DEMAND FORECASTING

Meaning of Demand Forecasting

Demand forecasting is not a speculative exercise into the unknown. It is essentially a reasonable judgment of future probabilities of the market events based on scientific background. Demand forecasting is an estimate of future demand. It cannot be hundred per cent precise. But it gives a reliable approximatiion regarding the possible outcome, with a reasonable accuracy. It is based on the mathematical laws of probability.

Demand Forecasting

Six factors are involved in Demand Forecasting:1. How far ahead – both long-term (5, 10, 20 years)and

short-term (upto 1 year)may be considered.

Short-term forecast provides information for tactical decisions; it is concerned with day-to-day operations within the limits of resources currently available.

Long-term forecast provides informatiion for major strategic decisions; it is concerned with extending or reducing the limits of resources.

Factors involved in Demand forecasting:

2. Demand forecasting may be undertaken at three levels:-

Macro-level taking into account the whole economy and based on index of industrial production, national income or expenditure. Assumptions for business forecasts are based on such data.

Industry level prepared by trade associations.

Firm-level – very important from managerial point of view.

Factors involved in Demand forecasting:

3. Should the forecast be General or Specific.

The firm may find a general forecast useful, but it usually needs to be broken down into commodity/ product-wise forecasts and forecasts by areas of sale.

Factors involved in Demand forecasting:

4. Whether forecasting is to be done for New Products or existing products.

Problems and methods of forecasting are different for new products and for well established products.

Factors involved in Demand forecasting:

Factors involved in Demand forecasting:

5. Classification of products: It is important to classify products as producer goods, consumer durables or consumer goods and services.

This is because economic analysis indicates different patterns of demand for each of these categories.

Factors involved in Demand forecasting:

6. Special Factors (uncertainty) peculiar to the product:

Nature of the competition.

How far the situation is complicated; what are the chances of error of inaccuracy arising because of using factors which are not easily measurable.

Political developments such as elections.

Sociological factors such as women’s dresses.

Purpose of Forecasting- Short-term forecasting

1. Appropriate production scheduling so as to avoid problem of overproduction and the problem of short-supply. Production schedules are geared to expected sales.

2. Cost reduction in raw materials purchase, inventory control by determining future resource requirements.

3. Determining appropriate pricing policy – avoiding increase in a weak market and reduction in bull market.

4. Setting sales targets appropriately and establishing controls and incentives.

5. Evolving suitable advertising and promotional program.

6. Forecasting short-term financial requirements – cash requirements depends on sales level and production operations. As it involves delay in arranging for additional funds, sales forecasts enable arrangement of funds well in advance.

Purpose of long-term forecasting1. Planning of a new unit or expansion of an existing unit.

This requires analysis of long-term potential of all the products of the firm.

2. Planning long-term financial requirements – Long-term sales forecasts are quite essential for organizing long-term financial requirements as arranging funds involves considerable time and effort.

3. Planning man-power requirements. Training and personnel development are long-term propositions. These take time and can be started well in advance on the basis of estimates of man-power requirements assessed based on sales forecasts.

4. 4. At macro level demand forecasts helps govt. in determining import-export policy as well as taxation policy.

Significance of Demand ForecastingDemand forecasting is very essential inProduction PlanningSales ForecastingControl of BusinessInventory ControlGrowth and Long-term Investment programmesStabilityEconomic Planning and Policy Making

Production Planning

Demand forecasting is a pre-requisite for production planning. Expansion of output is based on the estimates of likely demand; otherwise there will be over-production, piling up of inventory resulting in losses.

Sales Forecasting

Sales forecasting is based on demand forecasting. Advertising and other sales promotional efforts are planned based on sales forecasting.

Control of business

For controlling business it is necessary to prepare a proper budgeting of costs and profits. This is based on forecast of annual demand/sales and prices.

Inventory Control

A satisfactory control of business inventories, raw materials, intermediate goods, semi-finished and finished products, spare parts, etc. requires reliable estimates of future requirements which can be traced through demand forecasting.

Growth and Long-term Investment Programmes

Demand forecasting is necessary for determining the growth rate and its long term investment programmes and planning.

Stability

Stability in production and employment over a period of time is possible with suitable market demand forecasting and other business variables and by smoothening of business operations through counter-cyclical and seasonally adjusted business programmes.

Economic Planning and Policy Making

At the macro level, demand forecasting helps planners and policy makers in better planning and rational allocation of country’s resources.Government can determine its import-export policies as well as taxation policies taking a long-term view of demand for various goods through demand forecasting.