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Demand Forecasting

Demand forecasting is predicting the future demand for firm s product.

Techniques of Demand Forecasting

y Survey Methods y Statistical Methods

Survey Methods
Survey methods are used where the purpose is to make short-run forecast of demand. Under this method consumer surveys are conducted to collect information about their intentions and future plans.

Survey Methods
y Consumer s Survey Method y Opinion Poll of Experts

Consumer Survey Method

The consumer survey method of demand forecasting involves direct interview of the potential consumers. It is of three types:
y Complete enumeration method y Sample survey y 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.

1.) It proves very costly in terms of money and time. 2.)Consumers themselves may not know their actual demand in future. 3.)Consumer s response may be biased according to their own expectations about the market conditions.

Sample Survey Method

y This method is used when population is very large.

Under this method, only a sample of potential consumers or users is selected for interview. Consumers to be surveyed are selected from the relevant market through a sampling method. y Method of survey may be direct interview or mailed questionnaire to the sample-consumers. y Dp = HR (H.AD) HS

y Advantages


-Less time -Less cost o Limitations -Consumers biasness - Unawareness of consumer

End-Use Method
y In this method, the sale of the product under

consideration is projected on the basis of demand survey of the industries using this product as an input. y Difficulty arises because published data on the endusers is rarely available. y Managers need to have a thorough knowledge of the product and its uses. y Consultation with manufacturers or trader, users etc.

Opinion Poll Methods

It aim at collecting opinions of those who are supposed to possess knowledge of the market, e.g., sales representatives, sales executives, professional marketing experts and consultants.

Opinion Poll Methods

y Expert-Opinion Method y Delphi method y Market studies and experiments

Expert-Opinion Method
y Firms having a good network of sales representatives can put them on to the work of assessing the demand for the target product in the areas, regions or cities that they represent. y Sales representatives, being in close touch with the consumers or users of goods, are supposed to know the future purchase plans of their customers so in a position to provide an estimate of likely demand y Firms not having this facility, gather similar information about the demand for their products through the professional market experts or consultants.

Delphi method
This method is an extension of the Expert-Opinion method. Under this method, the experts are provided information on estimates of other experts along with the underlying assumptions. The experts revise their own estimates in the light of forecasts made by other experts. The information provided by the experts are based on sophisticated techniques and hence their opinions are structured opinion.

Market Studies and Experiments

An alternative method of collecting necessary information regarding current and also future demand for a product is to carry out market studies and experiments on consumer s behavior under actual, though controlled, market conditions.

Statistical Methods
y Trend projection methods y Barometric methods y Econometric methods

Trend Projection Methods

This method is concerned with the study of movement of variables through time. The use of this method requires a long and reliable time-series data. The trend projection method is used under the assumption that the factors responsible for the past trends in the variable to be projected will continue to play their part in future in the same manner and to the same extent as they did in the past.

Trend Projection Methods

y Graphical method y Fitting Trend Equation: Least Square method

-Linear Trend -Exponential Trend o Semi average method o Moving Average model

Graphical method
1.Plot the population of the past census years against time 2. Sketch a curve that fits the data 3. Extend this curve into the future to obtain the future demand.

Graphical Method

Graphical Method

Fitting Trend Equation:Least Square method

y This is a formal technique of projecting the trend in

demand. y When plotted, a time-series data may show various trends. y (i) Linear Trends (ii) Exponential trends

Linear trend
y When a time-series data reveals a rising trend in sales,

then a straight line trend equation of the following Y=a+b7X 7 Y = Na + b7X 7XY = a 7 X + b 7 X2

Exponential Trend
y When the total sale has increased over the past years at

an increasing rate or at a constant percentage rate per time unit, then the appropriate trend equation to be used is an exponential trend equation. y Trend equation is given as

Log Y = Log a + bX , when growth rate is constant y Iog Y = log a +b log X, when growth rate is increasing

y Acc to this method data is divided into two parts. The

averages of the first and second part are calculated separately.

Moving Average method

y When time series does not reveal a significant trend,

the moving average method is used.

Barometric Method
The barometric method was developed to estimate the general trend in overall economic activities and to forecast future trends on the basis of movements in the index of economic indicators. Net business investment New orders Employment Labor cost Lending rate for short term loans

o o o o o

Econometric Method
y Regression Method