Demand Forecasting

Demand Forecasting
The information regarding the future demand for

the product is obtained by demand forecasting.

Predicting the future demand for firms product

Purpose of demand forecasting

Planning and scheduling production

Acquiring inputs(labour, raw material and capital)

Making provision for finances Formulation pricing strategy Planning advertisement

Steps in Demand Forecasting

1.

Specifying the objective : (a) short term or long term demand (b) the overall demand for a product or for firms own product (c) the whole or only segment of the market for its product (d) firms market share The objective of demand forecasting must be determined before the process of forecast is started

2. Determining the time perspective

Demand forecasting for short period: 2-3 years or Demand forecasting for long period : more than 3 years Why?
For short term many of the demand determinants can be taken to remain constant or not to change significantly. In the long run, however, demand determinants may change signifacntly.

3. Making choice of method for demand forecasting All methods are not suitable for all kinds of demand forecasting , they differ because of purpose of forecasting data requirement of a method availability of data time frame

4. Collection of data and data adjustment :

primary data secondary data

Some time required data is not available in the required mode. In that case data needs to be adjusted. Some time the required data has to be generated from the secondary sources. 5. Estimation and interpretation of results :

Techniques of Demand Forecasting

Techniques of Demand Forecasting

Survey Method

Statistical Method

Survey Methods
Are generally used where the purpose is to make

short-run forecast of demand. To collect information about consumers intentions and future plans.
Survey of potential consumers plan and (ii) Opinion poll of experts
(i)

Consumer Survey Methods (direct interviews)

Direct interview of the potential consumers may

be in the form of:

(a) Complete Enumeration: In this case, almost

all the consumers or users of the product in question are contacted to ascertain their future of purchasing the product

 The quantities indicated by the consumers are

added together to obtain the probable demand for the product Dp = q1 + q2 + q3 + + qn

where q1, q2, q3, n, represent demand by individual households.

useful for products whose consumers are

concentrated in a certain locality may not be physically possible for cases where the market is widely dispersed.

(b) Sample Survey

In a sample survey, only few potential consumers

and users of the products are selected as respondents from the relevant market
The survey may take the form of either direct

interview or mailed questionnaire to the sample consumers

(c) The End-Use Method

This

method of forecasting demand has a considerable theoretical and practical importance, especially in forecasting demand for input

The method involves four basic stages: Stage 1: This stage requires that all the possible users of the product in question be identified and listed.
Stage 2: The second stage involves fixing suitable

technical norms of consumption, expressed in either per unit of production of the complete product or, in some cases, per unit of investment or per capita use.

 Stage3:Having established the technical norms of

consumption for the different industries and other end uses of the product, the third step is the application of the norms

Stage 4: The final stage in the end-use method of

demand forecasting involves the aggregation of the product-wise or use-wise content of the item for which the demand is to be forecast Result of this aggregation gives the estimate of demand for the product as whole for the terminal year in question

Opinion Poll Methods

These methods aim at collecting opinions of

those possessing knowledge of the market, such as the sales representatives, sales executives, professional marketing experts, and marketing consultant
The opinion poll methods include: (a) The Expert-Opinion method; (b) Delphi method; and, (c) Market Studies and Experiments

The Expert-Opinion Method

This

method involves the use of sales representatives in the assessment of demand for the product in the areas, States or cities they represent.

The sales representatives are expected to

know the future purchasing plans of consumers they transact business with.

The Delphi Method

This method of demand forecasting is an

extension of the simple expert opinion poll method. It is used to consolidate the divergent expert opinions and to arrive at a compromise estimate of future demand.
In the Delphi method, the experts are provided

with some information on estimates of forecasts of other experts, along with the underlying assumptions.

Market Studies and Experiments.

First select some areas of representative

markets, about four cities with similar features in terms of population, income level, cultural and social background, occupational distribution, and consumer preferences and choices.
This is followed by market experiments involving

changing prices, advertisement expenditures, and other controllable variables in the demand function, all things being equal

 Having introduced these changes, the

consequent changes in demand over a period of time are then recorded. Based on these data, elasticity coefficients are then computed, and these coefficients are used to assess the forecast demand for the product.

Statistical Techniques
The statistical techniques of demand forecasting

use historical (or time-series), and cross-section data for estimating long-term demand for a product.
The techniques are found more reliable than

those of the survey techniques.

These are useful for long-term forecasting and for

old products for larger levels of aggregations.

They include: (i) the Trend Projection techniques; (ii) the Barometric techniques; and, (iii) the Econometric techniques (a) The Regression Method. (b) The Simultaneous Equations Method

Econometric techniques
The Simple or Bivariate Regression Technique

In a simple regression technique, a single independent variable is used in estimating the statistical value of the dependent variable or the variable to be forecast.
Y = a + bX

 The Multi-Variate Regression Technique

The technique is used in cases where the demand for a commodity is determined to be a function of many independent variables, or where the explanatory variables are greater than one.

The procedure of multiple regression analysis involves the following steps: Step One: Specification of the independent or explanatory variables Step Two: Collection of time-series data on the independent variable. Step Three: Specification of the Regression Equation

 1. The Linear Function. The linear demand

function is where the relationship between the demand and its determinants is formulated by a straight line. The most common type of this equation is of the form:
Q = a bP + cY + dP + JA

2. The Power Function