DEMAND FORCASTING

• Demand Forecasting refers to an estimate of

future demand for the product. It is an
“objective assessment of the future course of
demand
 Difference between demand estimation and
Demand Forecasting
Aspect Demand Estimation Demand Forecasting
Definition The process of determining the The process of predicting
current demand for a product or future demand based on
service using available data. past trends and
influencing factors

Time Frame Focuses on the present or recent Focuses on the future

past

Purpose Helps businesses understand Assists in planning

market size, customer preferences, production, inventory,
and pricing strategy. marketing, and resource
allocation.

Methodology Uses surveys, historical data, market Uses time series analysis,
experiments, and regression trend analysis, and
analysis. econometric models
• Example:
• Demand Estimation: A smartphone company
conducts a market survey to estimate the
demand for its latest model in different cities.
• Demand Forecasting: The same company
predicts how many smartphones will be sold
in the next quarter based on past sales trends
and upcoming market conditions.
 Process of demand forecasting
• 1. Identifying the Purpose of Forecasting
• Determine why the forecast is needed (e.g., inventory planning, sales prediction, capacity
planning).
• Define the time horizon (short-term, medium-term, or long-term forecasting).
• 2. Collecting Relevant Data
• Gather historical sales data, customer trends, and market conditions.
• Consider internal data (past sales, production records) and external factors (economic
indicators, competitor strategies).
• 3. Selecting a Forecasting Method
• Qualitative Methods (used when historical data is limited or market conditions are
unpredictable):
• Expert opinion (Delphi method)
• Market research
• Salesforce estimates
• Quantitative Methods (based on historical data analysis):
• Time series analysis (Moving Average, Exponential Smoothing)
• Causal models (Regression Analysis, Econometric Models)
• Machine learning models
• 4. Analyzing Data and Applying the Chosen Model
• Identify demand patterns (seasonality, trends, cyclical fluctuations).
• Apply statistical or analytical techniques to generate forecasts.
• 5. Evaluating and Validating the Forecast
• Compare forecasted results with actual demand (if historical data is
available).
• Use accuracy metrics such as Mean Absolute Error (MAE) or Mean
Squared Error (MSE).
• 6. Implementing the Forecast in Decision-Making
• Use forecast results for production planning, inventory management, and
financial budgeting.
• Adjust pricing strategies or marketing efforts based on predicted demand.
• 7. Monitoring and Updating the Forecast
• Continuously track real-time demand and compare it with forecasts.
• Update forecasts regularly based on new data, changing market trends, or
unexpected events.
 Methods of Demand Forecasting
(Established Products )
A)Survey Method.
Under this method, information about the desire of the consumers and
opinions of experts are collected by interviewing them. This can be divided
into four types;
1. Opinion Survey method: This method is also known as Sales- Force –
Composite method or collective opinion method. Under this method, the
company asks its salesmen to submit estimate for future sales in their
respective territories. This method is more useful and appropriate because
the salesmen are more knowledgeable about their territory.
2. Expert Opinion: Apart from salesmen and consumers, distributors or outside
experts may also be used for forecast. Firms in advanced countries like USA,
UK etc...make use of outside experts for estimating future demand. Various
public and private agencies sell periodic forecast of short or long term
business conditions
3. Delphi Method: It is a sophisticated statistical
method to arrive at a consensus. Under this
method, a panel is selected to give
suggestions to solve the problems in hand.
Both internal and external experts can be the
members of the panel. Panel members are
kept apart from each other and express their
views in an anonymous manner
4. Consumer Interview method: Under this method a list of
potential buyers would be drawn and each buyer will be
approached and asked about their buying plans. This
method is ideal and it gives firsthand information, but it is
costly and difficult to conduct. This may be undertaken in
three ways:
• A) Complete Enumeration – In this method, all the
consumers of the product are interviewed.
• B) Sample survey - In this method, a sample of consumers
is selected for interview. Sample may be random sampling
or Stratified sampling.
• C) End-use method – The demand for the product from
different sectors such as industries, consumers, export and
import are found out.
Statistical Methods
• It is used for long term forecasting. In this method,
statistical and mathematical techniques are used to
forecast demand. This method is relies on past
data. This includes;
• 1. Trent projection method: Under this method,
demand is estimated on the basis of analysis of
past data. This method makes use of time series
(data over a period of time). Here we try to
ascertain the trend in the time series. Trend in the
time series can be estimated by using least square
method or free hand method or moving average
method or semi-average method
2.Regression and Correlation: These methods combine
economic theory and statistical techniques of estimation.
in this method, the relationship between dependant
variables(sales) and independent variables(price of related
goods, income, advertisement etc..) is ascertained. This
method is also called the economic model building.
3. Extrapolation: In this method the future demand can be
extrapolated by applying binomial expansion method. This
is based on the assumption that the rate of change in
demand in the past has been uniform.
4. Simultaneous equation method: This means the
development of a complete economic model which will
explain the behavior of all variables which the company
can control.
• 5. Barometric techniques: Under this, present events
are used to predict directions of change in the future.
This is done with the help of statistical and economic
indicators like:
• Construction contract,
• Personal income
• Agricultural income
• Employment
• GNP
• Industrial production
• Bank deposit etc…
 Factors Affecting Demand Forecasting

• 1. Prevailing Business conditions (price level change, percapita income,

consumption pattern, saving, investments, employment etc..,
• 2. Condition within the Industry (Price –product-competition policy of
firms within the industry).
• 3. Condition within the firm. (Plant capacity, quality, important policies of
the firm).
• 4. Factors affecting Export trade (EXIM control, EXIM policy, terms of
export, export finance etc..,)
• 5. Market behavior
• 6. Sociological Conditions (Population details, age group, family lifecycle,
education, family income, social awareness etc...)
• 7. Psychological Conditions (taste, habit, attitude, perception, culture,
religion etc…)
• 8. Competitive Condition (competitive condition within the industry)