DEMAND FORECASTING:

i) Meaning ii) Objectives of Demand Forecasting iii) Purpose of demand Forecasting. a) On the basis of Time Period b) On the basis of Levels c) On the basis of Category of Goods. iv) Approaches to Demand Forecasting. a) Steps in the Process of Demand Forecasting. b) Techniques / Methods of Demand Forecasting. v) Criteria for Good Forecasting Method. vi) Demand Forecasting for New Products, Established Products and Producers goods. vii) Limitations of Demand Forecasting.

i)

MEANING:
Demand forecasting means expectation about the future course of the market demand for a product. This enables the firm to make necessary plans for production and sales by keeping in view the market conditions. The demand forecasting is an estimate of the future demand. It cannot be hundred percent precise. But, it

gives a reliable approximation regarding possible

outcome, with a reasonable accuracy, if it is based on the mathematical laws of probability.

ii) OBJECTIVES OF DEMAND FORECASTING

Demand forecasting has several objectives. The following are some of the important objectives. a) To reduce cost of raw materials and control inventories, to stock enough raw materials according to demand estimates. b) To arrange for short-term financial requirements such as working capital.

c) To fix sales targets based on demand estimation and

to provide incentives to sales people.

d) To arrange for appropriate promotional efforts such as advertising and sales campaigns. e) To prepare proper price policies for achieving desired results. f) To plan production programmes so that there is neither over-production nor underproduction. iii) PURPOSES OF DEMAND FORECASTING The demand forecast can have different interpretations and applications, depending on the purposes of the forecast. The purposes of the forecast can be understood in a systematic way by classifying them (i) on the basis of the time period (ii) on the basis of levels of forecast; and (iii) on the basis of category of goods

a) Demand Forecasting on the basis of time period

On the basis of time period the sale predictions can relate to any one of the following: i) Short-term; ii) Medium-term; and iii) Long-term. i) Short-term Forecasting: Short-term forecasting

serves the following purposes: a) To evolve a suitable policy in view of the seasonal variations of demand and so as to

avoid the problem of short supply or overproduction of the firms product in the market.

b) To evolve a suitable policy in view of the

seasonal variations of demand and so as to avoid the problem of short supply or overproduction of the firms product in the market. c) To determine the suitable price policy to clear off the stocks during offseason and to take advantage in the peak season. d) To evolve a rational purchase policy for

buying raw materials and control its inventory

stock with a greater economy.

e) To set the sales targets and for establishing control over the business. f) To enable the firm to have a short-term financial policy to make use of the surplus cash and / or to arrange for cash in times of need. ii) Medium-term: In case of medium term forecast, experience and sound judgment are more important than statistical forecasting. The medium term forecast can assist in the decisions about timing of an activity, like advertising expenditure. These forecasts also contribute to control or revision of the decisions based on long-term forecast.

iii) Long-term Forecasting:

A long-term forecasting relates to the informations which are vital for undertaking strategic

decisions of the business pertaining to its expansion

or contraction. In general the long-term demand forecasting serves the following purposes.

a) Long-term demand potential will provide

the required guidelines for planning of a new business unit of for the expansion of

the existing one. Capital budgeting by a

firm is based on the long-term demand forecasting.

b) It is essential to determine long-term sales

forecast for an appropriate manpower planning by the firm in view of its longterm growth and progress of the business. c) In view of the long-term demand

forecasting and the production planning, it

becomes easier for the firm to determine its long-term financial planning and

programmes for raising the funds from the

capital market.

b) Demand forecasting on the basis of levels

Demand forecasting may be undertaken at any one of the following levels: a) Macro economic forecasting b) Industry demand forecasting

c) Firm demand forecasting and

d) Product line forecasting

c) Demand forecasting on the basis of category

of goods Economists broadly classify the goods into capital goods, consumer durable goods and nondurable goods. For each of these categories of

goods there would be distinctive pattern of

demand. Forecasting based on this classification servers any or all the purposes mentioned above under two classifications.

APPROACHES TO DEMAND FORECASTING

i) Steps in the process of demand forecasting: The following steps are necessary to have an

efficient forecast of demand:

a) Identification of objectives: The first step is to identify and clearly lay down the objectives of

forecasting, whether it is short-term forecast,

forecast of market shares or a general industry forecast. The purpose of this exercise may be

the estimate of one or more than one aspects,

like quantity and composition of demand, price to be quoted, sales planning, inventory control, etc.

b) Determining the nature of good : There are

three important categories of goods, viz., Capital

goods, Consumers durable goods, Consumers

non-durable goods. Demand determinants of

these categories are also different. Hence, the

determining variables of the demand function for

the product are to be ascertained.

c) Selecting a proper method of forecasting:

Another step is to select suitable methods of forecasting in view of the objectives, availability of data, etc. for example if the data shows cyclic fluctuations, the use of linear trend will be suitable. Similarly, general trend may be more useful for long-term forecasting, while seasonal

patterns will be more important for the short-term

forecast.

d) Interpretation of results: Mere preparation of

forecast does of not help the is management. of equal Interpretation results also

importance. Once the data are collected and

statistical estimates are made, their implications are to be judged for policy making. Interpretation

of demand forecasting is an art. It is very

significant for business decision-making. For that, we need to frequently revise the forecast in

the light of changing circumstances because

forecasts are, in the first instance, made on the assumption of continuation of past events.

b) Techniques / Methods of demand forecasting

It is to be noted here that there is no easy method or a simple formula, which enables the manager to

predict the uncertainty of future with cent per cent

accuracy. There are various methods to estimate potential demand. Some people rely on personal

judgment or statistical calculations. We can classify the methods of demand forecasting in the following manner: i) The Survey Method / Opinion polling method. ii) Trend Projection method / Extrapolation method iii) Economic Barometers. iv) The Statistical Methods.s