Friday, June 12, 2009

What do you understand by demand forecasting?

What do you understand by demand forecasting? Survey method is
one of the techniques of demand forecasting. Discuss its different types.


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 where large-scale production is being planned and production involves a long
gestation period.
TYPES OF DEMAND FORECASTING
There are two broad categories of forecasting. They are:
Short-term forecasting
Long –term forecasting
Short-term Forecasting
Forecasts for short periods normally do not exceed a year. There are number of
purposes for which short term forecasts may be used. They are:
In most companies knowledge of condition in the immediate future is essential for
evolving a suitable sales policy. Production schedules have to be geared to expected
sales, rather than to actual sales. If the firm assumes that prevailing conditions
continue in the next year also, then it only has to face the problem of over production or
short supply. Evolving suitable production policy is necessary to avoid the problem of
over –production and the problem of short supply.
Knowledge of near future conditions is important in purchasing. If prices of materials
are expected to rise or shortages are expected, businessman may take advantage of
the rise by easier buying. Proper price forecasting may, thus, help the firm in reducing
costs of operation.
Sales forecasting is useful to the businessman in determining appropriate price policy.
An increase of price is avoided when future market conditions are not expected to be
strong and the lowering of prices is avoided when costs and sales levels are likely to
rise substantially.
Many companies use forecasting for setting sales targets and for establishing controls
and incentives. If targets are set too high, they will be discouraging salesman who fail
to achieve them. If set too low, the targets will be achieved easily and hence incentives
will prove meaningless.
Short term sales forecasting will be of assistance. In short term financial forecasting
cash requirements depend on sales levels and production operators. Moreover it takes
time to arrange for funds on reasonable terms. Neglect of sales forecasting will
therefore complicate financial planning of the company.
Long-term Forecasting
In short term forecasting, a company is concerned only about the use if its existing
production capacity. But in the long term, capacity can be expanded or reduced. If the
capacity is too limited some orders can not be filled and potential business is lost. In
order to minimize these errors, the businessman must know something about long term
demand for his product.
Forecasts are important for several aspects of long term planning. They are as follows:
Planning of a new unit as expansion of an existing unit must start with an analysis of
the long-term demand potential of the products of the firm. A multi product firm must
ascertain not only the total demand situations, but also the demand for different terms.
If a company has better knowledge than its rivals of the growth trends of the aggregate
demand and of the distribution of the demand, its competitive position would be much
better. Once the demand potential is assessed it will easier for company to engage in
long term financial planning. Planning for raising funds require considerable advance
notice.
Man power requirement in existing as will as new firms must be based on long-term
forecasts of the company’s growth. Man power planning requires considerable lead
time as training and personnel development are long term prepositions.

1. Opinion Poll Methods
a. Expert’s opinion survey method: Obtaining views from a group of specialists
outside the firm has the possible advantages of speed and cheapness. This method is
best suited in situations where intractable changes are occurring. Example: forecasting
future technological states. It is possible that in cases where basic data are lacking
experts may give divergent views, but even then it is possible for the manager to adapt
his thinking on the basis of these views. Although this method is simple and
inexpensive, it has its own limitations. First, estimates provided by the sales
representatives or professional experts are reliable only to an extent depending on
their skill to analyze the market and their experience. Second, demand estimates may
involve the subjective judgement of the assessor that may lead to over or under
estimation. Finally, the assessment of market demand is usually based on inadequate
information available to the sales representatives they have only a narrow view of
market.
b. Delphi Method: This method is an extension of the simple expert opinion poll
method. At its simplest, panel members are asked by letters to give their predictions of
the likelihood of occurrence of specified events. Postal anonymity from other panel
members minimizes the impact of personal inhibitions on the making of speculations
about the future. Panel members are then informed by letters of the outcome and
particulars of the consensus. Those who dissent are invited to give reasons or else
modify their forecasts. This process may be repeated and the final range of outcome is
regarded as a probabilistic forecast.
c. Market Studies and Experiments: An alternative method of collecting necessary
information regarding demand is to carry out market studies and experiments on
consumer’s behaviour under actual, though controlled, market conditions. This method
is known in common parlance as market experiment method. Under this method, forms
first select some areas of representative markets- three or four cities having similar
features, viz., population, income levels, etc. 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 same. The controllable
variables may be changed over time. After such changes are introduced, the
consequent changes in the demand over a period of time are recorded. On the basis of
data collected, elasticity coefficients are computed. These coefficients are then used
along with the variables of the demand function to assess the demand for the product.
2. Consumers survey method
This method uses the most direct approach to demand forecasting by directly asking
the consumers about their future consumption plan. It is of three types:
Complete Enumeration Survey
Sample Survey
End-use Method
a. Complete Enumeration survey: In the complete enumeration survey, the probable
demands of all the consumers for the forecast period are summed up to have the sales
forecast for the forecast period. For example, if there are n consumers and their
probable demands for commodity X in the forecast period are x1, x2, x3…………… xn, the
sales forecast would be
?X = X1 + X2 + X3 + X4
The advantages of this method are:
it gives an unbiased information
if all consumers expect accurately. The forecast will be accurate.
However, the disadvantages are:
contact with a large number of consumers
tedious and cumbersome
the authenticity of data is doubtful.
Nevertheless, sales forecasts for products having a few consumers may be attempted
by this method.
b. Sample Survey: Under the sample survey method, the probable demand expressed
by each selected unit is summed up to get the total demand of sample units in the
forecast period. It is then blown up to find the total demand in the market. That is, the
total sample demand id multiplied by the ratio of number of consuming units in the
population to the number of consuming units in the sample.
This method when carefully applied gives good results especially for new products and
brands. Care should be taken is choosing a sample size which should not be too small
(it will have high sampling error) or too big (it will have little error but will be costly and
tedious). The advantages of sample survey over complete enumeration method are:
less tedious
less costly
less data error
c. End use method: The sale of the product under consideration is projected on the
basis of demand survey of the industries using this product as an intermediate product.
Demand for the final product is the end-use demand of the intermediate product used
in the production of this final product. However, an intermediate product may have may
end-uses (like steel can be used in agricultural machinery, construction, etc). It may
have demand in both domestic and international markets. The demands for final
consumption and exports net of imports are estimated through some other forecasting
method and its demand for intermediate use is estimated through survey of its user
industries regarding their production plans and input-output coefficient. Then the sum
of final consumption demand and exports net of imports of any commodity can be
obtained with the help of an input-output coefficient. Then the sum of final consumption
demand and exports demand net of imports of any commodity can be obtained with the
help of an input-output model.
Such a method is feasible for national planning organizations only and not industry.
The weaknesses of this method are:
(i) It requires every industry to furnish its plan of production correctly and well-ahead of
time.
(ii) Individual industry will have to rely on some other method to estimate the future
demand of its product for final consumption.
(iii) Only the intermediate demand or the input demand part of total demand for a
commodity can be predicted.
The advantages of this method are:
(i) Provides use-wise or sector-wise demand forecasts.
(ii) Does not require any historical data.
(iii) If the number of end users of a product is limited, it will be convenient to use this
method.

1 comment:

  1. Demand forecasting is a systematic process of estimating future customer demand for a product or service. It involves using historical data, market analysis, and various forecasting techniques to make predictions about the quantity of goods or services that consumers are likely to purchase during a specified time period in the future. Demand forecasting is a critical aspect of supply chain management, production planning, inventory control, and overall business strategy. Moolamore is an advanced accounting application that analyzes, manages, and projects real-time transaction data. Using our cash flow forecasting software and app, you can forecast and estimate your company's future financial position. Financial Management

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