Demand forecasting

Demand forecasting is not a speculative exercise into the unknown. It is essentially a reasonable judgment of future market movements based on scientific statistical methods of enquiry. Forecasting is important for effective planning, and reduces the dependence on chance. Factors involved in demand forecasting Listed below are some of the factors that have to be considered while undertaking forecasting To overcome the problem of time frame of a forecast there are shortrun forecasts (upto one year) and long-run forecasts for periods of 5,10 ,15,20 years How far ahead forecasts have to be made will depend on the nature of the industry if the projects have long gestation period ,like in the petroleum exploration, mining industry ,shipyards etc .These industries have high levels of capital cost, and risks so it requires long term forecasts to mitigate the adverse effects.

But it should be remembered that any forecast beyond 10 years usually becomes difficult due the uncertainty of the future and if done unscientifically the projections become rather dubious. A short term forecasting maybe weekly, monthly, quarterly, half-yearly etc. Another classification is according to the decisions to be made or objectives to met Short-term forecasts provides information for tactical decisions ie; day to day operations within the limits of resources currently available. Long-term forecasts provides information for major strategic decisions it is concerned with the extending/reducing the limits of resources. Demand forecasting can be undertaken at 3 levels Macro-level concerned with the whole economy measured by appropriate indices :index of industrial production, WPI, GNP,NI etc. Such published data constitute the basis on which businesses base their forecasts

Industry-level prepared by different industries trade associations Firm-level which is prepared by individual firm according to its requirements and needs ,from the managerial standpoint the most important

Should the forecast be general/specific- from the firms viewpoint a general forecast is useful but a more specific one broken down into commodity or product-wise forecasts/areas of sale/ demographics etc. Whether the product is new /established the techniques of forecasting will differ For the latter the sales trends are known and its competitive character established Products have to be classified as producer/consumer durables/consumer goods and services- as each category has its distinctive pattern of demand While forecasting ,special features peculiar to the product/market should be considered. Political situation ,psychological impact on demand, future expectations of people, etc.

PURPOSES OF FORECASTING It can be examined by looking at the short/long term periods Purposes of short term forecasting It leads to proper production scheduling to avoid over/under production , for this the production schedules are charted according to expected/projected sales. It helps the firm control inventories and reduce costing by determining before hand their needs based on demand projections Determine an appropriate pricing policy so as to be sensitive to the prevailing market conditions ,eg: not to over price the product when the market conditions are weak or under price when the market is buoyed. Setting sales targets and establishing controls and incentives, by relying on accurate demand forecasts realistic sales targets can be set. Evolving a suitable advertisement /promotion program. Forecasting short term financial needs cash requirements for day to day working of the business usual depend on sales level and production operations, since it is difficult to get short term funds at reasonable rates.

PURPOSES OF LONG TERM FORCASTING Planning of new unit or expansion of existing unit depends very much on the demand forecasts of the product in question, If the company has more knowledge than its rivals it will be in a more competitive position so as to succeed. Planning of long-term financial requirements- To raise large funds for the long term strategy of the business ,requires foresight and planning and demand forecasts play a crucial in determining fund requirements Planning manpower requirements - is one of the most important functions of any firm, so future manpower requirements assessments can be made based on sales forecasts

Determinants of demand Non-durable Consumer goods There are certain factors that determine the demand for non durable consumer goods purchasing power that is determined by the disposable personal income price of the product as also the price of complementary/ supplementry goods. Demography demand for a product depends on the characteristics of the population in terms male-female, income, sex, age profile etc So demand for these goods can be estimated by the following function d = f (Y,D,P) Where Y- income, D- demand,P =price

Durable consumer goods

While forecasting demand for durable goods the following points should be considered The consumer has to make a choice between whether to use a product longer by repairing it or by replacing it this choice will effect the demand forecasts Durable goods require special facilities for their use like TVs need electricity, cars require roads, etc So the existence and growth of these facilities are an important variable to be considered while forecasting demand. The unit considered while forecasting demand is the household, so the decision to purchased a durable good is influenced by the members of the household, which in turn depends on the characteristics of the family. When forecasting demand total demand consists of (a) a new owner demand and (b) a replacement demand. Replacement demand tends to grow with growth in total stock of the product with the consumers. Again once the consumer gets used to a product he is going to demand it in the future, this makes replacement demand regular and predictable. When purchasing power increases the scrappage tends to increase as is seen in affluent countries New owner demand is harder to forecast since there is no pervious consumption pattern data to rely on. So here d = N+R

Another factor that effects demand for durable goods is the price and credit conditions ,if the average life of the product is high, the influence of price would be dampened Changes in the credit terms can offset a price increase :lowering the cashdown payment ,extending the credit payment period, reducing the rate of interest. It should be noted that over a period of time even though the prices of durable goods have gone up ,due to increase in incomes and purchasing power they have become relatively cheaper. Hire-purchasing schemes also tend to push up demand for durable goods across all income categories Eg; Singer sewing machines, Zarapkars, credit for cars etc. Forecasting for durable goods is difficult ,since purchases are rather discretionary and made after deliberations since there is plenty of choice available. Demand for such products are made at an unevenly spaced intervals of time.

Capital goods These goods are used for further production, the demand will depend on the particular markets they serve and the end uses for what they are bought. examples: Demand for textile machinery will depend on the growth of textile industries in terms of number of units, replacement of existing machinery etc. here new demand and replacement demand will have to be considered The demand for commercial vehicles depends on the scrapping rate, availability of vehicles, economics of movement between road/rail, availability of finance ,etc. Data required for estimating demand for capital goods are : The growth prospects of the user industries Velocity of use of the product Consumption norm of capital goods per unit of installed.

Forecasting for new products Joel Dean has suggested a number of approaches to forecast for new products: Project the demand for the new product as an outgrowth of an existing old product Analyse the new product as a substitute for some existing product/service Estimate the demand by making direct enquires from the purchasers either by use of samples or on full scale. Offer the new product for sale in a sample market eg; direct mail or by introduction in a representive sample group. Survey consumers reactions to the new product through specialized dealers who are in a position to gauge the consumers needs and reactions

Criteria of a good forecasting method Accuracy : The Accuracy of the forecasts is measured by (a) the degree of deviations between forecasts and actuals and (b) the extent of success in forecasting directional changes. Simplicity and ease of comprehension: The management must be able to understand and have confidence in the techniques used. Understanding is also needed for a proper interpretation of the results. Economy: the cost of forecasting should be weighed against the operational cost of the business. The criteria here is of balancing the benefits from increased accuracy against the extra cost of providing the improved forecasting. Maintenance of timeliness: the forecast should be able to be maintained on an up to date basis. a). The relationships underlying the procedure should be stable so that they will carry into the future for a significant amount of time. b). Current data required to used for these underlying relationships should be available on timely basis. c). The forecasting procedure should permit changes to be made in the relationships as they occur.