@ Raveendra Rao.K.

SDM2013
DEMAND FORECASTING
BY
RAVEENDRA RAO.K.
SOM,
MANIPAL 576 104
@ Raveendra Rao.K. SDM2013
DEMAND FORECASTING
Demand forecasting is predicting future demand for a product. Forecasting is
scientifically calculated guess.
Factors involved in demand forecasting
1. How far ahead? Short run forecast (3, 6 9 or 12 months) versus long run
forecast (3 yrs to 5 yrs, 7 yrs or 10 yrs.)
Short-run forecast: provides information about tactical decisions (concerned
with day- to-day operations within the limits of resources currently
available)
Long-run forecasting: provides information about strategic decisions
(concerned with extending or reducing the limits of resources)
2. Demand forecasting at which level?
a) Macro-level: Concerned with business conditions over the whole economy.
GNP, FDI flows, National Income etc. Prepared by Govt.
b) Industry-level: Prepared by different trade associations
c) Firm-level: Which affects individual firm.
3. General forecasting or specific forecasting (i.e. Total food production or
commodity wise forecasting)
4. Forecasting of new product or established product?
5. Forecasting of Producer goods, Consumer goods or Services?
6. Special factors peculiar to product (Political conditions, sociological factors)
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Purpose of forecasting
Short-term forecasting

1. Appropriate production scheduling to avoid problem of over-
production and problem of short supply.
2. Helping firms in reducing cost of purchasing raw materials
3. Determining appropriate price policy
4. Setting sales targets and establishing controls and incentives
5. Evolving suitable advertising and promotion program
6. Forecasting short-term financial requirements.

Long-term forecasting

1. Planning of new unit or expansion of existing unit.
2. Planning long-term financial requirements
3. Planning manpower requirements.
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Techniques/Methods of Demand forecasting
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Survey Methods
Survey methods are generally used where the purpose is to make short-run
forecast of demand. Here information is collected about intensions and
future purchase plans.
A) Survey of customers
B) Opinion poll of experts
A.Consumer survey methods Direct interviews
It may be in the form of
1) Complete enumeration
2) Sample survey or
3) End-use method
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. Quantities indicated are added to get
demand for the product.
Limitations:
Successful for only those products whose consumers are concentrated in
certain locality or region.
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Consumers themselves may not know their actual demand in future.
Answers if given any be hypothetical
Consumers response may be biased according to their own expectations
about market conditions
Consumers plan may change with a change in factors not included in the
questionnaire.
Sample survey method.
Only few potential customers selected from market through sampling method
are surveyed. Probable demand is estimated as
D
p
= H
R
(H.A
D
) Where D
p
= Probable demand forecast


H
S
H = Census no. of households from the relevant
market
H
S
= No. of households surveyed
H
R
= No. of households reporting demand for the
product
A
D
= Avg. expected consumption by reporting households
= (Total qty reported to be consumed by households/ No of
households)

@ Raveendra Rao.K. SDM2013
Advantages: Limitations
Simple Consumers may not be aware of future demand
Less costly Biasing
Less time consuming Use of statistics

End-use method (For estimating demand for producer goods especially
inputs)
All possible users of product are contacted and estimate of their probale
output and hence input is done.
B Opinion poll methods
a) Expert opinion method
b) Delphi Method
c) Market studies and experiments
Expert opinion method (Sales force composite/Opinion poll method)
Sales persons from different regions are asked to give probable demand for
product and their figures are added to get probable for the product.
Sometimes consultants/Market experts are asked to give opinion about
probable demand.
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Advantages:
Simple and inexpensive
Limitations:
Depends on skill of sales rep or expert regarding consumer
behaviour.
It involves more subjectivity
Sales reps usually assess demand with a narrow market conditions ignoring factors
like GNP, Interest rates, inflation, availability of credit, etc.
Delphi Method
It is extension of opinion poll method. Here, the divergent expert opinions are
consolidated to arrive at a compromise estimate of future demand. This
method is generally used to cross check the forecast figures.
Market Studies and Experiments
Here 3 or 4 cities having similar features, viz, population, cultural background,
income levels, preferences of consumers are selected. Market experiments are
carried out by changing price, advertisement expenditure and other factors affecting
demand. Demand is noted after introducing changes in factors of demand. This is
done usually for a week, fortnight or month. On the basis of data collected, elasticity
coefficients are computed. These coefficients are used to calculate future demand.
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Laboratory experiments
Consumers are given money to buy from selected stores with varying prices,
displays etc and quantity purchased is noted down to compute elasticity
coefficients. Using this future demand is calculated.
Advantages:
All factors affecting demand can be tested. Results can be obtained in short
time frame.
Limitations:
Expensive
Done on small scale (Sample population/area) hence generalisation is
difficult
Controlled conditions are having effect only in short run, what about long
run?
Socio economic conditions (strikes, increase in interest rates etc) may give
erroneous results of the experiments.
Experimenting on customers with changes in prices may lead to
permanent loss of customers.