Demand Forecasting

 Demand forecasting refers to the predicting future demand for a product.

 It is necessary and much more important where a large-scale production is being planned and
production involves long gestation period
 The information regarding future demand is essential for planning and scheduling production,
purchase of raw materials, acquisition of finance and advertising comes under demand
forecasting
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Concept
Levels of Demand Forecasting
• Micro level demand forecasting refers to the demand forecasting by individual business firm for
estimating the demand for its product.
• Industry level demand forecasting refers to the demand forecasting for the product of the
industry as a whole. It relates to the market demand as a whole.
• Macro level demand forecasting refers to the total demand for the industrial output by the
nation.
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Need of Demand Forecasting
The objectives of forecasting differ according to types of forecasting. The purposes of short term
and long–term forecasting can be outlined as follows:
1. Purposes of Short–Term Forecasting
i. Formulating an appropriate production policy
ii. Appropriate pricing policy
iii. Setting sales targets
iv. Forecasting the financial requirement
v. Reducing cost of purchasing raw materials and controlling inventory
vi. Evolving a suitable advertising and promotional programme
2. Purposes of Long–Term Forecasting
i. Planning of a new unit and expansion of an existing unit
ii. Planning long–term financial requirements
iii. Planning manpower requirements
iv. Providing guideline for demand forecasts for related industries
v. Guiding the government
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Significances of Demand Forecasting
1. Predicting of sales of a firm
2. Arrangement of raw materials
3. Arrangement of labour
4. Capital expansion plan
5. Investment and inventory policy
6. Plant expansion or contraction plan
7. Production planning
8. Economic planning and policy making
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Steps in Demand Forecasting
1. Identification of objective
2. Determining the determinants of demand
3. Collection of data
4. Selecting a proper method of forecasting
5. Interpretation of results and present the findings
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Techniques / Methods of Demand Forecasting
A. Qualitative or Non-Statistical Methods
1. Survey Method
2. Market Experiment
B. Quantitative or Statistical Methods
1. Time Series Analysis
2. Moving Average Method
3. Regression Analysis
4. Barometric Technique
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Survey Method
Survey methods are often used to make short term forecasts when quantitative data are not
available. These methods can also be very useful for supplementing quantitative forecasts that
anticipate changes in consumer tastes or business expectations about future economic
conditions. The various survey methods can be discussed under the following three headings:
a. Consumer Survey Method
In the consumer survey method, consumers are asked what quantity of the product they would
be willing to buy under various conditions such as price, income levels, etc. This method is also
known as the direct interview method. The consumer survey method can be explained dividing
into following two types:
i. Complete Enumeration Survey Method (Census Survey)
Under complete enumeration survey method, the forecaster undertakes complete survey of all
the consumers of the commodity whose demand he/she wishes to forecast. Symbolically, if
there are n consumers and their probable demands for commodity X in the forecast period are
Q1, Q2, Q3,. . .,Qn where sales forecast would be
QP = Q1 + Q2 + Q3 + . . . + Qn=

Merits
The main merits of this method are the forecaster does not introduce any bias of his/her own. If
the expectations of all individual consumers prove to be cent percent correct, the forecast will
be accurate.
Limitations
This method has some limitations like costly, tedious, and cumbersome and there is a danger
that the data have been wrongly recorded and complied. This method may be more useful for
products having a few consumers
ii. Sample Survey Method
Under this method, only a few potential consumers are selected from relevant market through a
sampling method and then obtained the probable demand of each of the selected units in the
forecast period. On the basis of the information collected, the probable demand may be
estimated through the following formula:

DP =

Merits and Limitations

This method is less tedious, less costly and subject to less data error. This is where the role of
statistics has to be appreciated. If a sample is properly chosen, the sample survey method yields
good result. However, if there are biases in sample selection, it may give wrong result. This
method is quite useful for new products or new brands. Its use requires sincere cooperation
from the selected samples.
Also, the larger the sample size, the sampling error will be smaller. But using larger sample size
is more costly, time consuming and tedious
b. End–Use Method
Under this method, demand for a commodity is projected or forecasted through a survey of its
end–users. A commodity is used either as final consumption or as intermediate goods for other
industries. The demand for intermediate use is estimated through survey of its user industries
regarding their production plans and input–output coefficients.
Merits: The principal merit of this method is that it provides use wise or sector wise demand
forecasts. This information may be useful in managing future demand. This method does not
require any historical data.
Limitations: The main weakness of this method is that this requires every industry to furnish its
plan of production correctly well ahead of time which is less possible.
c. Opinion Poll Method/ Opinion Survey Method
The opinion poll method aims at collecting opinions of those who are supposed to have
knowledge of the market, e.g., sales representatives, sales executives, professionals, experts and
consultants. These method includes:
i. Expert opinion
ii. Delphi method
i. Expert opinion: The most important form of qualitative analysis used to generate information
is expert–opinion or personal insight of the expert. Although this method is highly subjective,
the feelings of experienced informants are highly qualitative and vital.
ii. Delphi method: In this method, members of a panel of experts individually receive a series of
questions relating to the underlying forecasting problem. Responses are analyzed by an
independent party, who then, tries to draw a consensus opinion by providing feedback to panel
member. This can give the information on the likely sales in the future
 Merits
This method is simple, economic and time saving. This method is more useful for new products
introduced in the market, where no data are available. The salesmen, sales representatives, etc.
can better judge the market responses to the product. The firm gets different points of views,
which are then balanced in the process.
Limitations
• Opinions of the firm’s own sales representatives may be biased, that is in order to safeguard
their own jobs.
• They may be induced to give highly optimistic figures.
• Opinions are subjective and may not be fully reliable.
While expressing opinions about the probable sales in the short period, the sales men may not
consider the effect of changes in other independent variables such as income, advertising, etc
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Market Experiment
Business firms can also make market experiments to forecast demand for their products
especially when they make change in price, advertising expenditure or want to introduce a new
product in the market. A big problem with the survey technique of demand forecasting
explained above is that consumer responses in the survey may not correspond to actual
consumer behavior.
Types of Market Experiment
Two types of market experiments are generally used, which are as follows:
a. Market Test
In this technique, the first step is to select a particular test area which accurately represents the
whole market in which the new product is to be launched. Thus, market area for testing may
consists of several cities and towns or a particular representative region of the country or a
sample of consumers taken from a mailing list.
Merits
Market tests have merits over consumer survey technique because they are based on actual
consumer behaviour and not on merely their intentions to buy the commodity.
Limitations
• This method is very costly and much time consuming.
• Being a costly method, experiments are usually carried out in a small sample size, therefore,
results of which cannot be generalized. In other words, it may not represent true market.
• Another problem is risk involved in the test marketing. In test markets, where price is raised, the
consumers may switch over to the products of the rival firms.
• Once the experiment is over and price is reduced to the original level, it may be difficult to
regain the lost customers.
• It is often difficult to select to an area which accurately represents the potential market.
• Firm cannot control all the factors that influence demand for a product.
• Because most test experiments last only for a short period, the changes in price or advertising to
know consumer’s response may go unnoticed by them in such a short period
b. Laboratory Test or Consumer Clinic
• This method is conducted to test the demand for a new product by a firm or to test the demand
for various brands of a product. In this method, sample of some consumers of a product which
are representative of the target market is selected and they are asked to visit shopping store of
a firm where various brands of the product are placed for sale. The preferences of the
consumers are recorded.
Merits
The merit of laboratory test is that it is likely to provide more accurate result than those of
consumer survey methods. This is because in laboratory test consumers asked to make actual
decisions regarding their purchases, while consumer surveys show simply their intentions to
buy.
Limitations
• Laboratory test method is very expensive.
• Being a costly method, experiments are usually carried out on small sample size, which may not
represent the true market.
• Laboratory test may be biased in the process of selection of a sample of consumers on which
experiment is to be performed.
• The selected consumers may not respond accurately when they know that they are a part of an
experiment being conducted and their behaviour is being recorded.