Types & Significance of Demand Forecasting

By-Shubham Singhal Saurabh Tripathi

Demand Forecasting? Demand + Forecasting

Acc. to Benham”The demand for anything at a given price, is the amount of it which will be bought per unit of a time at that price.”

Forecasting stand for estimating or prediction.

Demand Forecasting refers to the prediction or estimation of a future situation under given constraints.

Examples-Demand Forecasting for-

1) Sufficient food for estimated no. of Guests in

a party. 2) Adequate no. of goods required by

customers in a particular time period. 3) In Industries, for estimation of raw

materials required. 4) For prediction of the

services(manpower) required for production.

Types of Demand Forecasting1)Short Time Forecast-: Are prepared for one year & reviewed

monthly or half yearly. Used for marketing activities such as selling

or advertising.2) Long Time Forecast-: For long term planning, like investment

decision for a new unit or during expansion of existing unit.

Though they help in planning, the margin of error is higher.

Techniques for demand forecasting

1) Analytical Methods-:a) User Expectation method-: It depends upon the survey of buyers intention.

The survey of buyers will provide: Customers buying plan. Total likely consumption of Product.

Merits Demerits1) It comes directly from 1) Customers may misjudge. customers. 2) It is easy & inexpensive. 2) Consumers may get confuse due various alternatives.

b) Collective Opinion method-: It depends upon the collective opinion of sales

man of a particular product in different territories. Under this method, the salesmen have to report

to the head office, their estimates of expectations of sales in their territories.

Also referred to as “Hunch Method "of Forecasting.

E.g. Information obtained from retailers and wholesalers.

c) Experts Opinion Method-: Steps involved-: Views of Experts in their respective fields are

taken. These opinions are then exchanged among

various experts of same fields. Forecast is achieved by averaging these

opinions.

Advantage-: Depends upon experts research & analysis, so

it is reliable as well. No danger of “ group think” mentality.

2)Statistical Methods-: a) Trend Projection Method

b)Graphical Method

c) Least Square Method

d) Regression Analysis Method

Statistical techniques are used to maintain the objectivity as well as precision in Demand Forecasting.

a) Trend Projection Method-: In this method, previous data's on a product

considering its sales are chronologically arranged This arrangement is called “Time Series”. This time series represents the effective demand for a

particular product . Merits-: It does not require the formal knowledge of economic

theory and the market, it only needs the time series data. Demerits-: It assumes that the past is repeated in future. Also, it is an appropriate method for long-run forecasts, but inappropriate for short-run forecasts.

Trend Projection can be either done-: Graphically or, Statistically. 1) Graphically-: Lets take e.g of sales of a company in last 3 years. Now, using these data's we can predictthe sale for year 2008.

Period Year Quarter Sales(In Millions)

1. 2005 (I) 1000

2 (II) 1100

3. (III) 1400

4. (IV) 1200

5. 2006 (I) 1300

6. (II) 1500

7. (III) 1100

8. (IV) 1400

9. 2007 (I) 1600

10. (II) 1800

11. (III) 1700

12. (IV) 1900

Graph of sales of the company using Trend Projection method.

Statistically,

Constant Rate of Change=

“ Y=mx+c”Here, Y= Sales by the company, m= Slope, x= Time Period, c= Intercept.

Significance of Demand Forecasting It provides appropriate production

scheduling so as to avoid the problem of over-production & problem of short supply.

Helping the firms to reduce the cost for purchasing raw material.

Setting sales targets, establishing sales controls & incentives.

Manufacturers prefer “Make to Stock” rather than “Make to Order". Demand Forecasting helps to plan ahead and provide the finished goods to their customers as soon as possible.

Thank You!!!