DEMAND FORECASTING

Need of Demand Forecasting : Demand forecasting is predicting future demand for a product. The
information regarding future demand is essential for planning and scheduling production, purchase of
raw materials, acquisition of finance and advertising. It is much more important where a large-scale
production is being planned and production involves a long gestation period. The information
regarding future demand is essential also for the existing firms for avoiding under or over-production.
Most firms are, in fact, very often confronted with the question as to what would be the future demand
for their product. For, they will have to acquire .inputs and plan their production accordingly. The firms
are hence required to estimate the future demand for their product. Otherwise, their functioning will be
shrouded with uncertainty and their objective may be defeated.
An important point of concern in all business activities is to assess the future business trend whether it
is going to be favourable or unfavourbale. This assessment helps the top management in taking
appropriate policy decisions in advance. If sales are expected to rise substantially after, say, 10 years, it
will call for measures to build adequate productive capacity well in advance so that future profit
potential is not lost to the rival producers. This essentially relates to long-term planning.
On the other hand, if sales 01 a product are expected to go up in the very near future, it will be prudent
on the part of the management to make the needed adjustments in production schedule and take
suitable steps immediately to ensure that sufficient stocks are available with given plant capacity as
soon as needed. This involves short-term planning.
Irrespective of the length of future time period one is interested in, the planners and policy makers need
to know the possible future trends in relation to several variables, which is made possible through
forecasting. In this context, forecasting provides knowledge about future trends and deals with the
methods of acquiring this knowledge.
Due to dynamic nature of market phenomenon demand forecasting has become a continuous process
and requires regular monitoring of the situation.
Demand forecasts are first approximations in production planning. These provide foundations upon
‘which plans may rest and adjustments may be made. “Demand forecast is an estimate of sales in
monetary or physical units for a specified future period under a proposed business plan or program
or under an assumed set of economic and other environmental forces” planning premises outside
the business organisation for which the forecast or estimate is made”.
Sales forecast is an estimate based on some past information, the prevailing situation and prospects of
future. It is based on an effective system and is valid only for some specific period. The following are
the, main components of a sales forecasting system:
(i) Market Research Operations to get the relevant and reliable information about the trends
in market.
(ii) A data processing and analysing system to estimate and evaluate the sales performance in
various markets.

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 (iii) Proper co-ordination of steps (i) and (ii) and then to place the findings before the top
management for making final decision.
In this lesson, we will discuss the important methods of estimating and forecasting demand. The
techniques of forecasting are many, but the choice of a suitable method is a matter of experience and
expertise. To a large extent, it depends also on the nature of the data available for the purpose. In
economic forecasting, classical methods use historical data in a rather rigorous statistical manner for
making the future projections. There are also less formal methods where analyst’s’ own judgment plays
a greater part in picking, choosing and interpreting the available data than the statistical tools.
TECHNIQUES OF FORECASTING DEMAND
Survey Method : Survey method are generally used where purpose is to make short-run forecast of
demand. Under this method, surveys are conducted to collect information about consumers intentions
and their future purchase-plans.
This method includes :
(i) survey of potential consumers to elicit information on their intentions and plan;
(ii) opinion polling of experts, i.e., opinion survey of market experts and sales representative,
and through market studies and experiments.
The following techniques are used to conduct the survey of consumers and experts.
Consumer Survey Methods: The consumer survey method of demand forecasting involves direct
interview of the potential consumers. It may be in the form of :
* complete enumeration, or
* sample survey.
These consumer survey methods are used under different conditions and for different purposes. Their
advantages and disadvantages are described below.
Direct Interview Method: The most direct and simple way of assessing future demand for a product is
to interview the potential consumers or users and to ask them what quantity of the product they would -
be willing to buy at different prices over a given period say, one year. This method is known as direct
interview method. This method may cover almost all the potential consumers or only selected groups
of consumers from different cities or parts of the area of consumer concentration. When all the
consumers are interviewed, the method is known as complete enumeration survey method, and when
only a few selected representative consumers are interviewed, it is known as sample survey method. In
case of industrial inputs, interview of postal inquiry of only end-users of a conduct may be required.
These are described as follows :
Complete Enumeration Method : In this method, almost all potential users of the product are
contacted and are asked about their future plan of purchasing the product in question. The quantities
indicated by the consumers are added together to obtain the probable demand for the product.

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This method has certain limitations. It can be used successfully only in case of those products whose
consumers are concentrated in a certain region or locality. In case of a widely dispersed market, this
method may not be physically possible or may prove very costly in terms of both money and time.
Besides, the demand forecast through this method may not be reliable for many reasons: (i) consumers
themselves may not be knowing their actual demand in future and hence may be unable or not willing
to answer the query; (ii) even if they answer, their answer to hypothetical questions may be only
hypothetical, not real; and (ii) their plans may change with the change in factors not included in the
questionnaire
Sample Survey Method : Under this method, only a few potential consumers and users selected from
the relevant market through a sampling method are surveyed. Method of survey may be direct
interview or mailed questionnaire to the sample-consumers.
This method is simpler, less costly, and less time-consuming than the comprehensive survey method.
This method is generally used to estimate shortterm demand from business firms, government
departments arid agencies, and also by the households who plan their future purchase.
Sample survey method is widely used to forecast demand. This method, however, has some limitations.
The forecaster therefore should not attribute reliability to the forecast more than warranted. Besides,
sample survey method can be used to verify the demand forecast made by using quantitative or
statistical methods. Although some authors suggest that this method should be used to supplement the
quantitative method for forecasting rather than to replace it; this method can be gainfully used where
market area is localized.
Expert-Opinion Method: It is one of the most widely used and influential forecasting technique
where the opinions and intuition of management is utilised. The process brings together in an organised
manner, personal judgements about the process being analysed. Main reliance is on human judgement.
In this method, the executive uses his own anticipation and what he hears from others. Outside experts
are also consulted and the other executive heads are also required to give their opinion in the matter.
Salesmen are to provide information about customer’s attitude and preferences and the activities of
competitors. Thus, all possible information from the opinions of various persons is combined together
to change the subjective opinions into quantitative forecasts.
No doubt experts and experienced managers can be useful as guides and serve as reliable source of
information, but one has to make his own decision from all the opinions. Thus in this method broad
guess is made by the executive incharge of a business. There are many advantages and disadvantages
of opinion technique of forecasting:
Advantages :
(i) Simple and easy to understand.
(ii) No specialised skill is required.
(iii) Low cost.

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 (iv) It is based on the information or opinion of the persons who are directly involved in the
system.
(v) It can be used in case of new products where satisfactory data is not available.
Disadvantages :
(i) Opinions and intuitions are highly subjective.
(ii) Personal estimates are likely to be biased.
(iii) Time required to take the decision may be more.
(iv) results can be easily distorted.
(v) This method is not useful for long term planning.
Delphi Method : Delphi method of demand forecasting is an extension of the simple expert opinion
poll method. This method is used to consolidate the divergent expert opinions and to arrive at a
compromise estimate of future demand. The Process is simple.
Under Delphi method, the experts are provided information on estimates of forecasts of other experts
along with the underlying assumptions. The experts may revise estimates in the light of forecasts made,
by other. experts. The consensus of experts about the forecasts constitutes the final forecast. It may be
noted that the empirical studies conducted in the USA have shown that unstructured opinions of the
experts is most widely used technique of forecast. This may appear a bit unusual in as much as this
gives the impression that sophisticated techniques, e.g., simultaneous equations model and statistical
methods, are not the techniques which are used most often. However, the instructed opinions of the
experts may conceal the fact that information used by experts in expressing their forecasts may be
based on sophisticated techniques. The Delphi technique can be used for cross-checking the
information on forecasts.
Market Studies and Experiments : An alternative method of collecting necessary information
regarding demand is to carry out market studies and experiments in consumer’s behaviour under actual,
though controlled, market conditions. This method is known in common parlance as market experiment
method. Under this method, firms first select some areas of the representative markets - three or four
cities having similar features, viz., population, income levels, cultural and social background,
occupational distribution, choices and preferences of consumers. Then, they carry out market
experiments by changing prices, advertisement expenditure, and other controllable variables in the
demand function under the assumption that other things remain the same. The controlled variables may
be changed over time either simultaneously in all the markets or in the selected markets. After such
changes are introduced in the market, the consequent changes in the demand over a period of time (a
week, a fortnight, or month) are recorded. On the basis of data collected, elasticity coefficients are
computed. These coefficients are then used along with the variables of demand function to assess the
demand for the product.
Alternatively, market experiments can be replaced by consumer clinic or controlled laboratory
experiment. Under this method, consumers are given some money to buy in a stipulated store goods
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with varying prices, packages, displays, etc. The experiment reveals the consumers responsiveness to
the changes made in prices, packages and displays, etc. Thus, the laboratory experiments also yield the
same information as the field market experiments. But the former has an advantage over the latter
because of greater control over extraneous factors and its somewhat lower cost.
Limitations: The market experiment methods have certain serious limitations and disadvantages which
reduce the reliability of the method considerably.
(i) The experiment methods are very expensive. It cannot be afforded by small firms.
(ii) Being a costly affair, experiments are usually carried out on a scale too small permit
generalization with a high degree of reliability.
(iii) These methods are based on short-term and controlled conditions which may not exist in
an uncontrolled market. Hence the results may not be applicable in the uncontrollable long-term
conditions of the market.
(iv) The changes in socio-economic conditions taking place during the field experiments,
such as local strikes or lay-offs, advertising program by competitors, political changes natural
calamities, may invalidate the results.
(v) “Tinkering with price increases may cause a permanent loss of customers to competitive
brands that might have been tried”.
Despite these limitations, however, market experiment method is often used to provide an alternative
estimate of demand, and also “as a-check on results obtained from statistical studies.”. Besides, this
method generates elasticity co-efficients which are necessary for statistical analysis of demand
relationships.
Statistical Methods : Basically all statistical approaches of forecasting, project historical information
into the future. These are based on the assumption that future patterns tend to be extensions of past
ones and that one can make useful predictions by studying the past behaviour i.e. the factors. which
were responsible in the past will also be operative to the same extent in future.
Some companies have detailed sales record item wise as well as territory wise. This sales record can be
utilised to make useful predictions. The information should be complete with respect to events,
policies, quality of the product etc. from period to period. Such information in general is known as
Time series data. The time series for any phenomenon is composed of three components (i) Trend (ii)
Seasonal variation and (iii) Random fluctuations. Trend exhibits the general tendency of the data and is
known as long period or secular trend. This can be either upward or downward, depending on the
behaviour. Mostly trend is used for forecasting in practice. There are many methods to determine trend.
Some of the methods are:
(i) Graphical method.
(ii) Least square method.
(iii) Moving average method.