Forecasting is a technique that facilitates the process of planning and enabling efficient decision-making. By these estimates, projections are made for the future. Combining the aspect of forecasting with demand, it serves with the future projections regarding the quality demanded in precise. Certain questions like which product will be in demand?
Where will be the demand? are answered by demand forecasting. It also helps in developing relationships between the demand and price along with the price of the substitutes that are available. The change in demand as a result of the change in any of these factors is also revealed. So, primarily demand forecasting serves as a mechanism to forecast and estimate with precision the future demand of the product.
According to Pynes, Demand forecasting is “the anticipation of the leadership workforce that will be needed to accomplish future functional requirements and carry out the mission of the organization”.
Need of Demand Forecasting
Demand forecasting is very essential in the course of business decision snaking. Its relevance may be traced as under
1) Production Planning: Demand forecasting is a prerequisite for the production planning of a business firm. Expansion of output of the firm should be based on the estimates of likely demand, otherwise, there may be overproduction and consequent tosses may have to be faced.
2) Sales Forecasting: Sales forecasting is based on demand forecasting. The promotional efforts of the firm should be based on sales forecasting.
3) Control of Business: For controlling the business on a sound footing, it is essential to have well-conceived budgeting of costs and profits that are based on the forecast of annual demand/sales and prices.
4) Inventory Control: A satisfactory control of business inventories, raw materials, intermediate goods, semi-finished product, finished product, spare parts, etc., requires satisfactory estimates of the future requirements which can be traced through demand forecasting.
5) Growth and Long-Term Investment Programs: Demand forecasting is necessary for determining the growth rate of the firm and its long-term investment programs and planning.
6) Stability: Stability in production and employment over a period of time can be made effective by the management in the light of the suitable forecasting about market demand and other business variables and smoothening of the business operations through counter-cyclical and seasonally adjusted business programs.
7) Economic Planning and Policy Making: Demand forecasting at the macro level for the nation as a whole is of great help to the planners and policy-makers for a better planning and rational allocation of the country’s productional resources.
Procedures to Demand Forecasting
The following steps constitute a scientific approach to demand forecasting:
Step 1: Identify and state the objectives of forecasting clearly.
Step 2: Select the appropriate method of forecasting, in light of step 1.
Step 3: Identify the variables affecting the demand for the given product or service.
Step 4: Express these variables in appropriate forms.
Step 5: Collect the relevant data to represent the variables.
Step 6: Determine the most probable relationship between the dependent variable and the independent variable, using the appropriate statistical techniques.
Step 7: Make appropriate assumptions to forecast and interpret results in terms of market share, turnover in terms of value and volume, product groups, individual products, sizes and brands of each individual product and so on.
Step 8: Let there be alternative forecasts to make the forecasting exercise more meaningful.
Factors Affecting Demand Forecasting
Demand forecasting depends upon the following factors:
1) Nature of Goods: Demand forecasting differs on the basis of the fact that the goods may be producer goods, consumer goods or services, etc. Apart from this, demand forecasting also depends on the basis of durable and non-durable commodities.
2) Level of Competition: Market competition affects the process of demand forecasting. In a highly competitive market, the forecast is conservative taking into account the actions of competitors. It also depends on the future outlook of the industry due to the entry of new firms.
3) price: Demand forecasting is deeply influenced by a firm’s pricing policy. Higher prices in the future may influence future demand of the product or service unless it is supplemented by the high quality of the product.
Also Read:- Meaning and Definition of Managerial Economics
4) Level of Technology: Rapid changes in technology have the potential of rendering the existing products obsolete in the future. For example, the drastic fall in demand for Black and White T.V. due to the introduction of color T.V. in the last 15 years in India. Technological factor plays an important role in arriving at a reliable demand forecast in the future.
5) Economic Outlook: Future economic development plays an important role to forecast demand in the future. Positive economic development due, to a high level of investment, liberalization, globalization, etc., gives enough, a reason to have an optimistic demand forecast for future.
Significance of Demand Forecasting
The importance/ significance of demand forecasting is as follows:
1) Price Control: Demand forecasting helps in controlling prices by matching the output with future expected demand. For example, if demand is expected to go up in the future the steps may be taken to increase output and keep the prices in control.
2) Business Planning: Demand forecasting helps in business planning based on future activities to be taken up. For example, entrepreneurs may plan their export, sales, and production targets on the basis of future demand.
3) Competitive Strategy: Demand forecasting helps business to effectively formulate their competitive strategy in terms of manpower. finances, advertising, and other overheads. Future demand stimulates entrepreneurs to plan for future resource mobilization.
Limitations of Demand Forecasting
The limitations of demand forecasting can be explained as under
1) Change in Fashion: Change in fashion is an inevitable consequence of the advancement of civilization.
2) Consumer’s Psychology: Results of forecasting depend largely on the psychology of consumers, understanding which itself is difficult. Thus, demand forecasting becomes an uphill task.
3) Lack of Experts: Accurate forecasting necessitates experienced experts, who may not be easily available.
4) Lack of Past Data: Demand forecasting requires past sales data which may not be easily available. This may be a typical problem in the case of forecasting for a new product.