Demand Forecasting09!10!09 09

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Demand Forecasting


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Demand Forecasting

Forecasting is predicting what willhappen in future.

Forecast is of three types-1.Short term forecast

2.Medium term forecast

3.Long term forecast.


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Demand Forecasting

Short term forecast helps inproduction scheduling, raw materialprocurement and inventorying. It is

done for few months.

Medium term forecast is done for ayear & is used for budgeting.

Long term forecast is done for morethan a year & used for businessstrategy.


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Demand Forecasting

It is a process of estimating thefuture demand or sales pattern of afirm by taking into account the past

information, opinion of industryobservers & evolving consumptionpattern for a desired time period.


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Role of DF in managerialdecision making


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c) Appropriate price policy it can be determineddepending upon the anticipation of market demandcondition. It can also avoid an increase or reductionin price.

d) Setting realistic sales target for sales person Iftargets are too high, it discourages the salesperson,if its too low ,target can be easily achieved &incentives given will be meaningless.

e) Forecasting financial requirement cash

requirement depend on demand level & productionoperations.e.g.productiton & advertisement.


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Long term forecasting covers a period of more thanone year. it includes

a)Business planning starting of a new unit or expansionof an existing unit of production requires an analysis ofthe long term demand potential.

b)Financial planning long term DF are quite essential toassess long term financial requirements for purchasingmachinery, raw material,R&D Program.

c)Planning manpower requirements Training &

personnel development are long term propositions,taking considerable time to complete.


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Measures of marketdemand

Market demandThe marketers first step in evaluating

marketing opportunity is to estimate totalmarket demand

Market demand for the product is the totalvolume that would be bought by target group ofcustomers in a target geographical area in aspecific time period

Market forecast

Only the minimum level of industry marketingexpenditure and efforts will actually occurThe market demand corresponding to this level

is call the market forecast


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Measures of marketdemand

Market potential It is the highest limit approached by

market demand as industry marketingexpenditure approach infinity for a givenmarketing environment


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Measures of marketdemand..

Company demand It is the companys estimated share of market demand at

alternative levels of company marketing efforts in a giventime period. This share will depend on how its products,services, prices, communications are perceived by

consumers relative to the competitors Company sales forecast

Related to company sales forecast, there are two additionalconcepts involved. First is sales quota which is the salesgoal for a product line, company division or sales officer.Sales quota are slightly higher than estimated sales tostretch the sales force efforts.


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Measures of marketdemand..

Second is the sales budget which is theconservative estimate of the expected volumeof sales and is used for making currentpurchasing, production and cash flowsdecision. Sales budget are generally setslightly lower than the sales forecast

Company sales potential

This is the sales limit approached by companysdemand as the companys marketing effortsincreases relative to that of competitors.


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Characteristics of gooddemand forecasting methods

Eight major characteristics can be identified withforecasting methods to identify keycharacteristics of good demand forecastingmethods

1.Time horizon the length of time over which adecision is being made has a baring on theappropriate technique to use depending on thetime i.e. short and long DF can be measured

2.Level of details The level of detail neededshould match the focus of decision making unitin the forecast

3.Stability Forecasting in situations that arerelatively stable over time requires less attentionthan those that are in constant flux


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4. Pattern of data As different forecastingmethods vary in their ability to identifydifferent patterns it is useful to make thepattern in the data fit with the method thatsuits it the most

5. Type of model Other assumptions are alsomade in each forecasting technique that mustfit the situation under consideration

6. Cost Several costs are associated with

adapting forecasting procedure within anorganization like managerial development,storage, operation and opportunity in terms ofother techniques that might have been applied


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7. Accuracy

It is measured by the degree of deviationbetween past forecast and current actualperformance or present forecast and futureperformance

8. Ease of application

Models must be chosen within the abilities of theuser to understand them and within the timeallowed for using them


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Steps in demandforecasting

Demand forecasting is a scientific exercise. It has to gothrough a number of steps. These steps present asystematic way of initiating, designing and implementinga forecasting system.

1.Identification of objective Depending on the typeof forecast i.e. short and long, objective can be identified

2.Nature of the product and marketWhether the product is consumer good or producer

good, perishable or durable, analyzing the demand forfinished goods, demand for corresponding raw materialand intermediate goods should also be analyzed.


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Perishable commodities such asfresh vegetables and fruits can onlybe sold over a limited period of time

3.Determinants of demand Itdepends on demographic ,psychological factors


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4. Analysis of factors Statistical demand function isclassified into four factors.

a. Trend factorb. Cyclical factorc. Seasonal factor

d. Random factor

4. Choice of method The economist has to choosea particular technique from among the varioustechniques of demand forecasting dependingupon the nature of product

5. Testing accuracy The testing is needed to avoidthe margin of forecasting error and thereby toimprove decision making


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Methods of demandforecasting

Forecasting method

Survey MethodStatistical Method

umer

Collective

opinionmethod

Delphimetho

d

Marketexperime

ntmethod

Timeseries

analysis

Regression analysis

Graphical

method

Semiaverag

emethod

Movingaverag

emethod

Leastsquaremethod


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Survey method Under this approach surveys areconducted about the intention of consumers, opinion ofexperts or of markets

These methods are usually suitable for short term

forecast due to the nature of consumer intention By using this method, a firm can ask consumers what and

how much they are planning to buy at various prices ofthe product for the forthcoming prices usually a year


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Merits

It is a direct method of assessing information from the primary sources

It is a simple method as it is not based on past historical records

It saves time and cost by conducting surveys

It does not introduce any bias or value judgment particularly in the census method


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Demerits

Many a times consumers are not answeringto the questionnaire

It becomes difficult for a firm to ascertainnumber of consumers that intend to buyfrom that firm

Utility of these estimates is limited to a

period of about one year

There may be sampling error if the sample isnot properly chosen


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Collective opinion method Under this method salesman orexperts are required to estimate expected future demand of theproduct in their respective territories and sections

Merits

The method is simple and does not involve the use of statisticaltechniques

The forecast are based on the knowledge of salesman and aredirectly connected with sales

The method may prove quite useful in forecasting sales of a newproduct

Demerits

Completely a subjective and can influence the forecast Restricted to short term forecast

Salesman may be unaware of the broader economic changeslikely to have an impact under future demand

Methods of demand

forecasting


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Delphi method It also uses opinion of theexperts to come to a logical conclusionregarding future demand

Merits

It facilitates the maintenance of respondentsidentity throughout the discussionThis method renders it possible to pose the problem

to the experts at one time and have their responseThis technique saves time and other resources

Demerits It is a tedious method

Too conceptualized for discussion, generateconsiderable thinking and stimulate dialogue



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Market experiment method Under this method the maindeterminants of demand of a product like price,advertising, packaging, quality are identified

Here the market divisions must be homogeneous withregard to income, population, caste, religion, sex, age,

tastes, preference Merits

It is a carefully carried out exercise which helps researcher tocome out with a demand function indicating quantities

This method can be used to check the results of demand

forecasting obtained from other methods



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Demerits

These methods are expensive and timeconsuming

These methods are risky as they mightsend wrong signals to the consumers,dealers and competitors

It is difficult to satisfy the conditions ofhomogeneity



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Statistical method These methods make use of historicaldata as a basis for quantitative relationship to arrive atfuture demand patterns and trends

These are useful for long term forecasting

Time series analysis Most of the variables in business,

economics and commerce be it a series related to price,production, consumption, national income, foreign trade, foreignexchange reserves, investment, sales are all the time seriesdata spread over a long period of time

a.Trend Population, capital, technology

b.Seasonal variation Short term, cyclic fluctuations


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Graphical methods This method givesthe basic method of series to grow,decline or remain steady over a period oftime.

This method is useful in forecastingIndia's population, demand for cement,textiles, steel, paper where the future is

not too much different from the averageof past. This period of time in the trendanalysis is always a long time period


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Semi average method According to this method the data is divided into

two parts preferably with the same number ofyears. The average of the first and the second part

are calculated separately. These averages arecalled as semi averages

Moving average method When time series analysis does not reveal a

significant trend of any kind, the moving average

method may be used to smoothen the seriesThis is very simple and flexible method for

measuring trend


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Least square method The principle ofleast square provides an analytical toolto obtain an objective fit to the trend ofthe given time series

Regression analysis It is perhaps the most popular method of

forecasting.

It is mathematical analysis of the averagerelation between two or more variables interms of the original units of data


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Demand forecasting of a newproduct

Projecting demand for a new product is differentfrom those of established products

This requires an intensive study of an economicand competitive characteristics of product

Forecasting methods need to be tailored to aparticular product1. Product lifecycle analysis Many products generally

have a characteristics known as perishabledistinctiveness. This means that a product is distinctwhen it degenerates over the years into a common

product.This innovation of new product and its degenerationinto a common product is termed as the life cycle ofthe product


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Demand forecasting of a newproduct

2. Introduction

3. Growth

4. Maturity5. Saturation

6. Decline

Demand Forecasting09!10!09 09

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