DEMAND FORECASTING

SAMSON BEY 109517 VICTOR BASU ROY 109527 SRIKANTH GANESH 109526 KIMAY M. 109509

CONTENTS
Demand Forecasting Kinds of Demand Forecasting Purpose of Demand Forecasting Demand determinants Method of Demand Forecasting Forecasting demand for New product Criteria for good forecasting methods

DEMAND FORECASTING
Since the market is dynamic, volatile, & competitive in nature, it is very essential to plan better and allocate resources efficiently by a firm. Demand forecasting is of essential importance to a firm to enable itself to arrange the different resources & produce the right output at the right time. Demand forecasting, thus, is defined as an estimate of the future demand & it is based on the statistical data about past behavior and relations of the various determinants.

KINDS OF DEMAND FORECASTING

Demand forecasting is taken on 3 different levels: Micro Level or at level of firm : Refers to demand forecasting by the firm for its product. Industry Level : Refers to demand forecasting by all the firms composing the industry for the product. Macro Level : Refers to demand forecasting of industries for the economy as a whole on a national basis.

KINDS OF DEMAND FORECASTING

Demand forecasting is also based on the estimation period of a product or economy. Short Term Forecasting: Based on assumptions that the productivity capacity of a company cant be changed in a short period of time, i.e.; within a year. Long Term Forecasting : Based on assumptions that the company can change its scale of operation to expand or contract its productivity capacity in the long run.
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PURPOSE OF DEMAND FORECASTING

Purpose of short term forecasting(STF):
Suitable Production Policy: STF helps in avoiding fluctuation in production. Suitable Purchase Policy: STF helps reducing costs of production. Suitable Price Policy: STF helps in determining price of a product by a firm.

PURPOSE OF DEMAND FORECASTING

Purpose of long term forecasting(LTF):
Business Planning: LTF helps in careful estimation of probable demand for its product in the long run. Financial Planning: LTF helps in estimating the long-term requirements of finance of a firm. Man-Power Planning: LTF helps in planning of training and development of man-power of a firm in the long run.

DEMAND DETERMINANTS
The demand determinants for two categories of goods are different. The goods categories are Consumers Goods & Producers Goods Consumers Goods:
Non- Durable Goods These are perishable and cant be stored for a long time for e.g. vegetables. The demand determinants for such goods are:
Price Quantity No. of consumers

Durable Goods These are non-perishable and can be used for several years for e.g. T.V. The demand determinants for such goods are:
Repair or Replace Replacement demand and new demand Existence of special facilities
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DEMAND DETERMINANTS
Producers goods or Capital goods: Man- made instruments of production and are used for further production of goods ,as, for e.g. factory buildings, machinery and raw materials. Demand for capital goods is indirect and derived. The demand determinants of these goods are:
Profitability of industries using the capital goods(known as user industries) Ratio of production to capacity in the user industries.

METHOD OF DEMAND FORECASTING

The 6 methods of Demand Forecasting being followed are: Survey of Buyers intentions:
Direct method for finding the consumer needs & preferences for a product in a short period of time. If product is sold to a few large industrial buyers, interview of buyers is taken. Such opinions provide information about relation between demand &price, demand & income of customers etc.

 Advantages
Useful in case of bulk sale to a few industrial buyers. Helps in cases where only a few consumers have to be contacted.

 Disadvantages Not useful in case of large household survey as it is very difficult &
expensive.
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METHOD OF DEMAND FORECASTING

Collective Opinion Survey:
Estimation is done by the salesmen, who are closest to the customers and are in a position to assess the reaction of customers of the product of a firm. These estimates are then added, reviewed & revised for proposed changes in the marketing strategies of a firm. As opinions of all executives & departmental heads are taken into consideration, the final demand forecast is said to be result of collective opinion.

 Advantages
It is simple & directly based on direct information of consumers. Useful in forecasting sales of a new product. Estimates of salesmen can be biased. Demand forecasting for entire country cant be possible due to localized information.
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 Disadvantages

METHOD OF DEMAND FORECASTING

Survey of Experts Opinions:
It is also referred to as Delphi method of demand forecasting. Company may engage experts in the field of market research for demand forecasting. They take sample surveys of the markets, analyze the past & present economic conditions & take opinion polls to forecast demand of the product.

 Advantages
Inclusion of market experts reduces the chances of errors in the forecasting .

 Disadvantages
There can be variations in the approach of different experts bringing in differences in views hindering the proper determination of demand forecasting .
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METHOD OF DEMAND FORECASTING

Market Experiments:
This controlled market experimentation method is generally followed in U.S.A . Here, market studies & experiments are being conducted to know the behaviour of consumers under controlled market conditions. For e.g. A particular set of markets are taken having similar characteristics, such as population, consumer preferences etc. & experiments are being conducted by varying the certain determinants of demand such as price, packaging etc. assuming others to be constant. Then the company records the resultant changes of demand based on elasticity coefficients of these variables to determine the important demand determinants.

 Advantages
It helps the company to assess the determinants which hold an important factor in its products demand.

 Disadvantages
It is time consuming as well as risky , as it may lead to unfavourable reactions from consumers towards the company. 13

METHOD OF DEMAND FORECASTING

Trend Projections:
Each company has accumulated data on sales of its product for past many years. Such data is used to prepare time series relating to sales to analyse effective demand for a product. It is then used to prepare trend lines of time series for the product. The two methods used to find this are: Method of moving averages. Method of least square

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METHOD OF DEMAND FORECASTING

Method of moving averages:
It is a simple method of involving calculation of moving averages for a 3 or 4 year periods. Example:
Year Quantity demanded 1000 1200 1400 1600 1500 2000 3-yearly moving(total) 3600 4200 4500 5100 3-yearly moving(avg. trend) 1200 1400 1500
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1988 1989 1990 1991 1992 1993

Table: Calculating the trend by method of moving averages.

METHOD OF DEMAND FORECASTING

Method of least squares:
It is a method which has more scientific approach than the moving average method & is most commonly used. It uses the straight line equation:

Y=a+bX
Where , Y = Demand for the product a = Autonomous quantity demanded X = determinant or variable on which Y depends.

 Advantages
Trend Projection is a simple and inexpensive, & therefore, is quite popular.

 Disadvantages
Whenever a turning point occurs, the trend projection breaks down.
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METHOD OF DEMAND FORECASTING

Regression-Analysis of Economic Indicators:
It is the study of relationships among variables to predict or estimate the value of one variable from known or assumed values of other variables related to it. For e.g. by determining the relation between pneumonia cases & average daily winter temp., we can easily define the demand of such cases occurring in winter by the mathematical relationship between temperature and such cases. In economics, the managerial economist collects the data about relationship between demand and a particular economic indicator for a product. Then, by the method of least squares, regression equation of linear form is derived as:

Y=a+bX Where, Y = demand of the product X = economic indicator or parameter.

 Advantages
It is based on casual relationships and is quite consistent.

 Disadvantages
As it uses complex calculations, it is costly and time consuming.
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FORECASTING DEMAND FOR NEW PRODUCTS

Outgrowth of the demand for existing product. Considered as substitutes of the existing product. Analysis of growth of existing product and estimating the growth rate of new product. Finding out the response of the customer and make estimation of the demand for new product.

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CRITERIA FOR A GOOD FORECASTING

A good forecasting method should be appropriate with particular demand situation, should be technically efficient & economically ideal. The criteria to determine this are:

Accuracy in forecast:
Demand forecast should be accurate, as far as possible. It is measured in terms of past forecast of present sales and the no. of times it has been correct.

Plausible:
It should be reasonable and consistent with existing knowledge. Simple interpretation of the sophisticated statiscal methods should be given to the management for proper understanding.

Economy:
It should be economical in nature, i.e.; it shouldnt apply too much money & managerial effort.
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CRITERIA FOR A GOOD FORECASTING

Quick results:
 It should be capable of yielding quick and useful results.  It should help in quick and effective management decisions.

Availability & Timeliness:

 The method should be capable of maintaining forecast on an up-to-date basis.

Durability:
 It should be durable and shouldnt be changed too frequently.  Durability depends on two important factors:
Reasonableness and simplicity of variables relations. Stability of underlying relationships.

Flexibility:
 Demand forecast should be easily adjustable with changes occuring from time to time. 20

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