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Demand or Sales Forecasting • Demand forecasting is a difficult area of management. • Most managers believe they are good at forecasting. But forecasts made usually turn out to be wrong
Forecasting - Meaning • Forecasting is the process of estimation in unknown situations. • Risk and uncertainty are central to forecasting and prediction
Demand or Sales Forecasting • A demand forecast means estimation of the demand for the good in question in the forecast period or the estimated demand at some future point of time. • For example,if the good is Maruti car and the forecast period is the year 2020, and then the forecasting problem is to estimate the demand for Maruti cars in 2020. • Since the future is uncertain, accurate prediction is not possible.
Kotler has remarked that, • “forecasting is like trying to drive a car blindfolded and following directions given by person who is looking out of the back window”.
Kinds of Forecasts • There are two kinds of forecasts • Passive forecasts • Active forecasts
Passive Forecasts • Passive forecasts predict the future situation in the absence of any new action by the firm.
Active Forecasts • Under active forecasts, the firm tries to manipulate the demand by changing, price, quality, promotional efforts etc.
if Maruti Udyog is contemplating an improvement in the quality of its car and at the same time it is committed to go in for a vigorous advertising campaign for its product, then while passive forecasts would ignore the impact of these changes on demand, the forecast would pay due recognition to these factors while estimating the future demand for Maruti car. Thus, the active forecast is meaningful.
The Significance of Demand Forecasting • Unless the future demand is known well in advance there may not be enough time to plan and execute the production to meet that demand. • The firm will be facing the situation of over production or under production.
Production Planning • Demand forecasting is essential for the production planning of a firm. • Expansion of output should be based on the estimates of likely future demand, otherwise there may be over production, causing considerable loss to the firm.
For a smooth functioning of business on a sound footing, it is necessary to have well prepared budgeting of costs and profits that should be based on the forecast of annual demand / sales and price.
Inventory Control • A satisfactory control of business inventories, raw materials, intermediate goods, semi-finished products, finished products, spare parts etc., requires satisfactory estimates of their future requirements which can be traced through demand forecasting.
Growth and Long-Term Investment Programmes • Demand forecasting is crucial for determining the growth rate of the firm and for its long term investment programmes and planning.
Stability • Stability in production and employment over a period of time can be made possible only in the light of reliable forecasting about market demand and other business variables.
Economic Planning and Policy Making • Demand forecasting at the national level is much helpful to the government for formulating better plans in economic planning and for rational allocation of scarce resources.
Types of Demand Forecasting • Short-Term Forecasting • Long- Term forecasting
Short-Term Forecasting • Short-term forecasting is limited to short periods, not exceeding one year. • It concerns with policies regarding sales, purchasing, pricing and finances. • In short term forecasting ‘A company is concerned only about the use of its existing production capacity”.
Long-Term Forecasting • Long term forecasts are normally for periods exceeding a year, usually 3 to 5 years or even for a decade or more. • Long term forecasting involves the study of consumer preferences and tastes, the trends in the economy, and technological developments.
Short-Term Forecasting • Short-term forecasting is limited to short periods, not exceeding one year. • It concerns with policies regarding sales, purchasing, pricing and finances. • In short term forecasting ‘A company is concerned only about the use of its existing production capacity”.
Purposes of Short-Term Forecasting • Evolving a Sales Policy • Determining Price Policy • Evolving a Purchase Policy • Fixation of Sales Targets • Determining Short-Term Financial Panning
Long-Term Forecasting • Long term forecasts are normally for periods exceeding a year, usually 3 to 5 years or even for a decade or more. • Long term forecasting involves the study of consumer preferences and tastes, the trends in the economy, and technological developments.
Purposes of Long -Term Forecasting • Business Planning • Man-Power Planning • Long-Term Financial Planning
Methods of Demand Forecasting • Demand forecasting for Established Products • Demand forecasting for New products
Methods of Forecasting for Established Products There are two approaches to demand forecasting of established products. • Marketing Research Approaches • Statistical Approaches
Marketing Research Approaches • It refers the collection, analysis and interpretation of information relevant market and management decisions. • It can be done through, • Expert’s opinion survey method • Survey of Buyer’s Intentions • Delphi Method • Consumer Clinics
Expert’s opinion survey method • In this method, a group of specialist’s ether outside the firm – for example, investment analyst, academics, consultants, or inside – for example, executives are requested to give their “feel” about the likely sales of the product in the future period.
Expert’s opinion survey method • If the number of such experts is large and their expectations are different, then a weighted average of their expectations should be taken. • This method is also called the “hunch method”, for it generates forecasts based on the hunches (guesses) of experts.
Survey of Buyer’s Intentions • Under this method, the potential buyers are asked what they will buy under various conditions, (For example, price and income levels) and the response are aggregated over the market. • This may be attempted through a complete survey of all consumers (census survey) or by choosing a sample of selected consumers (sample survey)
Survey of Buyer’s Intentions • For census survey, the aggregate forecast demand (D) is the simple summation of the intended purchases D1, D2… Dn by all ‘N’ consumers in the market. That is • D = D1 + D2 + ……. + DN • In the case of sample surveys the method of aggregation depends on the type of sampling. • The national council of Applied Economic Research (NCAER) has applied this method in forecasting demand for steel in India.
