Demand forecasting

Topics to be covered

Definition

Factors

Purposes of Forecasting

Criteria for a good forecasting

Methods of demand forecasting

Definition Is a process by which an individual or a firm

predicts future demand for product or products

Accurate forecasting-enables these firms to produce required quantities at the right time and arrange well in advance for the various factors of production

Better planning and allocation of national resources.

Factors Influencing DF How far ahead?

Short term Long- term

Should forecast be general or specific

Problems and methods

Classification of goods - consumer - durable - consumer goods and services

Factors

Forecasting at different levels

– Macro

– Industrial

– Firm-level

Purposes of forecasting

Purposes of short-term forecasting

Purposes of long –term forecasting

Short-term forecasting Production scheduling

Reducing cost of purchasing raw materials

Determining appropriate price policy

Setting sales targets and establishing controls and incentives

Evolving a suitable advertising and promotion programme

Forecasting short-term financial

Long-term forecasting

Planning of a new unit or expansion of an existing unit

Planning of long-term financial requirements

Planning of man-power requirements

Criteria for a good forecasting Accuracy

Plausibility

Simplicity

Economy

Availability

Durability

Methods of demand forecasting Survey or buyer’s

intention

Delphi method

Expert opinion

Collective opinion

Naïve models

Smoothing techniques

Analysis of time series and trend projections

Use of economic indicators

Controlled experiments

Judgmental approach

Survey or buyers method

Direct method of estimating sales in the near future

Asking customers what the buyer’s are planning to buy Known as opinion survey

The burden of forecasting goes to buyer

Method is best when bulk of sales is made.

Customers may misjudge or mislead or may be uncertain about quantity

Not useful in case of house old customers

Does not measure and expose the variables under managements control

Methods of demand forecasting Survey methods

- experts opinion- consumer survey

- complete enumeration- sample survey- end- use

- Delphi method

Methods of demand forecasting

- market experimentation- stimulated market method- actual market method

Statistical method- trend analysis- heading indicator analysis- regression method- simultaneous equation

Survey Methods

conducted by sales agencies

a direct method of addressing people

helps in gaining first hand information

Expert’s opinion business firm prefers to depend on survey of

experts

Experts are those who have the feel about the product

opinion poll is conducted among experts

Sometimes this method is also called the “hunch method”

Advantages

This method is very easy and less costly to carry out.

This method produces quick results

When a firm intends to bring a new product, this method is very useful to elicit the opinion of experts on its marketing plans

Disadvantage

The experts must have wide knowledge and experience otherwise their opinion may be personal based on guess work.

Experts opinion may be biased for a number of reasons.

Consumer survey interviewing the consumers directly to get

information about their purchase plans at a number of possible prices over a particular period of time.

information collected through questionnaire

The data will have to be classified and tabulated for systematic presentation and analysis.

Complete enumeration method/ census method:

All consumers of a product are contacted and they are interviewed to know their probable demand for the forecast period.

This individual probable demand is added to ascertain the demand forecast for the firm’s product.

For example there are N consumers, each demanding commodity X, then the total demand forecast would be EN * n. where n=1.

Advantages This method simply records the data and

aggregates; it does not introduce any value judgment of his own.

The demand forecast through this method is likely to be more accurate than many other methods.

Disadvantages

It is time consuming and costly method

There can be large number of errors in the data collection, as it is a tedious and cumbersome process.

Sample survey Only few consumers are selected by using some

appropriate sampling technique.

They are interviewed to ascertain their probable demands for the product for the forecast period.

Their average demand is then calculated.

This average demand for the sample is multiplied by the total number of consumers to obtain the aggregate demand forecast for the product in question.

Advantages

It is a direct method of collecting data from consumers. The information obtained is first hand, it is more reliable.

This method saves time, cost and energy. It is economical, if information is collected by postal questionnaire.

Disadvantages There may be sampling error. The smaller the

size of the sample, the larger the sampling error.

This method provides scope for errors. The consumer may not understand the significance of the questions asked, they may be dishonest, reluctant or shy to reply or they may be either vague or imaginary replies. This reduces the usefulness of information collected.

End-use Method the demand for a product is forecasted through a

survey of its users.

A product may be used for final consumption by house old sector and government and as an intermediate product by different industries as well as may be exported and imported.

purposes can be obtained through a survey of all or selected consumers, exporters and importers and industries using it as an input thus the total demand forecast can be obtained as the sum of the demand forecast of all three components.

Advantages It provides use-wise or sector-wise demand

forecasts.

This method is used now as a standard tool in economic analysis and are extensively used by governmental and no-governmental agencies.

Disadvantages This method assumes that technical structure

of production remains unchanged overtime, which is not true. Because with economic development technical innovations continue to take place and lead to technological changes in the industrial structure.

This method needs extensive information on the probable demands of the final goods sector. No company how so ever large can hope to possess this information.

Delphi method

In this method an attempt is made to arrive at a consensus in an uncertain area by questioning a group of experts repeatedly until some sort of unanimity is arrived among all experts.

These meetings help to narrow down different views of experts.

Advantages

In this method it is possible to pose the problem to experts directly

It generates a reasonable opinion in place of unstructured opinion.

It is a cheap method, save time and resources.

Disadvantages

The success of this method depends upon wide knowledge and experience of experts.

It could be tedious and costly method if the experts are not too large and are cooperative and forecaster has the necessary funds and ability to perform the task.

Statistical method

Time series data: Refers to data collected over a period of time recording historical changes in variables like price, income, etc. that influenced demand for a commodity Time series analysis relate to determination of change in variable in relation to time.

Statistical method Cross sectional :Is undertaken to determine

the effect of changes in variables like price, income, etc. on demand for a commodity at a point of item. In cross sectional analysis, different levels of sales among different income groups may be compared at a specific point of time and income elasticity is then estimated on the basis of these differences.

Statistical methods Trend analysis: A firm which has been in existence

for a long time will have accumulated data on sales pertaining to different time periods.

When such data is arranged, chronologically it is know as “Time Series”.

A typical time series has four components, trend, cyclical fluctuations, seasonal variations and random or irregular fluctuations.

This method is highly subjective and considerably depends on the bias of the person drawing the curve.

The main advantage of this method is that it does not require the formal knowledge of economic theory and the market, it only needs the time series data.

Regression method

involves a study of the dependence of one variable on the other variables.

In demand forecasting demand is estimated with the help of a regression equation where in demand is the dependent variable and price, advertising expenditure, consumer’s income, etc is the independent variable.