Demand Forecasting

DEMAND FORECASTING
DEMAND FORECASTING
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.
— according to Cundiff and Still, "Demand Forecasting is an estimate of

Demand during a specified period. Which estimate is tied to a proposed
marketing plan and which assumes a particular set of uncontrollable and
competitive forces."
— In the words of Prof. Philip Kotler. The company (sales) forecast is the

expected level of company sales based on a chosen marketing plan and assumed
marketing environment"
— According to Evan J. Douglas, "Demand forecasting may be defined as the

process of finding values for demand in future time periods. "
Demand Forecasting
The cost should be controlled by producing correct level of goods in the firm
and also according to the demand for those goods in the market. For the
estimation of demand, demand forecasting is to be done by the firm.
 Forecasting = estimation of future situations.

 Forecasting reduces or minimizes the uncertainty.
 By forecasting effective decisions can be taken for tomorrow.
 Demand forecasting is based on the determinants of the demand.
 Demand for goods increases and gives sales.
 Sales are the primary source of the income for a firm.

STEPS INVOLVED IN DEMAND FORECASTING
1. Identification of business objectives:
In the first stage we should know what is the aim of forecasting? What we get or
know from the forecasting? Estimation of factors like quantity and composition
of demand for goods, price to be quoted, sales planning and inventory control
etc., are done in the first stage.
2. Determining the nature of goods under consideration:
Different category of goods has their own distinctive demand. Example capital

goods, consumer durables and non-durables goods in which category our goods
fall we should estimate.
3. Selecting a proper method of forecasting:
There are different methods for demand forecasting. Which is best suited method
that we should select for doing demand forecasting?
4. Interpretation of results:
The forecasting which is done by the managerial economist should be interpreted

in detailed manner. That means it should be easy to understand by the top
management.
Demand Forecasting Techniques

To invest money and others factors in business; we require a reasonable
accurate forecast of demand. Starting with qualitative methods like survey of
collective opinions, buyers' intention, Delphi approach and its variant, a number
of quantitative methods are used for computing demand forecasts as detailed
below:
Opinion polling method
a) Collective opinion Survey:
Sales personnel are closest to the customers and have an intimate feel of
the market. Thus they are most suited to assess consumer’s reaction to
company's products. Here each salesperson makes an estimate of the expected
sales in their area, territory, state and/or region, These estimates are collated,
reviewed and revised. Taking in to account product design, features and price is
decided and made. Thus, "collective opinion survey forms the basis of market
Analysis and demand forecasting.
Although this method is simple, direct, first hand and most acceptable, it suffers
from following weaknesses
1. demand estimates by individual salespersons to obtain total demand of

the country may be risky as each person has knowledge about a small
portion of market only
2. Salesperson may not prepare the demand estimation with the seriousness

and care
3. limited experience in their employment, salesperson may not have the

required knowledge and experience
b) Survey of Customers Intention
Another method of demand forecasting is to carry out a survey of

what consumers prefer and intend to buy. If the product is sold to a few
large industrial buyers, survey would involve interviewing them.
If it is a consumer durable product, a sample survey is carried out
about what they are planning or intending to buy. It is not east to query
all consumers through direct contact or through printed questionnaire by
mail. These surveys serve useful purpose in establishing relationships
between
a) demand and price

b) demand and income of consumers
c) demand and expenditure on advertisement etc.
This method is preferred when bulk of the sales made to

institutions and industrial buyers and only a few of them have to be
contacted. Disadvantages are. Survey method is not useful for households
- interviewing them is not only difficult but also expensive. They are not
able to give precise idea about their intentions particularly when
alternative products are available in the market.

c) Delphi Method
The Delphi technique was developed at RAND Corporation in the

1950s. Delphi method is a group (members) process and aims at
achieving a `single opinion of the members on the subject. Herein experts
in the field of marketing research and demand forecasting are engaged in
 analyzing economic conditions

 carrying out sample surveys of market
 conducting opinion polls
Based on the above, demand forecast is worked out in following steps:

1. Administrator sends out a set of questions in writing to all the
experts on the panel, who are requested to write back a brief
predication.
2. Written predictions of experts are collected and combined,
edited and summarized together by the administrator.
3. Based on the summary, administrator designs a new set of
questions and gives them to the same experts who answer back again
in writing.
4. Administrator repeats the process of collecting, combining,
editing and summarizing the responses.
5. Steps 3 and 4 are repeated by the administrator to experts
with diverse backgrounds until they come to one single opinion.
If there is divergence of opinions and hence conclusions, administrator has to sort

it out through mutual discussions. Administrator has to have the necessary
experience and background as he plays a key role in designing structured
'questionnaires and synthesizing the data.
d) Nominal Group Technique
This technique was originally developed by Delbecq and VandeVen. This

is a further modification of Delphi method of forecasting. A panel of 3-4
groups of up to 10 experts are formed and allowed to interact, discuss
'and rank all the suggestions in descending (highest to lowest) order as
per the following procedure:
Experts sit around a table in full view of one another and are
asked to speak to each other. An administrator hand over copies of
questionnaire needing a forecast and each expert is expected to write
down a list of ideas about the questions. After everyone has written down
their ideas, administrator asks each expert to share one idea, out of own
list. The idea shared is written on the `flip chart' which everyone can see.
Experts give ideas in rotation until all of them are written on the `flip
chart'. No discussion takes place in this phase and usually 15 to 25 ideas
emerge from this format.
In the next phase, experts discuss ideas presented by them.

Administrator ensures that all ideas have been adequately discussed.
During discussions similar ideas are combined. This reduces the number of
ideas. After completing group discussions, experts are asked to give in
writing ranks to ideas according to their perception of priority

Statistical methods
 Trend projection method
This technique assumes that whatever past years demand pattern will be
continued in the future also. Basing on the historical data that means
previous year’s data is used to predict the demand for the future. In this
trend projection method, previous year’s data is presented on the graph
and future demand is estimated.
 Regression Analysis
Past data is used to establish a functional relationship between two

variables. For Example, demand for consumer goods has a relationship
with income of Individuals and family; demand for tractors is linked to
the agriculture income and demand for cement, bricks etc. are dependent
upon value of construction contracts at any time. Forecasters collect data
and build relationship through co-relation and regression analysis of
variables.
Deficit monsoon hits tractor sales as farm operations see a decline
Our annual sale is pegged around 40,000 units. But, we are unlikely
to touch sales in excess of 20,000 units, says official of automotive
major Mahindra & Mahindra
Deficit rain during monsoon this year has brought down paddy acreage
during the kharif season. But the shortfall in rains has hit one segment of the
industry very hard.
The sale of tractors, used extensively in the agriculture operations, has shown
a steep dip during the current year. Automotive major Mahindra &
Mahindra has witnessed a significant de-growth in the overall tractor sales
in the State that, in turn, had its echo on the company’s overall
performance in the segment.
Mahindra & Mahindra president automotive and farm equipment sectors

Pawan Goenka said the company enjoys over 50 per cent market share in
the tractor sales in Andhra Pradesh where the total annual sale is pegged
around 40,000 units. “But, we are unlikely to touch sales in excess of
20,000 units as was witnessed in the previous fiscal,” he told The Hindu .
The acreage is down by about 3 lakh hectares, compared to 26 lakh hectares

normal, in the State and farmers have switched over to other crops like
cotton, pulses and maize on account of shortfall in the kharif plantation
during the early phase of monsoon. The State, according to figures released
by the Centre, faced the worst water crunch, with a 52 per cent deficiency
in the reservoir levels.
Tractors, according to Mahindra and Mahindra, are extensively used in the

canal irrigation where they serve as multi-utility vehicles. Thanks to the
steep drop in release of water to canal irrigated areas, the usage had come
down significantly.
Mahindra and Mahindra, accordingly, forecast the tractor growth rate
during the year to half to around 6 per cent from the earlier projected 12
per cent. “Tractor growth rate is expected to be around 6 per cent during
the year with first quarter showing some de-growth and second quarter
expected to be even,” he said. The company, however, sounded optimistic in
claiming that sales are expected to pick up by November when the Rabi
operations start. “The second half is expected to ensure growth of around 6
per cent,” Mr. Goenka said. The company has registered sale of 13,000 units
in the period between April and August, but was unlikely to touch the last
year’s figure in excess of 20,000 units.
Agriculture Department secretary V. Nagi Reddy admitted that the monsoon

had not been upto the expected levels and this was sure to bring down the
crop production. Though the State had witnessed normal rainfall, the deficit
in water availability could be attributed to the shortage in the catchment
areas in Karnataka and Maharashtra that reduced inflows into reservoirs.
According to him, there was over 10 per cent drop in the total cultivated
area because of the deficit rains. “Fall in production is, however, unlikely to
be proportionate with the dip in the total acreage as the shortfall is likely to
be made up by higher production of other crops,” Mr. Nagi Reddy said.
Source: the Hindu
 Econometric Models
Econometric models are more complex and comprehensive as this

model uses mathematical and statistical tools to forecast demand. This
model takes various factors which affect the demand. For example,
demand for passenger transport is not only dependent upon the
population of the city, geographical area, industrial units, their location
etc.
It is not easy to locate one single economic indicator for

determining the demand forecast of a product. Invariably, a multi-factor
situation applies Econometric Models, although complex, are being
increasingly used for market analysis and demand forecasts.
 Simple Average Method
Among the quantitative techniques for demand analysis, simple

Average Method is the first one that comes to one's mind. Herein, we take
simple average of all past periods - simple monthly average of all
consumption figures collected every month for the last twelve months or
simple quarterly average of consumption figures collected for several
quarters in the immediate past. Thus,
Sum of Demands of all periods =

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DEMAND FORECASTING

The activity of estimating the quantity of a product or service that consumers

— according to Cundiff and Still, "Demand Forecasting is an estimate of

— In the words of Prof. Philip Kotler. The company (sales) forecast is the

— According to Evan J. Douglas, "Demand forecasting may be defined as the

 Forecasting = estimation of future situations.

STEPS INVOLVED IN DEMAND FORECASTING

1. Identification of business objectives:

2. Determining the nature of goods under consideration:

Different category of goods has their own distinctive demand. Example capital

3. Selecting a proper method of forecasting:

The forecasting which is done by the managerial economist should be interpreted

Demand Forecasting Techniques

Opinion polling method

a) Collective opinion Survey:

1. demand estimates by individual salespersons to obtain total demand of

2. Salesperson may not prepare the demand estimation with the seriousness

3. limited experience in their employment, salesperson may not have the

b) Survey of Customers Intention

Another method of demand forecasting is to carry out a survey of

a) demand and price

This method is preferred when bulk of the sales made to

The Delphi technique was developed at RAND Corporation in the

 analyzing economic conditions

Based on the above, demand forecast is worked out in following steps:

If there is divergence of opinions and hence conclusions, administrator has to sort

d) Nominal Group Technique

This technique was originally developed by Delbecq and VandeVen. This

In the next phase, experts discuss ideas presented by them.

 Trend projection method

Past data is used to establish a functional relationship between two

Deficit monsoon hits tractor sales as farm operations see a decline

Mahindra & Mahindra president automotive and farm equipment sectors

The acreage is down by about 3 lakh hectares, compared to 26 lakh hectares

Tractors, according to Mahindra and Mahindra, are extensively used in the

Agriculture Department secretary V. Nagi Reddy admitted that the monsoon

Source: the Hindu

Econometric models are more complex and comprehensive as this

It is not easy to locate one single economic indicator for

 Simple Average Method

Among the quantitative techniques for demand analysis, simple

Sum of Demands of all periods =

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