DEMAND FORECASTING

Meaning: Demand forecasting is an attempt to estimate the future level of demand on the basis of
past as well as present knowledge and experience, to avoid both under production and
overproduction. It may be based on estimates of demand potential of the entire industry. The
demand forecasting serves as the reference point for all marketing control efforts.
Evan J. Douglas, “Demand estimation (forecasting) may be defined as a process of finding values
for demand in future time periods.”
Cundiff and Still, “Demand forecasting is an estimate of sales during a specified future period
based on proposed marketing plan and a set of particular uncontrollable and competitive forces.”
Significance of Demand Forecasting:
1. Fulfilling objectives: Implies that every business unit starts with certain pre-decided objectives.
Demand forecasting helps in fulfilling these objectives. An organization estimates the current
demand for its products and services in the market and move forward to achieve the set goals.
2. Preparing the budget: Plays a crucial role in making budget by estimating costs and expected
revenues. For instance, an organization has forecasted that the demand for its product, which is
priced at Rs. 10, would be 10, 00, 00 units. In such a case, the total expected revenue would be
10* 100000 = Rs. 10, 00, 000.
3. Stabilizing employment and production: Helps an organization to control its production and
recruitment activities. Producing according to the forecasted demand of products helps in
avoiding the wastage of the resources of an organization. This further helps an organization to
hire human resource according to requirement.
4. Expanding organizations: Implies that demand forecasting helps in deciding about the
expansion of the business of the organization. If the expected demand for products is higher, then
the organization may plan to expand further. On the other hand, if the demand for products is
expected to fall, the organization may cut down the investment in the business.
5. Taking Management Decisions: Helps in making critical decisions, such as deciding the plant
capacity, requirement of raw material, & ensuring the availability of labor & capital.
6. Evaluating Performance: Helps in making corrections. For example, if the demand for an
organization‟s products is less, it may take corrective actions and improve the level of demand by
enhancing the quality of its products or spending more on advertisements.
7. Helping Government: Enables the government to coordinate import and export activities and
plan international trade.
Objectives of Demand Forecasting:
A. Short-term Objectives:
1. Formulating production policy: Helps in covering the gap between the demand and supply of
the product. The demand forecasting helps in estimating the requirement of raw material in
future, so that the regular supply of raw material can be maintained. It further helps in maximum
utilization of resources as operations are planned according to forecasts. Similarly, human
resource requirements are easily met with the help of demand forecasting.
2. Formulating price policy: Refers to one of the most important objectives of demand
forecasting. An organization sets prices of its products according to their demand. For example,
if an economy enters into depression or recession phase, the demand for products fall. In such a
case, the organization sets low prices of its products.
3. Controlling sales: Helps in setting sales targets, which act as a basis for evaluating sales
performance. An organization make demand forecasts for different regions and fix sales targets
for each region accordingly.
4. Arranging finance: Implies that the financial requirements of the enterprise are estimated with
the help of demand forecasting. This helps in ensuring proper liquidity within the organization.
B. Long-term Objectives:
1. Deciding the production capacity: Implies that with the help of demand forecasting, an
organization can determine the size of the plant required for production. The size of the plant
should conform to the sales requirement of the organization.
2. Planning long-term activities: Implies that demand forecasting helps in planning for long term.
For example, if the forecasted demand for the organization‟s products is high, then it may plan to
invest in various expansion and development projects in the long term.
Factors Influencing Demand Forecasting:
1. Types of Goods: Affect the demand forecasting process to a larger extent. Goods can be
producer‟s goods, consumer goods, or services. Apart from this, goods can be established and
new goods. Established goods are those goods which already exist in the market, whereas new
goods are those which are yet to be introduced in the market.
2. Competition Level: Influence the process of demand forecasting. In a highly competitive
market, demand for products also depends on the number of competitors existing in the market.
Moreover, in a highly competitive market, there is always a risk of new entrants. In such a case,
demand forecasting becomes difficult and challenging.
3. Price of Goods: Acts as a major factor that influences the demand forecasting process. The
demand forecasts of organizations are highly affected by change in their pricing policies. In such
a scenario, it is difficult to estimate the exact demand of products.
4. Level of Technology: Constitutes an important factor in obtaining reliable demand forecasts. If
there is a rapid change in technology, the existing technology or products may become obsolete.
For example, there is a high decline in the demand of floppy disks with the introduction of
compact disks (CDs) and pen drives for saving data in computer.
5. Economic Viewpoint: Play a crucial role in obtaining demand forecasts. For example, if there is
a positive development in an economy, such as globalization and high level of investment, the
demand forecasts of organizations would also be positive.
Forecasts can be of three types, which are explained as follows:
1. Short Period Forecasts: Refer to the forecasts that are generally for one year and based upon the
judgment of the experienced staff. Short period forecasts are important for deciding the
production policy, price policy, credit policy, and distribution policy of the organization.
2. Long Period Forecasts: Refer to the forecasts that are for a period of 5-10 years and based on
scientific analysis and statistical methods. The forecasts help in deciding about the introduction
of a new product, expansion of the business, or requirement of extra funds.
3. Very Long Period Forecasts: Refer to the forecasts that are for a period of more than 10 years.
These forecasts are carried to determine the growth of population, development of the economy,
political situation in a country, and changes in international trade in future.
Steps of Demand Forecasting:
1. Setting the Objective: Refers to first and foremost step of the demand forecasting process. An
organization needs to clearly state the purpose of demand forecasting before initiating it. Setting
objective of demand forecasting involves the following:
 Deciding the time period of forecasting whether an organization should opt for short-term
forecasting or long-term forecasting
 Deciding whether to forecast the overall demand for a product in the market or only- for the
organizations own products
 Deciding whether to forecast the demand for the whole market or for the segment of the market
 Deciding whether to forecast the market share of the organization
2. Determining Time Period: Involves deciding the time perspective for demand forecasting.
Demand can be forecasted for a long period or short period. In the short run, determinants of
 demand may not change significantly or may remain constant, whereas in the long run, there is a
significant change in the determinants of demand. Therefore, an organization determines the
time period on the basis of its set objectives.
3. Selecting a Method for Demand Forecasting: Constitutes one of the most important steps of
the demand forecasting process Demand can be forecasted by using various methods. The
method of demand forecasting differs from organization to organization depending on the
purpose of forecasting, time frame, and data requirement and its availability. Selecting the
suitable method is necessary for saving time and cost and ensuring the reliability of the data.
4. Collecting Data: Requires gathering primary or secondary data. Primary‟ data refers to the data
that is collected by researchers through observation, interviews, and questionnaires for a
particular research. On the other hand, secondary data refers to the data that is collected in the
past; but can be utilized in the present scenario/research work.
5. Estimating Results: Involves making an estimate of the forecasted demand for predetermined
years. The results should be easily interpreted and presented in a usable form. The results should
be easy to understand by the readers or management of the organization.
Opinion Polling Method: In this method, the opinion of the buyers, sales force and experts could
be gathered to determine the emerging trend in the market. The opinion polling methods of demand
forecasting are of three kinds:
1. Consumer’s Survey Method or Survey of Buyer’s Intentions: In this method, the consumers
are directly approached to disclose their future purchase plans. This is the direct method of
estimating demand in the short run. Here the burden of forecasting is shifted to the buyer. The
firm may go in for complete enumeration or for sample surveys.
 Complete Enumeration Survey: Under the Complete Enumeration Survey, the firm has to go
for a door to door survey for the forecast period by contacting all the households in the area. The
major limitation of this method is that it requires lot of resources, manpower and time.
 Sample Survey and Test Marketing: Under this method some representative households are
selected on random basis as samples and their opinion is taken as the generalized opinion. This
method is based on the basic assumption that the sample truly represents the population. Apart
from that, this method is less tedious and less costly.
 End Use Method or Input-Output Method: This method is quite useful for industries which
are mainly producer‟s goods. In this method, the sale of the product under consideration is
projected as the basis of demand survey of the industries using this product as an intermediate
product, that is, the demand for the final product is the end user demand of the intermediate
product used in the production of this final product.
2. Sales Force Opinion Method: This is also known as collective opinion method. In this method,
instead of consumers, the opinion of the salesmen is sought. It is sometimes referred as the “grass
roots approach” as it is a bottom-up method that requires each sales person in the company to
make an individual forecast for his or her particular sales territory. These individual forecasts are
discussed and agreed with the sales manager. This method is more useful in forecasting sales of
new products.
3. Experts Opinion Method: This method is also known as “Delphi Technique” of investigation.
The Delphi method requires a panel of experts, who are interrogated through a sequence of
questionnaires in which the responses to one questionnaire are used to produce the next
questionnaire. The method is used for long term forecasting to estimate potential sales for new
products. This method presumes two conditions: Firstly, the panellists must be rich in their
expertise, possess wide range of knowledge and experience. Secondly, its conductors are
objective in their job. This method has some exclusive advantages of saving time & resources.
Statistical Method: Statistical methods have proved to be immensely useful in demand forecasting.
In order to main-tain objectivity, that is, by consideration of all implications and viewing the
problem from an external point of view, the statistical methods are used.
1. Trend Projection Method: A firm existing for a long time will have its own data regarding sales
for past years. Such data when arranged chronologically yield what is referred to as „time series‟.
Time series shows the past sales with effective demand for a particular product under normal
conditions. Such data can be given in a tabular or graphic form for further analysis.
 Graphical Method: This is the most simple technique to determine the trend. All values of
output or sale for different years are plotted on a graph and a smooth free hand curve is drawn
passing through as many points as possible.
 Least Square Method: Under the least square method, a trend line can be fitted to the time
series data with the help of statistical techniques such as least square regression. When the trend
in sales over time is given by straight line, the equation of this line is of the form:
y = a + bx.
Σ y = na + b ΣX
2. Barometric Technique: A barometer is an instrument of measuring change. This method is
based on the notion that “the future can be predicted from certain happenings in the present.” In
other words, barometric techniques are based on the idea that certain events of the present can
be used to predict the directions of change in the future.
3. Regression Analysis: It attempts to assess the relationship between at least two variables (one
or more independent and one dependent), the purpose being to predict the value of the
dependent variable from the specific value of the independent variable. The basis of this
prediction generally is historical data. This method starts from the assumption that a basic
relationship exists between two variables.
4. Econometric Models: Econometric models are an extension of the regression technique
whereby a system of independ-ent regression equation is solved. The requirement for
satisfactory use of the econometric model in forecasting is under three heads: variables,
equations and data. The appropriate procedure in forecast-ing by econometric methods is model
building. Econometrics attempts to express economic theories in mathematical terms in such a
way that they can be verified by statistical methods and to measure the impact of one economic
variable upon another so as to be able to predict future events.
Criteria of a Good Forecasting Method:
1. Accuracy: The forecast obtained must be accurate. How is an accurate forecast possible? To
obtain an accurate forecast, it is essential to check the accuracy of past forecasts against present
performance and of present forecasts against future performance. Accuracy cannot be tested by
precise measure-ment but buy judgment.
2. Durability: Unfortunately, a demand function fitted to past experience may back cost very
greatly and still fall apart in a short time as a forecaster. The durability of the forecasting power
of a demand function depends partly on the reasonableness and simplicity of functions fitted, but
primarily on the stability of the understanding relationships measured in the past. Of course, the
importance of durability deter-mines the allowable cost of the forecast.
3. Flexibility: Flexibility can be viewed as an alternative to generality. A long lasting function
could be set up in terms of basic natural forces and human motives. Even though fundamental, it
would nevertheless be hard to measure and thus not very useful. A set of variables whose co-
efficient could be adjusted from time to time to meet changing conditions in more practical way
to maintain intact the routine procedure of forecasting.
4. Availability: Immediate availability of data is a vital requirement and the search for reasonable
approximations to relevance in late data is a constant strain on the forecasters patience. The
techniques employed should be able to produce meaningful results quickly. Delay in result will
adversely affect the managerial decisions.
5. Economy: Cost is a primary consideration which should be weighed against the importance of
the forecasts to the business operations. A question may arise: How much money and managerial
effort should be allocated to obtain a high level of forecasting accuracy? The criterion here is the
economic considera-tion.
6. Simplicity: Statistical and econometric models are certainly useful but they are intolerably
complex. To those executives who have a fear of mathematics, these methods would appear to be
Latin or Greek. The procedure should, therefore, be simple and easy so that the management may
appreciate and understand why it has been adopted by the forecaster.
7. Consistency: The forecaster has to deal with various components which are independent. If he
does not make an adjustment in one component to bring it in line with a forecast of another, he
would achieve a whole which would appear consistent.