Q. What is Demand Forecasting? Explain in brief various methods of forecasting demand.
Demand forecasting seeks to investigate and measure the forces that determine sales for existing and new products. Generally companies plan their business – production or sales in anticipation of future demand. Hence forecasting future demand becomes important. The art of successful business lies in avoiding or minimizing the risks involved as far as possible and face the uncertainties in a most befitting manner.
Methods of Forecasting:
Demand forecasting is a highly complicated process as it deals with the estimation of future demand. It requires the assistance and opinion of experts in the field of sales management. Demand forecasting, to become more realistic should consider the two aspects in a balanced manner. Application of commonsense is needed to follow a pragmatic approach in demand forecasting.
Broadly speaking, there are two methods of demand forecasting.
1) Survey methods and
2) Statistical methods
1) Survey Methods:
Survey methods help us in obtaining information about the future purchase plans of potential buyers through collecting the opinions of experts or by interviewing the consumers. These methods are extensively used in short run and estimating the demand for new products. There are different approaches under survey methods. They are
1. Consumers interview method:
Under this method, efforts are made to collect the relevant information directly from the consumers with regard to their future purchase plans. In order to gather information from consumers, a number of alternative techniques are developed from time to time. Among them, the following are some of the important ones.
a) Survey of buyer’s intentions or preferences:
Under this method, consumer-buyers are requested to indicate their preferences and willingness about particular products. They are asked to reveal their ‘future purchase plans with respect to specific items.
b) Direct Interview Method:
Under this method, customers are directly contacted and interviewed. Direct and simple questions are asked to them.
i. Complete enumeration method:
Under this method, all potential customers are interviewed in a particular city or a region.
ii. Sample survey method or the consumer panel method:
Under this method, different cross sections of customers that make up the bulk of the market are carefully chosen. Only such consumers selected from the relevant market through some sampling method are interviewed or surveyed.
2. Collective opinion method or opinion survey method:
Under this method, sales representatives, professional experts and the market consultants and others are asked to express their considered opinions about the volume of sales expected in the future.
3. Delphi Method or Experts Opinion Method:
Under this method, outside experts are appointed. They are supplied with all kinds of information and statistical data. The management requests the experts to express their considered opinions and views about the expected future sales of the company.
4. End Use or Input – Output Method:
Under this method, the sale of the product under consideration is projected on the basis of demand surveys of the industries using the given product as an intermediate product.
2) Statistical Method:
It is the second most popular method of demand forecasting. It is the best available technique and most commonly used method in recent years. Under this method, statistical, mathematical models, equations etc are extensively used in order to estimate future demand of a particular product. They are used for estimating long term demand. They are highly complex and complicated in nature. Some of them require considerable mathematical background and competence.
1. Trend Projection Method:
An old firm operating in the market for a long period will have the accumulated previous data on either production or sales pertaining to different years. If we arrange them in chronological order, we get what is called „time series‟. It is an ordered sequence of events over a period of time pertaining to certain variables. It shows a series of values of a dependent variable say, sales as it changes from one point of time to another. In short, a time series is a set of observations taken at specified time, generally at equal intervals. It depicts the historical pattern under normal conditions. This method is not based on any particular theory as to what causes the variables to change but merely assumes that whatever forces contributed to change in the recent past will continue to have the same effect. On the basis of time series, it is possible to project the future sales of a company.
2. Economic Indicators:
Under this method, a few economic indicators become the basis for forecasting the sales of a company. An economic indicator indicates change in the magnitude of an economic variable. It gives the signal about the direction of change in an economic variable. This helps in decision making process of a company.