demand forecastingggg

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Demand forecasting


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Definition2

Demand forecasting is an estimation ofdemand for the product for a future period.

Demand forecasting is the scientific andanalytical estimation of demand for a product(service) for a particular period of time.

It is the process of determining how much of

what products is needed, when and where.


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Categorization of demand forecasting3

Firm(Micro) Level: Forecasting of demand forits product by an individual firm

Decision related to production and marketing

Industry level: For an product in an industry asa whole

Insight in growth pattern of the industry

In identifying the lifecycle stage of the productRelative contribution of the industry in national

income.


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Economy(macro) level: Forecasting of aggregatedemand(output) in the economy as a whole. Helps inpolicy making


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Importance of demandforecasting 5

1) Production planning

2) Sales forecasting

3) Inventory control

4) Growth and long term investmentprogramme

5) Stability

6) Economic planning and policymaking


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Short term forecasting6

1) Sales policy

2) Price policy

3) Purchase policy

4) Sales target

5) Short term financial planning


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Long term Forecasting7

1) Business planning

2) Manpower planning 3)Long term financial planning


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Components of demand forecasting8

1) Nature of forecasts

2) Nature of product

3) Determinants of demand

4) Identifying relevant data

5) Choice of method

6) Testing accuracy7) Evaluation of forecast


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Choice of forecasting technique9

1) Imminent objective of forecast: Whether it isfor a new product or to gauge impact of a newadvertising.

2) Cost involved: Cost of forecasting should not bemore than its benefits

3) Time perspective: Whether the forecasts ismeant for the short run or the long run.

4) Complexity of the technique: Methodinvolved in forecasting

5) Nature and quality of available data:


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Techniques of demand forecasting10

Survey method: Surveys are conducted to collectinformation about consumers intentions and theirfuture purchase plans.

This includes i) survey of potential consumers

Ii) Opinion polling of experts


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Consumer survey method11

Buyers are asked about future buying intentions ofproducts, brand preferences and quantities ofpurchase, response to an increase in the price or an

implied comparison with competitors product Census method: Involves contacting each and every

buyer.

Sample method: Involves only representativesample of buyers.


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Merits:

Simple to administer and comprehend

Suitable for short term decision regarding product andpromotion

Suitable when no past data is available

Demerits:

Expensive both in terms of resource and time.

Buyers may give incorrect responsesInvestigators bias regarding choice of sample and

questions cannot be fully eliminated


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Sales force opinion survey13

Sales persons are in direct contact with thecustomers , salespersons are asked about estimatedsales targets in their respective sales territories in agiven period of time.

Merits:

Cost effect as no addition cost is incurred oncollection of data.

Estimated figures are more reliable as they are basedon the opinion of salespersons on direct contact withthe customers.


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Demerits:

Results may be conditioned by the bias ofsalespersons

Salespersons may be unaware of the economicenvironment of the business and make wrongestimates.


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Expert-Opinion method15

It is one of the most widely used forecasting techniquewhere the opinion and intuition of management isutilized. Outside experts are consulted .

i) Group discussion: Decisions may be taken with thehelp of brainstorming session or by structureddiscussions.

ii) Delphi technique: Developed by the Randcorporation at the beginning of the cold war toforecast impact of technology on warfare.


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Way of getting repeated opinion of experts withouttheir face to face interaction

Consolidated opinion of experts is sent for revisedviews till conclusions converge on a point

Merits:

Decisions are enriched with the experience of

competent expertsFirm need not spend time, resources in collection ofdata for survey.


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Very useful when products are absolutely new to allmarkets.

Demerits:Experts may involve some amount of bias.

With external experts, risk of loss of confidentialinformation to rival firms.


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Market Simulation18

Market simulation: Firms create Artificial markets,consumers are instructed to shop with some money.

Labotary experiments ascertains consumers reaction tochanges in price, packaging and even location of the

product of the shop.Merits:Market experiments provide information in consumer

behavior regarding change in any determinant ofdemand

Experiments are useful in case of new productDemerits:People behave differently when they are being observed.


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Test Marketing19

Involves real markets in which consumers actuallybuy a product without the conscious of beingobserved.

Product is actually sold in certain segments of themarket, regarded as the test market

Choice and no of test markets are very crucial to thesuccess of the results.


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Test Marketing20

Merits: Most reliable among qualitative methods

Very suitable for new products

Considered less risky than launching the product across awide region

Demerits:

Very costly as it requires actual production of the productand in event of failure of the product the entire cost is

sunk. Time consuming to observe the actual buying pattern of

consumers


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Statistical methods21

They are based on the assumption that futurepatterns tend to be extension of past ones and that

one can make useful prediction studying the pastbehavior. The sales data can be used to make usefulpredictions.


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Graphical Method22

Past values of the variable on vertical axis and timeon horizontal axis and line is plotted

Movement of the series is assessed and future values

are forecasted Simple but provides a general indication and fails to

predict future value of demand


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Solve23

Year 1995 1996 1997 1998 1999 2000 2001

Deman

d(in1000units

75 70 72 69 54 54 37


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Barometric methods24

Barometric techniques alerts business to change inoverall economic conditions

Helps in predicting future trends on the basis ofindex of relevant economic indicators especially

when the past data do not show a clear tendency ofmovement in a particular direction


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Simple or bivariate regression analysis25

Deals with a single independent variable that

determines the value of the dependent variable Demand function: D=a+bP where b is negative


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Least square method26

The basic assumption is that the relationshipbetween the various factors remain unchangedin future period.

Y=a+bX where a=intercept, b=slope

Least square estimates of a and b are given by

normal equationsy=na+bx

xy=ax+bX2


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Limitations of demand forecasting27

Change in fashion: Results of demand forecastinghave short lasting impacts especially in dynamic

business environment

Consumerspsychology: Results of forecastingdepend largely on consumers psychology,

understanding which itself is difficult.

Lack of past data: Requires past data sales, which

may not be correctly available . Typical problem incase of a new product


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Uneconomical: May be too expensive for smallfirms to afford. May be too time consuming

Lack of experienced experts: Forecasting by lessexperienced individuals may lead to erroneousresults

demand forecastingggg

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