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Unit II

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11 views8 pages

Unit II

eea

Uploaded by

sowmyadell680
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Demand Forecasting

• Demand Forecasting is the process in which historical sales data is used to


develop an estimate of an expected forecast of customer demand. To
businesses, Demand Forecasting provides an estimate of the amount of
goods and services that its customers will purchase in the foreseeable
future. Critical business assumptions like turnover, profit margins, cash
flow, capital expenditure, risk assessment and mitigation plans, capacity
planning, etc. are dependent on Demand Forecasting
Demand Forecasting types

• Passive Demand Forecasting: Passive Demand Forecasting is carried out for stable businesses with very conservative growth plans.
Simple extrapolations of historical data is carried out with minimal assumptions. This is a rare type of forecasting limited to small and
local businesses.
• Active Demand Forecasting: Active Demand Forecasting is carried out for scaling and diversifying businesses with aggressive growth
plans in terms of marketing activities, product portfolio expansion and consideration of competitor activities and external economic
environment.
• Short-term Demand Forecasting: Short-term Demand Forecasting is carried out for a shorter term period of 3 months to 12 months. In
the short term, the seasonal pattern of demand and the effect of tactical decisions on the customer demand are taken into consideration.
• Medium to long-term Demand Forecasting: Medium to long-term Demand Forecasting is typically carried out for more than 12
months to 24 months in advance (36-48 months in certain businesses). Long-term Forecasting drives the business strategy planning, sales
and marketing planning, financial planning, capacity planning, capital expenditure, etc.
• External macro level Demand Forecasting: This type of Forecasting deals with the broader market movements which depend on the
macroeconomic environment. External Forecasting is carried out for evaluating the strategic objectives of a business like product
portfolio expansion, entering new customer segments, technological disruptions, a paradigm shift in consumer behavior and risk
mitigation strategies.
• Internal business level Demand Forecasting: As the name suggests, this type of Forecasting deals with internal operations of the
business such as product category, sales division, financial division, and manufacturing group. This includes annual sales forecast,
estimation of COGS, net profit margin, cash flow, etc.
Example
• A leading food manufacturing company refers to the last 24 months of
actual sales of its highly seasonal products like soups and mashed
potatoes. An analysis is carried out at the flavor and packaging size level.
Then based on the market potential, demand is forecasted for the next 12
to 24 months for sourcing of key ingredients like tomatoes, potatoes, etc.
and for capacity planning and evaluating the need for external co-packing.
Importance of Demand Forecasting

• Demand Forecasting is the pivotal business process around which strategic


and operational plans of a company are devised. Based on the Demand
Forecast, strategic and long-range plans of a business like budgeting,
financial planning, sales and marketing plans, capacity planning, risk
assessment and mitigation plans are formulated.
Steps involved in forecasting
• Identification of Objective
• Determining the nature of goods - capital goods, consumer durables, non-
durables
• Selecting a proper method of forecasting - objective, type of data, period.
• Interpretation of results
Demand Forecasting methods
Limitations
• Lack of Historical Sales Data
• Unrealistic Assumptions
• Cost Incurred
• Change in Fashion
• Lack of Expertise
• Psychological Factors

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