Demand forecasting is about making estimations of future customer demand using previous old data and other information. Proper demand forecasting gives managers of organisation information about their decisions for pricing, business growth and strategies for market growth. Without demand forecasting, Organisation may take poor decisions about their products and target markets.
Organization faces several internal and external risks, such as high competition, failure of technology, labour unrest, inflation, recession, and change in government laws.
Therefore, risk and uncertainty are the reason to make business decisions of an organization.
An organization can lessen the adverse effects of risks by determining the demand or sales prospects for its products and services in future. Demand forecasting is a systematic process that involves anticipating the demand for the product and services of an organization in future under a set of uncontrollable and competitive forces.
Demand forecasting helps in taking various business decisions, such as planning the production process, purchasing raw materials, managing funds, and deciding the price of the product. An organization can forecast demand by making own estimates called guess estimate or taking the help of specialized consultants or market research agencies.
Demand Forecasting helps in reducing risk and makes important decision.
The significance of demand forecasting is shown in the following points:
i. Fulfilling objectives:
With certain predicated objectives every business unit starts. Demand forecasting helps in fulfilling these objectives and setting up the goals.
ii. Preparing the budget:
By estimating cost and expected revenues, budgeting becomes more accurate and crucial.
iii. Stabilizing employment and production:
Helps an organization to control its production and recruitment activities. Also helps in avoiding the wastage of the resources of an organization.
iv. Expanding organizations:
Implies that demand forecasting helps in deciding about the expansion of the business of the organization. If the demand for products is more then the organization may expand further. But, if the demand for products is expected to fall or reduce, the organization may cut down the investment in the business.
v. Taking Management Decisions:
Helps in making critical decisions, like determining the requirement of raw material, plant capacity and availability of labour and capital.
vi. Evaluating Performance:
Helps in making corrections related to quality etc.If demand reduces of the product but by analysing and taking corrective action improves the level of demand by enhancing the quality of product.
vii. Helping Government:
Enables the government to coordinate import and export activities and plan international trade.
1) Methods which are dependent and follows surveys, interviews and opinions.
2) This method includes the consumer survey Delphi method market surveys etc. of demand forecasting.
3) This method follows the opinion of different groups of people who are linked with the product to predict the future demand.
4) For short term forecasting prediction qualitative methods are preferred.
Qualitative forecasting techniques include interpretation of data combined with the professional expertise during the job experience.
You might forecast demand by holding focus groups of customers to discuss and gauge their reactions to several new product features your company is considering.
Qualitative techniques uses information from sources like:
Market Research: Conducted through surveys.
Historical Analogy: The sale of new product or service is compared with the sales of a previous similar product or service.
Sales patterns It is assumed that the sales patterns associated with the previous product or service can be transferred to the new product or service
The opinions of experts in the particular area are sought. Experts give their views on current trends & likely future developments that may have an impact on the general economy or a specific industry or market.
Focus Groups: Consists of panels of customers who are asked to provide their opinions about a product or service.
Delphi Method: “A qualitative forecasting technique where the opinions of experts are combined in a series of iterations (repetitions). The results of each iteration are used to develop the next, so that convergence of the experts’ opinions is obtained”. This method is based on the knowledge & judgment of a small group of experts.
Panel Consensus: A group of people provides opinion about the future & a facilitator brings the group to a consensus.
1) Statistical tools are used to predict the future demand of the product
2) Time series analysis, barometric method and regression method fall under the quantitative methods of demand forecasting.
3) The quantitative methods emphasizes on the use of past sales data along with various factors influencing the demand to estimate the future demand of the product.
4) Long-term forecasts are usually undertaken through the quantitative methods of demand forecasting.
Quantitative forecasts often use historical data, such as previous sales and revenue figures, production and financial reports and website traffic statistics. Looking at seasonal sales data, for example, can help you plan next year’s production and labour needs based on last year’s monthly or quarterly figures.
Based on historical information that is usually available within the company. Various techniques are:
A method for forecasting sales data when a definite upward or downward pattern exists. Model includes double exponential smoothing, regression & triple smoothing.
Seasonal Adjustment :
Seasonal models take into account the variation of demand from season to season. Adjustments can be made to a baseline forecast to predict the impact of a seasonal demand.
“A method of forecasting where time series data are separated into up to three components: trend, seasonal, and cyclical; where trend includes the general horizontal upward or downward movement over time; seasonal includes a recurring demand pattern such as day of the week, weekly, monthly, or quarterly; and cyclical includes any repeating, non-seasonal pattern. A fourth component is random, that is, data with no pattern. The new forecast is made by projecting the patterns individually determined and then combining them”.
Graphical Methods :
Plotting information in a graphical form. It is relatively easy to convert a spreadsheet into a graph that conveys the information in a visual manner. Trends & patterns are easier to spot & extrapolation of previous demand can be used to predict future demands.
Econometric Modeling :
A set of equations intended to be used simultaneously to capture the way in which dependent and independent variables are interrelated.
Life Cycle Modeling :
“A quantitative forecasting technique based on applying past patterns of demand data covering introduction, growth, maturity, saturation, and decline of similar products to a new product family”.
The objectives of demand forecasting are divided into short and long-term objectives, which are shown in Figure-1:
The objectives of demand forecasting (as shown in Figure-1) are discussed as follows:
i. Short-term Objectives:
a. 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.
b. 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 falls. In such a case, the organization sets low prices of its products.
c. 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.
d. 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.
ii. Long-term Objectives:
a. 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.
b. 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:
Demand forecasting is a proactive process that helps in determining what products are needed where, when, and in what quantities. There are a number of factors that affect demand forecasting.
i. 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.
Information regarding the demand, substitutes and level of competition of goods is known only in case of established goods. On the other hand, it is difficult to forecast demand for the new goods. Therefore, forecasting is different for different types of goods.
ii. Competition Level:
Influence the process of demand forecasting. In a highly competitive market, demand for products also depend 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.
iii. Price of Goods: