DEMAND FORECASTING

DEFINITION

A forecast is a prediction or estimation of a future situation, under given conditions.

Forecasts can broadly be classified into categories:

(i) Passive forecasts

(ii) Active forecasts

(i) Passive forecasts: where prediction about future is based on the assumption that the firm does not change the course of its action.

(ii) Active forecasts: where forecasting is done under the condition of likely future changes in the actions by the firm

Generally, business firms are interested in both passive and active forecasts.

NEED FOR FORECASTING

DETERMINING SCOPE OF A FORECASTING EXERCISE

Period of forecast

(i) Short-run forecasting: seasonal factors are the ingredients of short-run forecasts. Ex. Textiles and Apparel Industry, Electricity

(ii) Medium-term forecasting: Policies are the factors affecting this. Ex present State Government policy of banning the Cola drinks at the government schools and colleges

(iii) Long-term forecasting: various variables having inter-relationship of economic, psychological and sociological factors determining consumer behaviour. Ex diversification

Levels of forecast

(i) Macro-economic forecasting: Censes survey. Young India survey by CNN

(ii) Industry demand forecasting: Tata’s Westside had conducted a survey in 1997 about retail market before starting the Westside retail outlet on Dec 15th 1998.

(iii) Firm demand forecasting: Godrej

(iv) Product-line forecasting: helps the firm to decide which of the product or products should have priority in the allocation of firm’s limited resources. P&G whether to produce more of hair shampoo( either head and shoulders or Pantene) or to produce Tide or Camay soap. Premium End segment

Qualities of Good Forecasting

1) Simple

2) Economy of time

3) Economy of money

4) Accuracy

5) Reliability

Consumers’ survey

Complete Enumeration Survey:

DF = (ID1 + ID2 + ID3+ ….IDn)

Where DF = demand forecast for all households, ID = intended demand of household. Ex. Census survey

Advantages: first-hand unbiased information

Disadvantages: costly, unwillingness of consumers to answer, uncertainty, time consuming

Simple Random Sampling

DF = (ID1 + ID2 + ID3+ ….IDn) N/n where N is population and n is sample picked up.

Advantages: takes less time and money

Disadvantage: unwillingness of consumers to answer, uncertainty, Biased answers

Market Experiment

Test Market: This is actual experiment where shops are open in different localities and then consumers’ reactions are observed and recorded. Ex. Little heart biscuits (Britannia)

Clinic Method: or Simulation method or laboratory experiment, involves providing token money to a set of consumers and asking them to shop around in a simulated market.

End Use Method

Steps: identify the use of the intermediate product in the final product

Identify the demand in the national and international markets.

Then project the sale of the product under consideration.

Sales Force Opinion Method

When any Oil Engines manufacturing companies want to produce trolley, gathering information from the sales force is Sales force opinion method or collective opinion.

The men who are closest to the market are questioned and their responses aggregated.

Advantages: cheap and easy

Disadvantages: Congenital optimism and congenital pessimism, near-future forecasting is only possible, various socio-economic factors are not considered.

Experts’ Opinion Survey Method

Simple Method: Researchers identifies the ‘experts’ on the commodity whose demand forecast is being attempted and probes with them on the likely demand for the product in the forecast period.

Delphi Method:

Opinions are first collected from experts and then instead of mathematical averaging efforts are made to match them. To narrow down the gap experts are brought together, arranging one or more meetings and arriving at some narrow range for the forecast under attempt.