DEMAND FORECASTING

DEFINITION
A forecast is a prediction or estimation
of a future situation, under given
conditions.
Forecasts can broadly be classified into
categories:
(i) Passive forecasts
(ii) Active forecasts.

 Passive forecasts: Where prediction

about future is based on the
assumption that the firm does not
change the course of its action.
Active forecasts: Where forecasting is
done under the condition of likely
future changes in the actions by the
firm. Generally, business firms are
interested in both passive and active
forecasts.

STEPS IN DEMAND
FORECASTING
Demand forecasting is a scientific exercise and
has to go through a number of steps. At each
step critical considerations are required.
The following steps are required for demand
forecasting.
Identification of objectives.
Nature of product and market.
Determinants of demand.
Analysis of factors.
Choice of method.
Testing accuracy.

OBJECTIVES OF DEMAND
FORECASTING
The need of DF differs according to the time span of
forecasting.
When the fluctuations in demand are more, relatively
shorter period should be chosen.
NEED FOR SHORT TERM FORECASTING.
Short term forecasting may cover a period of 3
months, 6 months to 01 year depending on the nature
of business.
It is generally done for forecasting products. The uses
include:
Appropriate production scheduling.
Suitable purchase policy.
Appropriate price policy.
Setting realistic sales targets for salesmen.

NEED FOR LONG TERM

FORECASTING
Long term forecasting covers a
peroid of 5, 10 or 20 years.
Following are its uses:
Business planning.
Financial planning.
Planning manpower requirements.

CHARACTERISTICS OF A GOOD
DEMAND FORECASTING METHOD
8 major characteristics can be identified with
forecastingmethods:
Time horizon i.e. length of time over which a decision is
being made.
Level of detail:- This must match the focus of the decision
making unit in the forecast.
Stability:- Situations that are relatively stable over time
requires less attention.
Pattern of data:- Data required for use should be available
on timely basis.
Type of model:- the assumption of each technique must be
satisfied and the easily comprehended by the
management.
Cost
Accuracy

METHODS OF DEMAND
FORECASTING
Forecasting
methods
Survey
method

Consume
r survey
method

Collective
opinion
method

Statistical
method

Delphi
method

Market
experime
nts
method

Graphical
method

Time
series
analysis

Semi
averages
method

Regressio
n analysis

Moving
averages
method

Least
squares
method

SURVEY METHODS
Under this approach surveys are conducted about the
intentions of consumers, opinion of experts or of markets.
It could be a census survey (considering entire population)
or a sample survey (selected subsets of the population).
These methods are suitable for short term forecast due to
volatile nature of consumer intentions.
The survey methods include:
Consumer survey method: under this method a from can ask
consumers what and how much they are planning to buy at
various prices of the product for the forthcoming time period,
usually one year (could be census or sampling method)
Delphi method:- this consists of an attempt to arrive at a
consensus in an uncertain area by questioning a group of experts
repeatedly, until the responses appear to converge or the
disagreement is clear.

Collective opinion method:- Here salesmen (sales

force polling method) are required to estimate future
demand of the product in their respective territories and
sections. The estimates of individual salesmen are
averaged or consolidated to find out the total estimated
sales and then reviewed by top executives to eliminate
bias of optimism on the part of salesmen and pessimism
on the part of others. Also reviewed in the context of
factors affecting demand
Market experiments method:- in this the main
determinants of demand of a product are identified, these
factors are varied separately over different markets or
different time periods, holding other factors constant. The
effect of the experiment on consumer behavior is studied
and this demand forecasted.
NOTE:- Refer prescribed textbook for detailed study, merits
and demerits of each method.

STATISTICAL METHODS
These methods make use of historical data as a
basis for extrapolating quantitative relationships
to arrive at the future demand patterns and
trends.
These are useful for long term forecasting and for
forecasting old products.
They are broadly classified under:
Time series analysis:- It is an arrangement of
statistical data in a chronological order that is in
accordance with its time of occurrence. Based on the
time series data on the variable under forecast, a
trend line or curve is plotted. Trend line can be worked
out fitting a trend equation to time series data
through least squares method or some other
estimation method.

 Regression analysis:- it is the most popular method

of forecasting. It is a mathematical analysis of the
average relation between two or more variables in
terms of the original units of the data. Here there
are two types of variables. The variable whose
value is to be predicted is called the regressed or
dependant variable and the variable which
influences the dependant value is called the
regressor or predictor or explanatory variable.
When the study is confined to 2 variables it is called
simple regression and to study the effect of more than
one predictor on the value of the predicted variable is
called multiple regression.