Demand Forecasting

A forecast is a prediction or estimation of a future situation, under a given condition. Needs And Importance: It enable the firm to produce the required quantities at the right time. It enable to arrange the various factors of production well in advance. Forecasting is an important aid in effective and efficient planning. Important in calculating rate of return on capital investment.

Needs and importance Cont.

Before launching a new product, demand forecasting is prerequisite. Help management in reducing its dependence on chance. Purpose of forecasting Demand: Short-run forecast. Seasonal patterns are of prime importance. Long-run forecasts. Helpful in proper capital planning.

Methods/Techniques of Demand forecasting

Survey Methods: (1) Consumer Survey Methods[ Direct Interviews] Suitable when a firm is planning to introduce a new product or making a substantial changes in existing product. It may be in the form of (i) Complete Enumeration. Probable demands of all the consumers are summed up.

Total demand forecast for a product is given by, Di

I =1

Here D stands for the quantity demanded of a product by each consumer.

Advantages and Disadvantages

Advantage: first-hand unbiased information Disadvantages: Contacting large number and scattered customers is difficult. Consumers may hesitant to divulge their purchase plans. Consumers may misjudge their own future purchase. Very costly

2. Sample Survey Method

Demand by selected units are summed up to get total market Demand. Total Demand is given by, 2500 Here, 2500 is total Di * population, and 100 100 is selected sample. Compare to the complete Enumeration method, it is less costly, less cumbersome, involve less data error. However choice of sample is very critical.

Method-Cont.
Expert Opinion Method. Forecasting is based on views obtained from specialists. One such method is, Delphi Technique. Usefulness of this method depends on the skill and insight of the experts. Survey of sales Force: Forecast is based on the information based on those who are closest to the market, may be salesmen or representative.

Market Experiments [Two types of market experiments are]

(i) Test Marketing. A particular test area which accurately represents the whole market is selected, then by choosing more than one test area , the firm can asses the effect on demand of the various alternative marketing strategies.[ one merit is that , it is based on actual consumer behaviour. However it is very costly and time consuming. Customers loss at the time of test difficult to regain. Selection of the area, accurately represent the potential market is difficult. Controlling other factors , influencing demand is difficult.

Market Experiments: Cont.

(ii) Controlled experiments. A sample of some consumers of a product which are representative of the target market is selected and asked to visit a shopping store of a firm where various brands of a product are placed. They are further asked which and how much of each brands they would by at different prices. Their preferences are recorded.

Market Experiments: Cont.

(iii) Time Series Analysis: It shows a recognizable pattern over time, using past and historical data. With the help of time series analysis we can get the following kinds of predictions: (i) Finding a trend value for a specific year/years (ii) Finding seasonal fluctuations. (iii) Predicting turning points in future movement.

Time Series Analysis

Trend Projection When data of a variable demand or (Sales) show a generally increasing or decreasing trend over time, we can forecast its future value by (i) fitting a line to data graphically and (ii) by least squire method.

Time Series Analysis: Cont.

(i) Graphical Method. In this method, we plot the sets of the data of the two variables ( dependent and independent variables) on graph. The regression line is then approximated by sketching it freehand in such a manner that the line passes through the middle of the scatter of points.

Time Series Analysis: Cont.

(ii) Least Squires Method. In the least squires method of estimating regression line S = a + bP, we need to find the values of the constants a and b with the help of normal equations:

Leading/ Lag Indicator Method.

A leading series consists of data that move ahead of the series being compared, e.g., applications for the amount of housing loan over time is a leading series for the demand of construction material. Bank rate change by RBI is a leading indicator of interest rate charged by commercial banks. Lag behind series: If the forecast variable lag behind the movement of leading indicator, e.g., movement of agriculture income and the sale of tractor.

Econometric Method
Econometric is use of statistical methods and economic theory to estimate the casual relationship between economic variables. Economic theory tells us the demand for a commodity is a function of its own price, disposable income, prices of related commodities, advertising expenditure. Demand Equation can be written as Qd = a +b1Pn + b2Pc + b3Y + b4AD Y = disposal income AD = Advertising Exp. a = constant (intercept) b1, b2, b3 and b4 are the parameters of the various independent variables Here, Pn = own price Pc = Price of a competitive goods

Econometric Method: Cont.

Through the regression technique of ordinary least squire method the above demand equation is estimated and the parameters of the equation(a,b1,b2) are obtained using the past data. The next step is to predict the values of the various variables (P, Y, AD, etc.) for the future period for which demand forecast is to be made. Now, the estimates of parameters and future values are substituted into the above demand equation, which after solving gives the value of Qd.