What is Demand Forecasting ?
Demand Forecasting is a method of estimating the future demand of a product or service in a certain time span based on proposed marketing plan and a set of particular uncontrollable and competitive forces.
An organization faces risks of recession, inflation, competition, labour unrest and changing government rules and regulations. Thus the organisation works under risks and uncertainties. Demand forecasting, keeping in view the above variables, reduces risks in business and helps management make well informed decisions by way of planning the production process, keeping inventories in case of high future demand, purchasing raw materials, managing funds, and deciding the pricing. Furthermore, the organization’s capital investment and expansion decisions are based on demand forecast.
Objectives of Demand Forecasting
The objectives of demand forecasting are:
i). Formulating the production policy:
The demand forecasting helps in stocking or planning the smooth flow of raw material in the future. As operational planning is done in advance depending on demand forecast, it results in maximizing resource utilization. It also helps in the requirement and fulfillment of human resources.
ii).Deciding the price policy:
The prices of products are based on demand forecasting. Should the economy enter into recession, the prices would have to be kept low and vice versa.
iii). Managing Sales:
Depending on the demand forecast, the sales targets are set for different regions thereby helping to manage the sales and evaluating sales performance.
iv). Arranging finance:
The financial requirements of the organisation are assessed with the help of demand forecasting helping to ensure proper liquidity within the organization.
2. Long-term Objectives:
i). Deciding the production capacity:
With the help of demand forecasting, an organization can determine the capacity of the plant required for production so that the sales requirement is fulfilled.
ii) Planning long-term activities:
Demand forecasting helps in planning for long term. For example, if the forecasted demand for the products is high, then the organization may plan to invest in increasing the production capacity or set up another plant to cater to the demand.
Factors Influencing Demand Forecasting
i) Types of Products:
The types of products affect the demand forecasting to a large extent. Products may be fast moving consumer goods, consumer durables, capital goods. The products may be existing or new which have yet not been launched in the market. It is easier to estimate the demand of existing products but difficult to estimate demand of new products that have not yet been launched.
ii) Competition Level:
It influences the process of demand forecasting. The demand for products in a market that is highly competitive also depends on the number of competitors. Entry of new entrants in the market also has a risk in a highly competitive market. Hence, demand forecasting becomes difficult in such a scenario.
iii) Price of Goods:
It is a major factor that influences demand forecasting . The demand forecasts of organizations are highly affected by change in their pricing policies leading to difficulty in the exact demand estimation.
iv) Change in Technology:
With a sudden change in technology, the current products may become redundant thus making demand forecasting difficult.
v) State of the Economy :
It plays a crucial role in demand forecasts. Factors such as globalization and a booming economy lead to positive demand forecast.
Apart from the above factors, there are some other factors that influence demand estimation:
1. Time Period of Demand Forecasts:
The accuracy of a demand forecast depends on the time period of the forecast.
Forecasts are of three types:
i). Short Term Forecasts:
These are generally for one year and are based on the knowledge of the experienced staff. Based on these, the organization decides the production policy, pricing, credit terms and the distribution policy.
ii). Long Term Forecasts:
These are for a period of 5-10 years and based on scientific and statistical methods. Based on these, the organization decides about the addition of capacity, introduction of newer products and fund requirements.
iii). Very Long Term Forecasts:
These are for a period of more than 10 years. These help to assess the population growth, development of the economy, changes in international business etc.
2. Level of Demand Forecasts
A demand forecast can be carried out at a macro level, at industry level and at the company level. At the macro level, the environmental forecast is done which calls for projecting inflation, interest rate, unemployment, consumer spending and saving, business investment, net exports, industrial production and national income allocation. At the industry level, forecasts are made by the trade associations or chamber of commerce using statistical techniques and also keeping in view the policies of the industry. The industry forecast is based on surveys of consumers’ intention. It can indicate the time direction in which the industry as a whole will be moving.
At the company level, forecasts are done keeping in mind the specific policies of the company and factors such as changing consumer tastes and preferences, competitive strategies, technology etc.
As stated above, there are different forecasts for different types of products like:
(i) Demand forecasting for fast moving consumer goods like milk, pulses, medicine, fruits etc.
(ii) Demand forecasting for consumer durables like, Television, Refrigerator, Airconditioner, car etc.
(iii) Demand forecasting for capital goods such as crane, D.G. set, plant machinery etc.
(iv) Demand forecasting for new products.
Fast Moving Consumer Goods:
These are also known as perishable consumer goods as they vanish after a single act of consumption. These include items like food, milk, bakery products, medicines, fruits, etc. Their demand depends on the household disposable income(purchasing power of the household) price of the commodity and the related commodities and population.
Consumer durables are very sensitive to changes in price. Demand for consumer durables is very much influenced by their prices and their credit facilities.
The demand for capital goods is a derived one as they contribute to further production. For example, the demand for a paper making machinery and the number of units required depends on the expansion of the paper industry.
The process of demand estimation of a new product is different from that of established products. It has to be researched intensively and it takes quite a lot of time and funds to do . A new product is basically the evolution of the existing product.
Thus we see that demand forecasting is a very needed and useful tool for management to take the right decisions on raw material, machinery, funds and sales. In my next blog, I shall be discussing the Demand Forecasting Techniques.