Demand forecast will help the manager to take the following decisions effectively.

The following are needed for demand forecasting:

Appropriate production scheduling

Suitable purchase policy

Appropriate price policy

Setting realistic sales targets for salesmen

Forecasting financial requirements

Business planning

Financial planning

Planning man-power requirements

To select the appropriate forecasting technique, the manager/forecaster must be able to

accomplish the following:

1. Define the nature of the forecasting problem

2. Explain the nature of the data under investigation

3. Describe the capabilities and limitations of potentially useful forecasting techniques.

4. Develop some predetermined criteria on which the selection decision can be made.

Forecasting Method:

Several methods are employed for forecasting demand. All these methods can be
grouped under survey method, statistical method and other methods. Survey methods
and statistical methods are further subdivided in to different categories.

A. Survey Method:

Survey techniques are used where the purpose is to make short-run demand forecasts.
Under this method, information about the desires of the consumer and opinion of
experts are collected by interviewing them. Survey method can be divided into two
type’s viz., survey of buyer intention (survey of potential consumers to elicit
information on their intentions and plans) and opinion polling of experts, that is,
opinion survey of market experts and sales representatives.

a. survey of buyer intention:

In this method, consumers are contacted personally to disclose their future purchase
plans. This is the most effective method because the buyer is the ultimate maker and we
are collecting the information directly from him.

i. census method ii. Sample method

Suppose there are 10,000 buyers for a particular product. If the company wishes to elicit
the opinion of all the buyers, this method is called census method.

On the other hand, the firm can select a group of buyers who can represent the whole
population. This method is called the sample method.

Opinion Poll Methods. These methods aim at collecting opinions of those possessing
knowledge of the market, such as the sales representatives, sales executives,
professional marketing experts, and marketing consultants. The opinion poll methods
include:
(a) The Expert-Opinion method; (b) Delphi method; and, (c) Market Studies and
Experiments

The Expert-Opinion Method. This method involves the use of sales representatives in
the assessment of demand for the product in the areas, States or cities they represent.
The sales representatives are expected to know the future purchasing plans of
consumers they transact business with. The estimates of demand thus obtained from the
different sales representatives at different areas, States and cities are added up to get the
overall probable demand for the product in question.

The Delphi Method. A variant of the survey method is Delphi method. It is a

sophisticated method to arrive at a consensus. Under this method, a panel is selected to
give suggestions to solve the problems in hand. Both internal and external experts can
be the members of the panel. Panel members one kept apart from each other and
express their views in an anonymous manner. There is also a coordinator who acts as an
intermediary among the panelists. He prepares the questionnaire and sends it to the
panelist. At the end of each round, he prepares a summary report. On the basis of the
summary report the panel members have to give suggestions. This method has been
used in the area of technological forecasting. It has proved more popular in forecasting.

Market Studies and Experiments. This method requires that firms first select some
areas of representative markets, about four cities with similar features in terms of
population, income level, cultural and social background, occupational distribution,
and consumer preferences and choices. This is followed by market experiments
involving changing prices, advertisement expenditures, and other controllable variables
in the demand function, all things being equal. These variables are changed over time,
either simultaneously in all the markets or in selected markets. Having introduced these
changes, the consequent changes in demand over a period of time are then recorded.
Based on these data, elasticity coefficients are then computed, and these coefficients are
used to assess the forecast demand for the product.

B. Statistical Method

1. Time Series Analysis or Trend Method:

Under this method, the time series data are used to fit a trend line or curve either
graphically or through statistical method of Least Squares. The trend line is worked out
by fitting a trend equation to time series data with the aid of an estimation method. The
trend equation could take either a linear or any kind of non-linear form. The trend
method outlined above often yields a dependable forecast. The advantage in this
method is that it does not require the formal knowledge of economic theory and
the market; it only needs the time series data. The only limitation in this method is
that it assumes that the past is repeated in future. Also, it is an appropriate method for
long-run forecasts, but inappropriate for short-run forecasts.

Sometimes the time series analysis may not reveal a significant trend of any kind. In
that case, the moving average method or exponentially weighted moving average
method is used to smooth the series.

2. Correlation and Regression:

These involve the use of econometric methods to determine the nature and
degree of association between/among a set of variables. Econometrics, you may
recall, is the use of economic theory, statistical analysis and mathematical
functions to determine the relationship between a dependent variable (say, sales) and
one or more independent variables (like price, income, advertisement etc.). The
relationship may be expressed in the form of a demand function, as we have seen
earlier.

Such relationships, based on past data can be used for forecasting. The analysis
can be carried with varying degrees of complexity. Here we shall not get into
the methods of finding out ‘correlation coefficient’ or ‘regression equation’; you
must have covered those statistical techniques as a part of quantitative methods.
Similarly, we shall not go into the question of economic theory. We shall
concentrate simply on the use of these econometric techniques in forecasting. We
are on the realm of multiple regression and multiple correlation. The form of the
equation may be:

DX = a + b 1 A + b 2 P X + b 3 P y

You know that the regression coefficients b 1 , b 2 , b 3 and b 4 are the components of
relevant elasticity of demand. For example, b 1 is a component of price elasticity of
demand. The reflect the direction as well as proportion of change in demand for
x as a result of a change in any of its explanatory variables. For example, b2 < 0
suggest that D X and P X are inversely related; b4 > 0 suggest that x and y are
substitutes; b 3 > 0 suggest that x is a normal commodity with commodity with
positive income-effect. Given the estimated value of and bi , you may forecast the
expected sales (DX), if you know the future values of explanatory variables like own
price (PX), related price (Py), income (B) and advertisement (A). Lastly, you may
also recall that the statistics R2 (Co-efficient of determination) gives the measure of
goodness of fit. The closer it is to unity, the better is the fit, and that way you get a
more reliable forecast. The principle advantage of this method is that it is
prescriptive as well descriptive. That is, besides generating demand forecast, it
explains why the demand is what it is. In other words, this technique has got both
explanatory and predictive value.

Dependent variable: depends on the value of other variables It is the primary interest
of other variables. It is the primary interest to researchers.

•Independent (explanatory) variable: used to explain the variation in the dependent

variable.