DEMAND FORECASTING Meaning A forecast is a prediction

DEMAND FORECASTING

Meaning… • A forecast is a prediction or estimation of future situation. It is an objective assessment of future course of action. Since future is uncertain, no forecast can be absolutely correct. • Demand forecasting refers to predicting the future demand for a particular product. • This helps in effective and efficient planning.

Importance. . . • Effective planning: provides scientific and reliable basis for anticipating future operations • Investment decision: investments are made keeping in mind the returns and the returns depend on the market demand. • Resource allocation: efficient allocation of resources when future estimates are available • Pricing decisions: in order to pursue optimal pricing strategies firm need to have complete information about future demand

Objectives of demand forecasting. . . Short-term • Formulation of Production policy • Proper availability of labour • Proper availability of raw materials • Price policy formulation Long-term • Labour requirements • Arrangement of funds • Expansion decisions

Techniques of Demand Forecasting Qualitative Quantitative

Qualitative Techniques • Based on expert opinion instead numeric analysis • Includes interpretation of data combined with the professional expertise developed over time on the job. • Examples include opinion survey method, executive judgement method, Delphi method, salesforce polling

Opinion survey method • In this method, the survey is conducted directly on the customers on their purchases and buying intentions. • This method requires extensive statistical analysis and can be timeconsuming and expensive. • However this method is quite useful forecasting demand of a new product.

Executive judgement method • The opinions of experts from different departments are considered and averaged to forecast the future sales. • This method of forecasting can be done easily and quickly without the necessity of elaborate statistics. • The main disadvantage is that it depends on individual opinions which can be very subjective and could lead to wrong forecasting.

Delphi method • It consists of an attempt to arrive at a consensus in an uncertain area by questioning a group of experts repeatedly until the responses appear to converge along a single line (consensus). • It is basically a more formal version of the jury of opinion method. • This method is very effective for long range forecasting. • The main disadvantage of this method is that from the returns there is lack of reliability.

Salesforce polling method • In this method, the forecast is done based on the opinions of salespeople who have steady interactions with the clients. • As they are closest to the customers, they can better predict the requirements of the customers for the future market. • The drawback is that the salespeople can be either optimistic or pessimistic about their predictions and this could lead to inaccurate forecasting.

Quantitative methods • It is a statistical technique to make predictions about the future which uses numerical measures and prior effects to predict future events. • These techniques are based on models of mathematics and in nature are mostly objective. • They are highly dependent on mathematical calculations. • Examples include trend projection, econometric methods, barometric method.

Trend Projection • This method assumes that the pattern of demand in the past will hold true for the future as well • This can be done using 2 techniques- graphical and least square • Trend analysis is often a quick method to gain insights into your business operations and obtain rough forecasts for key business variables. • However both accuracy and reliability of such forecasts suffer when the business environment changes

Barometric method • Economists use economic indicators as a barometer to forecast the overall trend in the business activities. • Some important indicators include employment, gross national product, wholesale prices, etc. • However the barometric technique can be used only for a short-term forecasting.

Econometric methods • It refers to the use of mathematical economic theory and statistical procedures. • This is a very complex method as it requires knowledge of maths, economics, and statistics • The forecast made through these methods is more reliable than the other forecasting methods.

Limitations of Demand Forecasting • • Forecasts are never 100% accurate It is a time-consuming process It is an expensive process Forecasting requires a lot of techniques and resources

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