Demand forecasting

Demand forecasting is the activity of estimating the quantity of a product or service that consumers will
purchase. Demand forecasting involves techniques including both informal methods, such as educated
guesses, and quantitative methods, such as the use of historical sales data or current data from test
markets. Demand forecasting may be used in making pricing decisions, in assessing future capacity
requirements, or in making decisions on whether to enter a new market.

Necessity for forecasting demand

Often forecasting demand is confused with forecasting sales. But, failing to forecast demand ignores two
important phenomena. There is a lot of debate in the demand planning literature as how to measure
and represent historical demand, since the historical demand forms the basis of forecasting. Should we
use the history of outbound shipments or customer orders or a combination of the two to proxy for
demand.

Stock effects
The effects that inventory levels have on sales. In the extreme case of stock-outs, demand coming into
your store is not converted to sales due to a lack of availability. Demand is also untapped when sales for
an item are decreased due to a poor display location, or because the desired sizes are no longer
available. For example, when a consumer electronics retailer does not display a particular flat-screen TV,
sales for that model are typically lower than the sales for models on display. And in fashion retailing,
once the stock level of a particular sweater falls to the point where standard sizes are no longer
available, sales of that item are diminished.

Market response effect

The effect of market events that are within and beyond a retailer’s control. Demand for an item will
likely rise if a competitor increases the price or if you promote the item in your weekly circular. The
resulting sales increase reflects a change in demand as a result of consumers responding to stimuli that
potentially drive additional sales. Regardless of the stimuli, these forces need to be factored into
planning and managed within the demand forecast.

In this case demand forecasting uses techniques in causal modeling. Demand forecast modeling
considers the size of the market and the dynamics of market share versus competitors and its effect on
firm demand over a period of time. In the manufacturer to retailer model, promotional events are an
important causal factor in influencing demand. These promotions can be modeled with intervention
models or use a consensus process to aggregate intelligence using internal collaboration with the Sales
and Marketing functions.
 Methods
No demand forecasting method is 100% accurate. Combined forecasts improve accuracy and reduce the
likelihood of large errors.

Methods that rely on qualitative assessment

Forecasting demand based on expert opinion. Some of the types in this method are,

Unaided judgment
Prediction market
Delphi technique
Game theory
Judgmental bootstrapping
Simulated interaction
Intentions and expectations surveys
Conjoint analysis

Methods that rely on quantitative data

Discrete Event Simulation
Extrapolation
Quantitative analogies
Rule-based forecasting
Neural networks
Data mining
Causal models
Segmentation