frequently, understanding short-term demand is important. For most
businesses, however, a short-term forecast is just one piece of a larger puzzle. You’ll probably want to look
further out with medium- or long-term demand forecasting.

4. LONG-TERM DEMAND FORECASTING

Your long-term forecast will make projections one to four years into the future. This forecasting model focuses on
shaping your business growth trajectory. While your long-term planning will be based partly on sales data and
market research, it is also aspirational.

Long-term demand forecasting is conducted for a period greater than a year, which helps to identify and plan for
seasonality, annual patterns, and production capacity. A long-term projection is like a blueprint; by forecasting
farther out into the future, businesses can focus on shaping the growth trajectory of their brands, creating their
marketing plan, planning capital investments and expansion strategies, and more to prepare for future demand.

Think of a long-term demand forecast as a roadmap. Using this forecasting technique, you can plan out your
marketing, capital investments, and supply chain operations. That will help you to prepare for future demand.
Being ready for your business growth is crucial to making that growth happen.

5. MACRO & MICRO DEMAND FORECASTING

External macro forecasting incorporates trends in the broader economy. This projection looks at how those
trends will affect your goals. An external macro demand forecast can also give you direction for how to meet
those goals.

Your company may be more invested in stability than expansion. However, a consideration of external market
forces is still essential to your sales projections. External macro forecasts can also touch on the availability of raw
materials and other factors that will directly affect your supply chain.

Demand forecasting at a macro level looks at external forces disrupting commerce such as economic conditions,
competition, and consumer trends. Understanding these forces help businesses identify product or service
expansion opportunities, predict upcoming financial challenges or raw material shortages, and more. Even if your

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company is more interested in stability than growth, a look at external market forces can still keep you in the loop
when it comes to issues that could impact your supply chain.

Demand at a micro level is still external, however, it drills down to the particulars of a specific industry or
customer segment (for example, projecting demand for an organic peanut butter among millennial parents in
Austin, Texas).

6. INTERNAL DEMAND FORECASTING

One of the limiting factors for your business growth is internal capacity. If you project that customer demand will
double, does your enterprise have the capacity to meet that demand? Internal business demand forecasts review
your operations.

The internal business forecasting type will uncover limitations that might slow your growth. It can also highlight
untapped areas of opportunity within the organization. This forecasting model factors in your business financing,
cash on hand, profit margins, supply chain operations, and personnel.

A limiting factor for business growth is internal capacity; say you project that customer demand will triple in the
next three years; does your business have the capacity to meet that demand? With internal forecasting, the
needs of all operations that may impact future sales are identified. For example, in human resources, demand
forecasting could help identify how many people will need to be hired within those next three years to keep things
running smoothly and fill future customer demand.

Internal business demand forecasting is a helpful tool for making realistic projections. It can also point you toward
areas where you need to build capacity in order to meet expansion goals.

IMPORTANCE / SIGNIFICANCE OF DEMAND

FORECASTING
DEMAND FORECASTING plays a crucial role in the management of every business. It helps an

organization to reduce risks involved in business activities and make important business decisions.
Apart from this, demand forecasting provides an insight into the organization’s capital investment and
expansion decisions.

Demand forecasting is vital to the management of every business. It enables an organization to

mitigate business risks and make effective business decisions.

Moreover, demand forecasting provides insight into the organization’s capital investment and
expansion decisions.

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THE SIGNIFICANCE / IMPORTANCE OF DEMAND FORECASTING IS SHOWN IN THE

FOLLOWING POINTS:

1. PRODUCING THE DESIRED OUTPUT

2. ASSESSING THE PROBABLE DEMAND
3. FORECASTING SALES FIGURES
4. BETTER CONTROL
5. CONTROLLING INVENTORY
6. ASSESSING MANPOWER REQUIREMENT
7. ENSURING STABILITY
8. PLANNING IMPORT AND EXPORT POLICIES

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 1. PRODUCING THE DESIRED OUTPUT
Demand forecasting enables an organization to produce the pre-determined output. It also helps the
organization to arrange for the various factors of production (land, labor, capital, and enterprise)
beforehand so that the desired quantity can be produced without any hindrance.

2. ASSESSING THE PROBABLE DEMAND

Demand forecasting enables an organization to assess the possible demand for its products and
services in a given period and plan production accordingly. In this way, demand forecasting avoids
dependence on merely making assumptions for demand.

3. FORECASTING SALES FIGURES

Sales forecasting refers to the estimation of sales figures of an organization for a given period.
Demand forecasting helps in predicting the sales figures by considering historical sales data and
current trends in the market.

4. BETTER CONTROL

In order to have better control on business activities, it is important to have a proper understanding of
cost budgets, profit analysis, which can be achieved through demand forecasting.

5. CONTROLLING INVENTORY

As discussed earlier, demand forecasting helps in estimating the future demand for an organization’s
products or services. This, in turn, helps the organization to accurately assess its requirement for raw
material, semi-finished goods, spare parts, etc.

6. ASSESSING MANPOWER REQUIREMENT

Demand forecasting helps inaccurate estimation of the manpower required to produce the desired
output, thereby avoiding the situations of under-employment or over-employment.

7. ENSURING STABILITY

Demand forecasting helps an organization to stabilize their operations by initiating the development of
suitable business policies to meet cyclical and seasonal fluctuations of an economy.

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 8. PLANNING IMPORT AND EXPORT POLICIES

At the macro level, demand forecasting serves as an effective tool for the government in determining
the import and export policies for the nation. It helps in assessing whether import is required to meet
the possible deficit in domestic supply.

OBJECTIVES OF DEMAND FORECASTING

Demand forecasting constitutes an important part in making crucial business decisions.

THE OBJECTIVES OF DEMAND FORECASTING ARE DIVIDED INTO SHORT AND LONG-TERM

OBJECTIVES, WHICH ARE SHOWN IN FIGURE-1:

THE OBJECTIVES OF DEMAND FORECASTING (AS SHOWN IN FIGURE-1) ARE DISCUSSED

AS FOLLOWS:

I. SHORT-TERM OBJECTIVES
Include the following:
i. FORMULATING PRODUCTION POLICY:

Helps in covering the gap between the demand and supply of the product. The demand forecasting
helps in estimating the requirement of raw material in future, so that the regular supply of raw material
can be maintained. It further helps in maximum utilization of resources as operations are planned
according to forecasts. Similarly, human resource requirements are easily met with the help of
demand forecasting.

ii. FORMULATING PRICE POLICY:

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Refers to one of the most important objectives of demand forecasting. An organization sets prices of
its products according to their demand. For example, if an economy enters into depression or
recession phase, the demand for products falls. In such a case, the organization sets low prices of its
products.

iii. CONTROLLING SALES:

Helps in setting sales targets, which act as a basis for evaluating sales performance. An organization
make demand forecasts for different regions and fix sales targets for each region accordingly.

iv. ARRANGING FINANCE:

Implies that the financial requirements of the enterprise are estimated with the help of demand
forecasting. This helps in ensuring proper liquidity within the organization.

II. LONG-TERM OBJECTIVES

Include the following:

i. DECIDING THE PRODUCTION CAPACITY:

Implies that with the help of demand forecasting, an organization can determine the size of the plant
required for production. The size of the plant should conform to the sales requirement of the
organization.

ii. PLANNING LONG-TERM ACTIVITIES:

Implies that demand forecasting helps in planning for long term. For example, if the forecasted
demand for the organization’s products is high, then it may plan to invest in various expansion and
development projects in the long term.

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FACTORS INFLUENCING DEMAND
FORECASTING
Demand forecasting is a proactive process that helps in determining what products are needed
where, when, and in what quantities. There are a number of factors that affect the process of demand
forecasting.

SOME OF THE FACTORS THAT INFLUENCE DEMAND FORECASTING ARE SHOWN

IN FIGURE-2:

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THE VARIOUS FACTORS THAT INFLUENCE DEMAND FORECASTING (“AS SHOWN

IN FIGURE-2) ARE EXPLAINED AS FOLLOWS:

1. TYPES OF GOODS:
Affect the demand forecasting process to a larger extent. Goods can be producer’s goods, consumer
goods, or services. Apart from this, goods can be established and new goods. Established goods are
those goods which already exist in the market, whereas new goods are those which are yet to be
introduced in the market.

Information regarding the demand, substitutes and level of competition of goods is known only in case
of established goods. On the other hand, it is difficult to forecast demand for the new goods.
Therefore, forecasting is different for different types of goods.

2. COMPETITION LEVEL:
Influence the process of demand forecasting. In a highly competitive market, demand for products
also depend on the number of competitors existing in the market. Moreover, in a highly competitive
market, there is always a risk of new entrants. In such a case, demand forecasting becomes difficult
and challenging.

3. PRICE OF GOODS:
Acts as a major factor that influences the demand forecasting process. The demand forecasts of
organizations are highly affected by change in their pricing policies. In such a scenario, it is difficult to
estimate the exact demand of products.

4. LEVEL OF TECHNOLOGY:
Constitutes an important factor in obtaining reliable demand forecasts. If there is a rapid change in
technology, the existing technology or products may become obsolete. For example, there is a high
decline in the demand of floppy disks with the introduction of compact disks (CDs) and pen drives for
saving data in computer. In such a case, it is difficult to forecast demand for existing products in
future.

5. ECONOMIC VIEWPOINT:

Play a crucial role in obtaining demand forecasts. For example, if there is a positive development in
an economy, such as globalization and high level of investment, the demand forecasts of
organizations would also be positive.

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APART FROM AFOREMENTIONED FACTORS, FOLLOWING ARE SOME OF THE

OTHER IMPORTANT FACTORS THAT INFLUENCE DEMAND FORECASTING:

I. TIME PERIOD OF FORECASTS:

Act as a crucial factor that affect demand forecasting. The accuracy of demand forecasting depends
on its time period.

Forecasts can be of three types, which are explained as follows:

▪ SHORT PERIOD FORECASTS:
Refer to the forecasts that are generally for one year and based upon the judgment of the
experienced staff. Short period forecasts are important for deciding the production policy, price policy,
credit policy, and distribution policy of the organization.

▪ LONG PERIOD FORECASTS:

Refer to the forecasts that are for a period of 5-10 years and based on scientific analysis and
statistical methods. The forecasts help in deciding about the introduction of a new product, expansion
of the business, or requirement of extra funds.

▪ VERY LONG PERIOD FORECASTS:

Refer to the forecasts that are for a period of more than 10 years. These forecasts are carried to
determine the growth of population, development of the economy, political situation in a country, and
changes in international trade in future.

Among the aforementioned forecasts, short period forecast deals with deviation in long period
forecast. Therefore, short period forecasts are more accurate than long period forecasts.

II. LEVEL OF FORECASTS:

Influences demand forecasting to a larger extent. A demand forecast can be carried at three levels,
namely, macro level, industry level, and firm level. At macro level, forecasts are undertaken for
general economic conditions, such as industrial production and allocation of national income. At the
industry level, forecasts are prepared by trade associations and based on the statistical data.

Moreover, at the industry level, forecasts deal with products whose sales are dependent on the
specific policy of a particular industry. On the other hand, at the firm level, forecasts are done to
estimate the demand of those products whose sales depends on the specific policy of a particular
firm. A firm considers various factors, such as changes in income, consumer’s tastes and
preferences, technology, and competitive strategies, while forecasting demand for its products.

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III. NATURE OF FORECASTS:
Constitutes an important factor that affects demand forecasting. A forecast can be specific or general.
A general forecast provides a global picture of business environment, while a specific forecast
provides an insight into the business environment in which an organization operates. Generally,
organizations opt for both the forecasts together because over-generalization restricts accurate
estimation of demand and too specific information provides an inadequate basis for planning and
execution.

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STEPS IN DEMAND FORECASTING
The Demand forecasting process of an organization can be effective only when it is conducted
systematically and scientifically. To achieve the desired results, it is important that demand
forecasting is done systematically.

DEMAND FORECASTING INVOLVES A NUMBER OF STEPS, WHICH ARE SHOWN IN

FIGURE-3:

THE STEPS INVOLVED IN DEMAND FORECASTING (AS SHOWN IN FIGURE-3) ARE

EXPLAINED AS FOLLOWS:

1. SETTING THE OBJECTIVE:

Refers to first and foremost step of the demand forecasting process. An organization needs to clearly
state the purpose of demand forecasting before initiating it.

SETTING OBJECTIVE OF DEMAND FORECASTING INVOLVES THE FOLLOWING:

▪ Deciding the time period of forecasting whether an organization should opt for short-term
forecasting or long-term forecasting

▪ Deciding whether to forecast the overall demand for a product in the market or only- for the
organizations own products

▪ Deciding whether to forecast the demand for the whole market or for the segment of the
market

▪ Deciding whether to forecast the market share of the organization

2. DETERMINING TIME PERIOD:

Involves deciding the time perspective for demand forecasting. Demand can be forecasted for a long
period or short period. In the short run, determinants of demand may not change significantly or may
remain constant, whereas in the long run, there is a significant change in the determinants of demand.
Therefore, an organization determines the time period on the basis of its set objectives.

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 3. SELECTING A METHOD FOR DEMAND FORECASTING:
Constitutes one of the most important steps of the demand forecasting process Demand can be
forecasted by using various methods. The method of demand forecasting differs from organization to
organization depending on the purpose of forecasting, time frame, and data requirement and its
availability. Selecting the suitable method is necessary for saving time and cost and ensuring the
reliability of the data.

4. COLLECTING DATA:

Requires gathering primary or secondary data. Primary’ data refers to the data that is collected by
researchers through observation, interviews, and questionnaires for a particular research. On the
other hand, secondary data refers to the data that is collected in the past; but can be utilized in the
present scenario/research work.

5. ESTIMATING RESULTS:
Involves making an estimate of the forecasted demand for predetermined years. The results should
be easily interpreted and presented in a usable form. The results should be easy to understand by the
readers or management of the organization.

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LIMITATIONS OF DEMAND FORECASTING
LIMITATIONS OF DEMAND FORECASTING ARE:

1. LACK OF HISTORICAL SALES DATA

2. UNREALISTIC ASSUMPTIONS
3. COST INCURRED
4. CHANGE IN FASHION
5. LACK OF EXPERTISE
6. PSYCHOLOGICAL FACTORS

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 1. LACK OF HISTORICAL SALES DATA
Past sales figures may not always be available with an organization. For example, in case of a new
commodity, there is unavailability of historical sales data. In such cases, new data is required to be
collected for demand forecasting, which can be cumbersome and challenging for an organization.

2. UNREALISTIC ASSUMPTIONS

Demand forecasting is based on various assumptions, which may not always be consistent with the
present market conditions. In such a case, relying on these assumptions may produce incorrect
forecasts for the future.

3. COST INCURRED

Demand forecasting incurs different costs for an organization, such as implementation cost, labor
cost, and administrative cost. These costs may be very high depending on the complexity of the
forecasting method selected and the resources utilized. Owing to limited means, it becomes difficult
for new startups and small-scale organizations to perform demand forecasting.

4. CHANGE IN FASHION

Consumers’ tastes and preferences continue to change with a change in fashion. This limits the use
of demand forecasting as it is generally based on historical trend analysis.

5. LACK OF EXPERTISE

Demand forecasting requires effective skills, knowledge and experience of personnel making
forecasts. In the absence of trained experts, demand forecasting becomes a challenge for an
organization. This is because if the responsibility of demand forecasting is assigned to untrained
personnel, it could bring huge losses to the organization.

6. PSYCHOLOGICAL FACTORS

Consumers usually prefer a particular type of product over others. However, factors, such as fear of
war and changes in economic policy, could affect consumers’ psychology. In such cases, the
outcomes of forecasting may no longer remain relevant for the time period.

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CRITERIA FOR A GOOD / EFFICIENT DEMAND
FORECASTING METHOD
DEMAND FORECASTING can be effective if the predicted demand is equal to the actual demand.

The effectiveness of demand forecasting depends on the selection of an appropriate forecasting

technique.

Each technique serves a specific purpose; thus an organization should be careful while selecting a
forecasting technique for a particular problem.

A forecast is said to be successful when the excepted demand is equal to the actual demand.

This can only be possible if the right method of demand forecasting is selected.

There are thus, a good many ways to make a guess about future sales. They show contrast in cost,
flexibility and the adequate skills and sophistication. Therefore, there is a problem of choosing the
best method for a particular demand situation.

The following points explain the criteria for the selection of demand forecasting technique:

CRITERIA FOR GOOD DEMAND FORECASTING--

✓ ACCURACY

✓ TIMELINESS

✓ AFFORDABILITY

✓ EASE OF INTERPRETATION

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THE CRITERIA THAT NEED TO BE CONSIDERED BEFORE FORECASTING THE

DEMAND FOR A PRODUCT ARE AS FOLLOWS:

1. ACCURACY:
Implies that an organization should make forecasts close to real figures, so that the real picture of
demand can be determined. For example, there would be an increase in sales in the coming years is
an inaccurate forecast. On the other hand, there would be an increase in sales by 30% in the next
year is an accurate forecast.

The forecast obtained must be accurate. How is an accurate forecast possible? To obtain an accurate
forecast, it is essential to check the accuracy of past forecasts against present performance and of
present forecasts against future performance. Accuracy cannot be tested by precise measurement
but buy judgment.

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Almost all the methods of demand forecasting yield accurate results under different circumstances.
However, not all methods are appropriate to be used for all kinds of forecasting.

For example, a lack of statistical data limits the use of regression analysis in order to predict demand.
Therefore, an appropriate selection of forecasting technique would ensure the accuracy of results.

2. DURABILITY:

Implies that forecasts should be done in such a way that they can be used for long periods as
forecasts involves a lot of time, money, and efforts.

Unfortunately, a demand function fitted to past experience may back cost very greatly and still fall
apart in a short time as a forecaster. The durability of the forecasting power of a demand function
depends partly on the reasonableness and simplicity of functions fitted, but primarily on the stability of
the understanding relationships measured in the past. Of course, the importance of durability deter-
mines the allowable cost of the forecast.

3. FLEXIBILITY:

Implies that the forecasts should be adjustable and adaptable to changes. In today’s uncertain
business environment, there is a rapid change in the tastes and preferences of consumers, which
affect the demand for products. Therefore, the demand forecasts made by an organization should
reflect those changes. Apart from this, an organization, while making forecasts, should consider
various business risks that may take place in the future.

Flexibility can be viewed as an alternative to generality. A long lasting function could be set up in
terms of basic natural forces and human motives. Even though fundamental, it would nevertheless be
hard to measure and thus not very useful. A set of variables whose co-efficient could be adjusted from
time to time to meet changing conditions in more practical way to maintain intact the routine
procedure of forecasting.

4. ACCEPTABILITY:

Refers to one of the most important criterion of demand forecasting. An organization should forecast
its demand by using simple and easy methods. In addition, the methods should be such that
organizations do not face any complexities. However, organizations generally prefer advanced
statistical methods, which may prove difficult and complex.

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 5. AVAILABILITY /TIMELINESS:

Implies that adequate and up-to-date data should be available for forecasts. The forecasts should be
done in timely manner so that necessary arrangements should be made related to the market
demand.

Immediate availability of data is a vital requirement and the search for reasonable approximations to
relevance in late data is a constant strain on the forecasters patience. The techniques employed
should be able to produce meaningful results quickly. Delay in result will adversely affect the
managerial decisions.

As discussed earlier, demand forecasting can be short term or long term. The demand forecasting
methods used for both the time periods vary.

For example, the demand for a new product, which needs to be introduced in a month’s time, cannot
be assessed using the time series analysis method. This is because this method requires data
collected over long periods.

6. PLAUSIBILITY / EASE OF INTERPRETATION:

Implies that the demand forecasts should be reasonable, so that they are easily understood by
individuals who are using it.

The executive should have good understanding of the technique chosen and they should have
confidence in the techniques used. Understanding is also needed for a proper interpretation of results.
Plausibility requirements can often improve the accuracy of results.

Outcomes generated using demand forecasting methods are generally represented in the form of
statistical or mathematical equations. Therefore, it should be ensured that personnel carrying out
forecasting are trained and efficient to use forecasting methods and interpret the results.

7. ECONOMY / AFFORDABILITY:

Implies demand forecasting should be economically effective. The forecasting should be done in such
a manner that the costs should be minimized and benefits should be maximized.

Cost is a primary consideration which should be weighed against the importance of the forecasts to
the business operations. A question may arise: How much money and managerial effort should be
allocated to obtain a high level of forecasting accuracy? The criterion here is the economic considera-
tion.

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The cost for different demand forecasting methods varies based on its implementation, expertise
required, the time period involved, etc. Thus, organizations should select a method that suits their
budget and requirements without compromising on the outcome.

For example, the complete enumeration method of demand forecasting yields accurate results but
could prove expensive for small-scale organizations.

8. SIMPLICITY

Statistical and econometric models are certainly useful but they are intolerably complex. To those

executives who have a fear of mathematics, these methods would appear to be Latin or Greek. The

procedure should, therefore, be simple and easy so that the management may appreciate and

understand why it has been adopted by the forecaster.

9. CONSISTENCY:

The forecaster has to deal with various components which are independent. If he does not make an

adjustment in one component to bring it in line with a forecast of another, he would achieve a whole

which would appear consistent.

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METHODS / TECHNIQUES 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

The main challenge to forecast demand is to select an effective technique.

There is no particular method that enables organizations to anticipate risks and uncertainties in future.
Generally, there are two approaches to demand forecasting.

The first approach involves forecasting demand by collecting information regarding the buying
behavior of consumers from experts or through conducting surveys. On the other hand, the second
method is to forecast demand by using the past data through statistical techniques.

Different organizations rely on different techniques to forecast demand for their products or services
for a future time period depending on their requirements and budget.

Thus, we can say that the techniques of demand forecasting are divided into survey methods and
statistical methods. The survey method is generally for short-term forecasting, whereas statistical
methods are used to forecast demand in the long run.

THESE TWO APPROACHES ARE SHOWN IN FIGURE-10:

I. SURVEY METHODS

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.

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Under the survey method, the consumers are contacted directly and are asked about their intentions
for a product and their future purchase plans. This method is often used when the forecasting of a
demand is to be done for a short period of time

THE SURVEY METHOD UNDERTAKES THREE EXERCISES, WHICH ARE SHOWN IN

FIGURE-11:

THE EXERCISES UNDERTAKEN IN THE SURVEY METHOD (AS SHOWN IN FIGURE-

11) ARE DISCUSSED AS FOLLOWS:

EXPERTS’ OPINION POLL:

Refers to a method in which experts are requested to provide their opinion about the product.
Generally, in an organization, sales representatives act as experts who can assess the demand for
the product in different areas, regions, or cities.

Sales representatives are in close touch with consumers; therefore, they are well aware of the
consumers’ future purchase plans, their reactions to market change, and their perceptions for other
competing products. They provide an approximate estimate of the demand for the organization’s
products. This method is quite simple and less expensive.

HOWEVER, IT HAS ITS OWN LIMITATIONS, WHICH ARE DISCUSSED AS FOLLOWS:

1. Provides estimates that are dependent on the market skills of experts and their experience.
These skills differ from individual to individual. In this way, making exact demand forecasts
becomes difficult.

2. Involves subjective judgment of the assessor, which may lead to over or under-estimation.

3. Depends on data provided by sales representatives who may have inadequate information
about the market.

4. Ignores factors, such as change in Gross National Product, availability of credit, and future
prospects of the industry, which may prove helpful in demand forecasting.

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DELPHI METHOD:
Refers to a group decision-making technique of forecasting demand. In this method, questions are
individually asked from a group of experts to obtain their opinions on demand for products in future.
These questions are repeatedly asked until a consensus is obtained.

In addition, in this method, each expert is provided information regarding the estimates made by other
experts in the group, so that he/she can revise his/her estimates with respect to others’ estimates. In
this way, the forecasts are cross checked among experts to reach more accurate decision making.

Ever expert is allowed to react or provide suggestions on others’ estimates. However, the names of
experts are kept anonymous while exchanging estimates among experts to facilitate fair judgment and
reduce halo effect.

The main advantage of this method is that it is time and cost effective as a number of experts are
approached in a short time without spending on other resources. However, this method may lead to
subjective decision making.

MARKET EXPERIMENT METHOD:

Involves collecting necessary information regarding the current and future demand for a product. This
method carries out the studies and experiments on consumer behavior under actual market
conditions. In this method, some areas of markets are selected with similar features, such as
population, income levels, cultural background, and tastes of consumers.

The market experiments are carried out with the help of changing prices and expenditure, so that the
resultant changes in the demand are recorded. These results help in forecasting future demand.

THERE ARE VARIOUS LIMITATIONS OF THIS METHOD, WHICH ARE AS FOLLOWS:

a. Refers to an expensive method; therefore, it may not be affordable by small-scale organizations

b. Affects the results of experiments due to various social-economic conditions, such as strikes,
political instability, natural calamities

II. STATISTICAL METHODS

Statistical methods are complex set of methods of demand forecasting. These methods are used to
forecast demand in the long term. In this method, demand is forecasted on the basis of historical data
and cross-sectional data.

Historical data refers to the past data obtained from various sources, such as previous years’ balance
sheets and market survey reports. On the other hand, cross-sectional data is collected by conducting
P a g e 32 | 41
interviews with individuals and performing market surveys. Unlike survey methods, statistical methods
are cost effective and reliable as the element of subjectivity is minimum in these methods.

The statistical methods are often used when the forecasting of demand is to be done for a longer
period. The statistical methods utilize the time-series (historical) and cross-sectional data to estimate
the long-term demand for a product. The statistical methods are used more often and are
considered superior than the other techniques of demand forecasting due to the following
reasons:

▪ There is a minimum element of subjectivity in the statistical methods.

▪ The estimation method is scientific and depends on the relationship between the dependent
and independent variables.
▪ The estimates are more reliable
▪ Also, the cost involved in the estimation of demand is the minimum.

THESE DIFFERENT STATISTICAL METHODS ARE SHOWN IN FIGURE-12:

TREND PROJECTION METHOD

Trend projection or least square method is the classical method of business forecasting. In this
method, a large amount of reliable data is required for forecasting demand. In addition, this method
assumes that the factors, such as sales and demand, responsible for past trends would remain the
same in future.

In this method, sales forecasts are made through analysis of past data taken from previous year’s
books of accounts. In case of new organizations, sales data is taken from organizations already
existing in the same industry. This method uses time-series data on sales for forecasting the demand
of a product.

THE TREND PROJECTION METHOD UNDERTAKES THREE MORE METHODS IN ACCOUNT,

WHICH ARE AS FOLLOWS:

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 I. GRAPHICAL METHOD:

Helps in forecasting the future sales of an organization with the help of a graph. The sales
data is plotted on a graph and a line is drawn on plotted points.

II. FITTING TREND METHOD:

Implies a least square method in which a trend line (curve) is fitted to the time-series data
of sales with the help of statistical techniques.

IN THIS METHOD, THERE ARE TWO TYPES OF TRENDS TAKEN INTO ACCOUNT, WHICH

ARE EXPLAINED AS FOLLOWS:

a) LINEAR TREND:
Implies a trend in which sales show a rising trend.

In linear trend, following straight line trend equation is fitted:

S = A+BT

Where,

S= annual sales

T=time (in years)

A and B are constant

B gives the measure of annual increase in sales

b) EXPONENTIAL TREND:
Implies a trend in which sales increase over the past years at an increasing rate or constant rate.

The appropriate trend equation used is as follows:

Y = aTb
Where,

Y= annual sales
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T= time in years

a and b are constant

Converting this into logarithm, the equation would be:

Log Y = Log a + b Log T

The main advantage of this method is that it is simple to use. Moreover, the data requirement of this
method is very limited (as only sales data is required), thus it is inexpensive method.

However, this method also suffers from certain limitations, which are as follows:

1. Assumes that the past rate of changes in variables will remain same in future too, which is not
applicable in the practical situations.

2. Fails to be applied for short-term estimates and where trend is cyclical with lot of fluctuations

3. Fails to measure relationship between dependent and independent variables.

III. BOX-JENKINS METHOD:

Refers to a method that is used only for short-term predictions. This method forecasts demand only
with stationary time-series data that does not reveal the long-term trend. It is used in those situations
where time series data depicts monthly or seasonal variations with some degrees of regularity. For
instance, this method can be used for estimating the sales forecasts of woolen clothes during the
winter season.

BAROMETRIC METHOD

Barometric forecasting uses past demand to predict future demand. The barometric method
differs from trend analysis by using a combination of three “indicators” to gauge demand. Those
indicators may change based on external factors and demand is forecasted based on the analysis of
all three indicators.
Indicators used are leading indicators, lagging indicators, and coincidental indicators. Leading
indicators are events for demand that move up or down. Lagging indicators impact trends after time
has passed. And coincidental indicators may shift demand up or down depending on economic
activities. Barometric planning requires analyzing all three indicators accurately to create a forecast.

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Barometric Method is 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, viz. 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.

The Barometric Method of Forecasting was developed to forecast the trend in the overall economic
activities. This method can nevertheless be used in forecasting the demand prospects, not
necessarily the actual quantity expected to be demanded.

Often, the barometric method of forecasting is used by the meteorologists in weather forecasting. The
weather conditions are forecasted on the basis of the movement of mercury in a barometer. Based on
this logic, economists use economic indicators as a barometer to forecast the overall trend in the
business activities.

The Barometric Method of forecasting was first developed in 1920’s, but, however, was abandoned
due to its failure to predict the Great Depression in 1930’s. The Barometric technique was, however,
revived, reformed and developed further by the National Bureau of Economic Research (NBER),
USA in the late 1930’s.

The barometric method is based on the approach of developing an index of relevant economic
indicators and forecasting the future trends by analysing the movements in these indicators. A time-
series of several indicators is developed to study the future trend. These can be classified as:

1. Leading Series: The leading series is comprised of indicators which move up or down ahead
of some other series The most common examples of leading indicators are- net business
investment index, a new order for durable goods, change in the value of inventories,
corporate profits after tax, etc.

2. Coincidental Series: The coincidental series include indicators which move up and down
simultaneously with the general level of economic activities. The examples of coincidental
series – the rate of unemployment, the number of employees in the non-agricultural sector,
sales recorded by manufacturing, retail, and trading sectors, gross national product at
constant prices.

3. Lagging Series: A series consisting of those indicators, which after some time-lag follows the
change. Some of the lagging series are- outstanding loan, labour cost per unit production,
lending rate for short-term loans, etc.

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THE FOLLOWING ARE THE CRITERIA ON WHICH THE INDICATORS ARE CHOSEN:

▪ The economic significance of the indicator; such as greater the significance the greater
is the score of the indicator.
▪ Time Series- statistical adequacy; a higher score is given to the indicator provided with
adequate statistics.
▪ Conformity with the movement in overall economic activities.
▪ Immediate availability of the time series.
▪ The consistency of the series to the turning points in overall economic activities.
▪ Smoothness of the series.

The problem of indicator selection may arise if some indicators appear in more than one class of the
indicators.

The only advantage of the barometric method of forecasting is that is helps to overcome the problem
of finding the value of an independent variable under regression analysis.

The major limitations of this method are;

First, Often the leading indicator of the variable to be forecasted is difficult to find out or is not easily
available.

Secondly, the barometric technique can be used only for a short-term forecasting.

ECONOMETRIC METHODS
The econometric forecasting model is a tool that reveals relationships among economic variables to
forecast future developments. The concept introduces this term by briefly describing the development
and history of the model and exploring its strengths and weaknesses.

"Econometric systems of equations are the main tool in economic forecasting. These comprise
equations which seek to model the behavior of discernible groups of economic agents (CLEMENTS
AND HENDRY, 2002)."

Econometric methods combine statistical tools with economic theories for forecasting. The forecasts
made by this method are very reliable than any other method. An econometric model consists of two
types of methods namely, REGRESSION MODEL and SIMULTANEOUS EQUATIONS MODEL.

THESE TWO TYPES OF METHODS ARE EXPLAINED AS FOLLOWS:

I. REGRESSION METHODS:

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Refer to the most popular method of demand forecasting. In regression method, the demand function
for a product is estimated where demand is dependent variable and variables that determine the
demand are independent variable.

If only one variable affects the demand, then it is called single variable demand function. Thus, simple
regression techniques are used. If demand is affected by many variables, then it is called multi-
variable demand function. Therefore, in such a case, multiple regressions are used.

THE SIMPLE AND MULTIPLE REGRESSION TECHNIQUES ARE DISCUSSED AS FOLLOWS:

a) SIMPLE REGRESSION:
Refers to studying the relationship between two variables where one is independent variable and the
other is dependent variable.

THE EQUATION TO CALCULATE SIMPLE REGRESSION IS AS FOLLOWS:

Y = a + bx

Where,

Y = Estimated value of Y for a given value of X

b = Amount of change in Y produced by a unit change in X

a and b = Constants

The equations to calculate a and b are as follows:

b) MULTIPLE REGRESSION:
Refers to studying the relationship between more than one independent and dependent variables.

In case of two independent variables and one dependent variable, following equation is
used to calculate multiple regression:

Y = a + b1X1 +b2X2

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Where,

Y (Dependent variable) = Estimated value of Y for a given value of X1 and X1

X1 and X2 = Independent variables

b1 = Amount of change in Y produced by a unit change in X1

b2 = Amount of change in Y produced by a unit change in X2

a, b1 and b2 = Constants

The equations used to calculate a and b values are as follows:

The number of equations depends on the number of independent variables. If there are two
independent variables, then there would be three equations and so on.

II. SIMULTANEOUS EQUATIONS:

Involve several simultaneous equations.

THERE ARE TWO TYPES OF VARIABLES THAT ARE INCLUDED IN THIS MODEL, WHICH ARE

AS FOLLOWS:

1) ENDOGENOUS VARIABLES:
Refer to inputs that are determined within the model. These are controlled variables.

2) EXOGENOUS VARIABLES:
Refer to inputs of the model. Examples are time, government spending, and weather conditions.
These variables are determined outside the model.

For developing a complete model, endogenous and exogenous variables are determined first. After
that, necessary data on both exogenous and endogenous variables are collected. Sometimes, data is
not available in required form, thus, it needs to be adjusted into the model.

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After the development of necessary data, the model is estimated through some appropriate method.
Finally, the model is solved for each endogenous variable in terms of exogenous variable. The
prediction is finally made.

CONCLUSION

In fine, the ideal forecasting method is one that yields return over cost with accuracy, seems
reasonable, can be formalized for reasonably long periods, can meet new circumstances adeptly and
can give up-to-date results. The method of forecasting is not the same for all products.

There is no unique method for forecasting the sale of any commodity. The forecaster may try one or
the other method depending upon his objective, data availability, the urgency with which forecasts are
needed, resources he intends to devote to this work and type of commodity whose demand he wants
to forecast.

METHODS OF DEMAND FORECASTING FOR A

NEW PRODUCT
The demand forecasting is the scientific tool to predict the likely demand of a product in the future. It
is the starting point of fulfilling a customer order and based on the forecasted demand, a firm commits
its resources, capacities and capabilities for a period of time to create goods and services that its
customers value and are willing to pay for. Hence, according to AMERICAN MARKETING
ASSOCIATION, “Demand forecasting is an estimate of sales in dollars or physical units for a
specified future period under a proposed marketing plan.”

HOW TO FORECAST DEMAND FOR NEW PRODUCT?

Demand forecasting for the new products requires special skill and techniques as they are new
products and no previous data will be available about their sales.
The methods or techniques should be carefully tailored for the product. JOEL DEAN makes six
possible approaches towards forecasting of new products.

The demand of new product can be forecasted by anyone of the following techniques. They are as
follows:
▪ THE EVOLUTIONARY APPROACH IN FORECASTING DEMAND
▪ THE SUBSTITUTE APPROACH IN FORECSATING DEMAND
▪ THE GROWTH CURVE APPROACH IN FORECASTING DEMAND
▪ THE OPINION POLL APPROACH IN FORECASTING DEMAND
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 ▪ THE SALES EXPERIENCE APPROACH IN FORECASTIND DEMAND
▪ THE VICARIOUS APPROACH IN FORECASTING DEMAND

SUBSTITUTE APPROACH

It is based on the assumption that a new product will be analysed as a substitute of an existing
product. In this method, the demand of substitute product is analysed and on the basis of such
analysis (or survey) forecasts are made for the new product to be introduced in the market.

EVOLUTIONARY APPROACH

This method of sales forecasting is based on the assumption that the new product will be considered
an improvement over existing products. It is further assumed that the new product can follow some
life-cycles as of existing products. The sales of existing product are analysed and efforts are made to
forecast the sales of the new product of the enterprise on this basis.

BUYERS OR CONSUMERS VIEW

In this method, the potential buyers of the product are contacted and efforts are made to know their
opinions regarding new product. Efforts are also made to guess the quantity to be purchased by these
consumers. Sales forecasts of the new product are based on these opinions and estimates.

VICARIOUS APPROACH (OR EXPERTS’ OPINION)

This approach of sales forecasting of new product is based on the opinion of experts in the field of
marketing, who know the needs, desires, tastes and preferences of customers. Experts are contacted
and their opinions are collected regarding the utilities and possible demand of the product. Sales
forecasts are prepared on the basis of opinion of these experts.

SALES EXPERIENCE APPROACH (OR MARKET TEST METHOD)

In this method, the new product is offered for sale in a sample market for a fixed period. The results of
the sales of the product are considered to be the base of forecasting the demand for the new product.
The results of sales of the product in these segments are collected and deeply analysed.

WHICH IS THE BEST METHOD TO FORECAST DEMAND FOR NEW PRODUCTS?

All the above methods of forecasting demand for the New Product are not mutually exclusive.
According to JOEL DEAN, “a combination of many of them is often desirable when they can
supplement each other.”
✓ When a New Product is only an improvement of the old product, EVOLUTIONARY
APPROACH becomes useful in forecasting the demand;

✓ The GROWTH-CURVE APPROACH has only limited application;

✓ The VICARIOUS APPROACH appears to be simple, but very difficult to implement in

forecasting demand for new products in market.

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