This is a presentation covering the concepts of demand forecasting. it includes the meaning of demand forecasting, purpose, scope and factors affecting demand forecasting. It also covers the methods of forecasting for both new and existing products.

1. Prepared by- Amanda Bvera

2.  Demand results in sales which constitutes the primary source of revenue for the
business.
 A forecast is a prediction or estimation of a future situation, under given
conditions.
 Demand forecasting predicts the future trend of sales given the present state of
demand determinants.
 Demand forecasting is different from demand estimation in the sense that the
former predicts about the future trend of sales while the latter tries to find out
expected present sales level, given the present state of demand determinants.
 Forecast can be both physical as well as financial in nature, and are used mostly
for planning purposes.

3.  Forecasting is done for both the long run as well as short run. The purpose of the two,
however, are different.
 In a short run forecast seasonal patterns are of prime importance. Such a forecast
helps in preparing suitable sales policy and proper scheduling of output in order to
avoid over-stocking or costly delays in meeting the orders. Besides giving an idea of
likely demand, short-run forecasts also help in arriving at suitable prices for the
products and in deciding about necessary modifications in advertising and sales
techniques.
 Long-run forecasts are helpful in proper capital planning. When installing production
capacity, an element of flexibility in their availability has to be ensured to take care of
planned and expected changes in production. Long-term planning thus helps in saving
the wastage in material, manhours, machine-time and capacity. Long-run forecasting
is usually used for ‘new unit’ planning, expansion of the existing units, planning long-
run financial requirements and man-power requirements.

4.  Before taking up a forecasting exercise, one has to know the specific purpose
for which the predictions are sought. The sales forecasts can have differing
interpretations and applications, depending upon the purpose of the forecast.
Defining scope of the forecasting exercise is, therefore, a necessary pre-
requisite.
 There are at least 6 considerations which need to be taken care of while
determining the scope of a forecasting exercise:
 Period of forecast
 Level of forecast
 General purpose or specific purpose forecasts
 Forecasts of established products or new products
 Type of commodity for which forecast is to be undertaken
 Miscellaneous factors to be included or not.

5.  Period of forecast:
 As a first step one has to decide about the length of the period for which the forecasting
exercise is taken up. The time periods are usually divided into (a) Short-run (b) medium
term (c) long-run.
 Short-run forecasting: In case of short-run forecasting, one is looking for the factors
which bring fluctuations in the demand pattern in the market. The most important factor
in this regard maybe the weather conditions. As the weather conditions influence the
demand for consumer goods, it indirectly affects the demand for machinery, equipment,
raw material, etc., needed to produce these consumer goods. Thus, seasonal factors are
the ingredients of short-run forecasts.
 Medium-term forecasting: In case of medium-term forecasting, experience and sound
judgment are more important than statistical forecasting. The medium-term forecasts
can assist in the decision about timing of an activity, like advertising expenditure. These
forecast also contribute to control or revision of the decisions based on long-run forecasts.
The main feature of medium-term forecasts is the trend. The direction of the trend, has
important implications for subjects like employee recruitment and training, etc.
 Long-run forecasting: In the long-run, the validity of the trend itself must be ascertained.
If the trend is likely to change for the worse, this would have implications for the firm’s
entire long-term strategy, it could suggest the wisdom of diversification policy for the
firm. For long-run forecasts, reliance is usually placed on statistical techniques, though
judgement still remains an asset in identifying the variables which are mainly
controllable and are likely to influence future sales. In the very long-run analysis one
must include variables relating to socio-psychological aspects-in particular an analysis of
the inter-relationship of economic, psychological and sociological factors determining
consumer behaviour.

6.  Levels of forecast:
 Sales forecasting may be undertaken at any one of the following levels:
 Macro-economic forecasting: It is concerned with business conditions over the whole
economy. These business conditions are measured with the help of some appropriate
indices like those relating to national income, industrial production, wholesale
prices, etc. These indices are provided by official and non-official agencies and these
can be treated as basic assumptions on which to base the demand forecasts.
 Industry demand forecasting: Such forecasts can give indications to a firm regarding
the direction in which the whole industry will be moving. These forecasts, based on
surveys of consumer’s intentions and analysis of statistical trends, are generally
supplied by trade associations to its members. The business may use such forecasts
to compare the trends of industry sales with its own current and expected sales and
thus determine its market share.
 Firm demand forecasting: A big firm will like to do forecasting of its own products
independent of the rest of the firms in the industry. Such forecasting reveals
whether or not the company is well placed to maintain or even better its share in the
market.
 Product line forecasting: It helps to decide which of the product or products should
have priority in the allocation of the firm’s limited resources.

7.  General purpose or specific purpose forecasts:
Though a general forecast is useful for a firm, it will be even more helpful if the
general forecast is broken down into specific forecasts with respect to commodities,
area of sale, domestic and export markets.
 Forecasts of established or new products:
Problems and methods of forecasting differ in these two cases . For the established
products past sale trends and competitive conditions are known, while this is not
the case for new products, hence suitable forecasting methods need to be adopted in
this regard.
 Type of commodity for which forecast is to be undertaken:
Economists broadly classify good into three categories – capital goods, consumer
durables and non-durable goods. For each of these categories of goods there would
be distinctive demand patterns.
 Miscellaneous factors to be included or not:
The forecaster should decide how much the sociological and psychological factors
are going to enter into the forecasting exercise. To be more effective, this exercise
must also include the factors like the features peculiar to the product and the
market, nature of competition, impact of uncertainty and risk and the consequent
errors in accuracy, etc.

8.  The following steps are necessary to have an efficient forecast of demand:
 Step 1: Identification of objective
 Step 2: Determining the nature of goods under consideration
 Step 3: Selecting a proper method of forecasting
 Step 4: Interpretation of results
 This can be explained as follows:
 Identification of objective: It is necessary to be clear about what does one want to get
from the forecast. The purpose of the exercise may be the estimation of one or more
than one aspect, like quantity and composition of demand, price to be quoted, sales
planning, inventory control, etc. The approach to the problem will accordingly differ.

9.  Determining the nature of goods under consideration: Different categories of goods
have their own distinctive demand patterns. It is therefore, necessary to determine
the class in which the goods fall. These categories are: the capital goods, consumer
durables and non-durables. This will help us in identifying the approach of the
forecasting exercise and in determining the variables to be considered for
forecasting.
 Selecting a proper method of forecasting: The selection of an appropriate method of
forecasting is related to the objective of forecasting, type of data available, period for
which the forecast is to be made, etc. For example, if the data shows cyclical
fluctuations, the use of linear trend will not be suitable. Similarly, general trend
may be more useful for long-run forecasting, while seasonal patterns will be more
important for the short-term forecasts.
 Interpretation of results: Mere preparation of forecast does not lead the
management anywhere. Interpretation of results is equal importance. Efficiency of a
forecast depends, to a large extent, upon the efficiency in the interpretation of its
results. Most of the times, the forecasted results are to be well-supported by the
background factors which have not entered the exercise of forecasting. Further, we
need to frequently revise the forecasts in the light of changing circumstances
because forecasts are, in the first instance, made on the assumption of continuation
of past events.

10.  The significance of demand forecasting is shown in the following points:
 Fulfilling objectives
 Preparing the budget
 Stabilizing employment and production
 Expanding organisations
 Taking managerial decisions
 Evaluating performance
 Helping the government
 This is explained in the following manner:

11.  Fulfilling objectives: Implies that every business unit starts with certain pre-decided objectives. Demand
forecasting helps in fulfilling these objectives. An organisation estimates the current demand for its
products and services in the market and moves forward to achieve the set goals.
 Preparing the budget: Plays a crucial role in making the budget by estimating costs and expected
revenues.
 Stabilising employment and production: Helps a firm to control its production and recruitment
activities. Producing according to the forecasted demand of products helps to reduce the wastage of the
resources of the firm. This further helps the organisation to hire human resources as per the
requirement.
 Expanding organisations: Implies that demand forecasting helps in deciding about the expansion of the
business. If the expected demand for products is higher, then the organisation may plan to expand
further. On the other hand if the demand for products is expected to fall, the organisation may cut down
the investment in the business.
 Taking managerial decisions: Helps in making critical decisions, such as decided the plant capacity,
determining the requirements of raw materials and ensuring the availability of labour and capital.
 Evaluating performance: Helps in making corrective decisions, for example if the demand for the firm’s
products are low, it may take corrective actions to improve the level of demand by enhancing the quality
of its products or spending more on publicity and advertising.
 Helps the government: It enables the government to coordinate import and export activities and plan
international trade. It could also pertain to boosting the level of production in the country.

12.  Goods can broadly be classified into three categories as follows:
 Durable consumer goods
 Non-durable consumer goods
 Capital goods
 While forecasting demand for each of these categories, we keep in mind different
considerations because different types of goods have their own distinctive demand
patterns.
 This is explained in detail in the following slides.

13.  Consumer durables: Each consumer durable has a special market for its
product, which in turn has its peculiarities. So, forecasting demand for
individual products in such cases requires special techniques adapted to meet
these peculiarities. Moreover, the demand for consumer durables falls into two
categories: replacement demand and new demand. Forecasts should be made
separately for both. The special difficulties or peculiarities in forecasting in
case of consumer durables are as follows:
 Changes in size and characteristics of population.
 Saturation limit of the market
 Existing stock of the goods
 Replacement demand vs. New demand
 Income level of the consumers
 Consumer credit outstanding
 Tastes and scales of preferences of consumers
 The forecaster of consumer durables, therefore has to use to different
techniques to predict his future level of sales.

14.  Non-durable consumer goods: These include those consumer goods which can
only be used once, e.g., food, beverages, tobacco, etc. Demand for such goods is
basically influenced by the following factors: purchasing power (or disposable
income) of the consumers (Yd), price of the commodity (P) as well as
population and its characteristics (S). Symbolically, it is
D = f(Yd, P, S)
 Capital goods or producer’s goods: Capital goods are defined as those goods
which help in further production of goods. Capital goods include factory
buildings, machinery, equipment, tools, etc. Capital goods are, therefore,
demanded only when there is a demand for the goods which these capital
goods help in producing. In other words, demand for a capital good is a derived
demand, which will depend upon the profitability, level of capacity utilisation
and wage rates in the industries using the capital good. Moreover, demand for
a capital good is of two kinds:
 Replacement demand
 New demand

15.  The following information is needed for estimating capital good’s demand:
 Growth possibilities of the industries using the capital goods.
 The norm of consumption of capital goods per unit of installed capacity. It is
assumed that the norms of consumption often remain stable. However, in practise
one finds cases where shortages arise, like in case of construction of bridges where
mild steel is sometimes used when constructional steel is not available. Thus,
though the norms usually remain stable but they are sometimes violated too.
 The extent of excess capacity in the industry using the producer’s goods.
 The forecast of demand for the good which the producer’s goods help in producing.
 The existing stock of the producer’s goods.
 The age-distribution of the existing stock of producer’s goods
 The rate of obsolescence.
 The availability of funds and costs of funds to the firms using the producer’s good.
 The nature of tax provisions on re-equipment.
 The prices of substitutes and complementary goods.
 The market structure within which the producer’s good operates.

16.  The methods of forecasting can be divided
into two categories namely, opinion polling
methods and mechanical methods.
 The opinion polling methods deals with the
collection and aggregation of various units-
their demand patterns, consumption
patterns, spending plans, etc. These
methods are subjective, more expensive and
can also be time consuming. These methods
are useful for predicting the demand for
new products and also for predicting the
short run demand forecasts.
 Mechanical methods are cheaper, faster
and easier to calculate as they are based on
the records already available with the firm.
Methods of demand
forecasting
Opinion
polling
method
Consumer
survey
Sale force
opinion
method
Expert
opinion
method
Mechanical
method
Time series
Barometric
method
Regression
analysis
Econometric
method

17.  Consumer survey: In this method, the
consumers are contacted personally
and are invited to share and disclose
their consumption patterns and
demand preferences. This method is
advantageous in the sense that it
collects first hand information and is
free form other biases. This method is
conducted in three forms:
 Complete enumeration: Here, the entire
population is surveyed and the results
are collected and aggregated.
 Sample survey: Here only a sample or a
unit from the relevant population is
surveyed and the results from various
such units are collected and aggregated.
 End-use: In this method, the input-
output values are used. The firms using
the particular good as an intermediate
good are surveyed and hence the results
obtained from this procedure are
aggregated.
Consumer
Survey
Complete
enumeration
Sample survey
End-use/Input-
output method

18.  Sales force opinion method: This method is called the reaction survey method in
which the opinion of the salesmen, that is people closest to the market are
surveyed and their responses are collected and aggregated. An advantage of this
method is that it is cheap and easy, in the sense that it does not involve any
elaborate statistical measurement. Another advantage to this method is that it is
based on the first-hand knowledge of the salesmen.
 Expert’s opinion method: Obtaining views from a group of specialists outside the
firm has the possible advantages of speed and cheapness. This method is best
suited in situations where intractable changes are occurring. It is possible in cases
where basic data are lacking experts may give divergent views, but even then it is
possible for the manager to adapt his thinking on the basis of these views.

19.  Time series: The time series
analysis lays on the use of time as a
variable in the analysis of seasonal
patterns and trends in the sales of
the products. The variables analysed
under this method are:
 Trend: It is the overall movement of
the time series.
 Cyclical fluctuations: It is the wavelike
movements and intermittent changes
in the time series.
 Seasonal patterns: It is the seasonal
up and down movement in the time
series that occur at a particular time.
 Irregular movements: These are the
movements left after the isolation of
the other three variables.
Time series
Trend
Cyclical
fluctuations
Seasonal
patterns
Irregular
movements

20.  Barometric series: Under the barometric
method it is assumed that there is some
economic relationship between the various
time series. Based on this, there are three
types of relationships among the series as
follows:
 Leading series: It is moving ahead of the time
series it is compared to.
 Coincident series: Moving along the series it is
compared to.
 Lagging series: It is moving behind the series
it is compared to.
 Forecasting through barometric techniques
involves the following stages:
 To locate the leading indicator for the
variable whose forecast is being undertaken.
 To estimate a mathematical/statistical
relationship of leading indicator with the
variable under forecast.
 To find out the forecasted values of the
variable.
 If possible, to verify the validity of the forecast
with the help of coincident indicators and/or
lagging indicators.
Barometric
series
Leading
series
Coincident
series
Lagging
series

21.  Correlation and Regression method: One of the popular methods of forecasting. It
realises the fact that more variables other than time affect the value of sales. The
numerous variables influencing sales are identified through correlation and
analysed under regression with the help of a model, to determine the future trend
of sales.
 Econometric method: The difference between the barometric and econometric
method is the scope of variables that are analysed. It analyses a vast number of
economic and demographic variables and builds up a cause-effect relationship.
Forecasting through econometric models involves three stages:
 Identification of variables and the functional form.
 Estimation of parameters.
 Finding the forecast values.

22. In modern times, particularly due to fast expanding communication and
transportation facilities, the rate of change in demand has accelerated a great deal.
Consequently, the problems of adjustment have also grown for a firm. There is an
increased complexity of products and processes. The adaptability and flexibility of
competing producers in adding new products and processes also lead to need for
further adjustments. It is necessary for a firm, therefore, to know about the impact
of future conditions. For this, it needs to undertake demand forecasting. There are
many methods for this purpose. The final method of forecasting must be chosen on
the basis of the following criteria:
 Accuracy
 Longevity
 Flexibility
 Acceptability and Simplicity
 Economy
 Availability

23. Accuracy
•A firm should
forecast its
demand near to
its actual
market
demand, so
that required
quantities
could be made
available for
the consumer .
Inaccurate
forecasts are of
huge costs to
the firms.
Longevity
•Preparation of
demand
forecasts takes
huge time,
money and
planning.
Therefore it
should be
usable for a
linger span of
time.
Flexibility
•A demand
forecast should
be flexible and
adaptable to
any kind of
changes.
Nowadays
there is a rapid
change in the
behaviour of
the consumers.
Therefore the
forecast method
of the firm
should reflect
the changes
accordingly.
Acceptability
•It is one of the
most important
criteria of a
good demand
forecast. That
means that the
forecast should
be acceptable to
all. It should
also be simple
in its
application and
understanding.
Economy
•A good
forecasting
method should
have adequate
and up to
optimal results.
It should have
a relationship
with cost and
benefits. It
should be
economically
effective.
Availability
•A good
forecasting
method should
have adequate
and up to date
data
availability.
The forecast
should be done
in a timely
manner, so that
necessary
arrangements
can be made
relating to the
market.

24.  The results achieved by a forecasting method must be weighed against the cost of the
method. But the results that can be achieved by a forecasting method are difficult to
estimate before the cost of making the forecast has been expended. Hence the choice of
method must be done on a priori grounds.
 The use to which the forecast can be made should be well understood. In fact, it is not
a question of results achievable but that of results achieved by a forecasting method.
For this, the persons making the decisions must fully understand the forecasting
methods, their assumptions and probabilities.
 It is quite easy to judge the existing trend. But for a good forecast it is necessary that
it should also predict deviations and turning points so that the forecasts are more
effective.
 There is a time gap between the occurrence of an event and its forecast-Known as the
‘lead’ time. Longer the lead the forecast has before the event, the greater will be its
usefulness. One may even sacrifice some accuracy for gaining a lead rather than
sacrificing a lead for accuracy.

25.  To forecast the demand for new products, we can use either of the following four
methods:
 Survey of buyer’s intensions or consumer survey
 Test marketing
 Life cycle segmentation analysis
 Bounding curving method
 Forecasting the demand for new products is always a challenge for the manager.
As for the existing products the past trend of sales is already known. But for new
products no such information is available. Hence, there is an element of risk in
forecasting the demand for such products. Here, the sound judgement and
calculative decision style

26.  Consumer survey: In this method, consumers are contacted personally to disclose their
future purchase plans. This may be attempted with the help of either a complete
survey of all consumers called as complete enumeration, or by selecting a few
consuming units out of the relevant population called as sample survey. In case the
commodity under consideration is an intermediate product, then the industries using
it as an end-product are surveyed known as end-use method.
 Test marketing: This method is a variation of the sample survey method. It involves
selecting a test area which can be regarded as a truly representative portion of the
total market. The product must then be launched in the test area in a manner
identical to that which is intended to be used if and when the product is launched in
the broad national market. Package design, sales force, TV and press support, price
and so on, must be selected with this consideration in mind. If the product is
successful in the test area, a forecast can then be made that similar levels of success
will be achieved in the total market. Despite the fact that this method has the
advantages of a real life experiment. It has many disadvantages too, such as:
 It is exceptionally costly in terms of both time and money.
 The test must be continued for a long period in order to allow the consumer repurchase cycle
to occur, else false predictions about the success of the product would be made.
 It is difficult to select a test market which is representative of the total market.
 Rival producers may immediately imitate the product in the test market and launch it in the
national market.

27.  Life cycle segmentation analysis: Each product has a life cycle consisting of
introduction, growth, maturity, saturation and decline. Since business tactics differ at
each stage of the product life cycle, we would want to know when the product will be at
any one of these stages. But since the total market also has its segments, life cycle for
the same product may be proceeding at different rates in different market segments.
Timing and the type of tactics will, therefore, differ according to the segment
concerned. Conceptually, the five stages in the product life cycle and the relevant
elements for their marketing mix are as follows:
 Introduction: Quality has the greatest marketing impact, then advertising; but price and
service has the least impact.
 Growth: Early adopters have now already purchased the good; buyer resistance is now being
met; advertising is the most effective weapon and then the quality.
 Maturity: Most price insensitive buyers have now bought; rivals have entered the market; so
price elasticity has become very much higher. So price is most important, followed by
advertising, quality and service.
 Saturation: Price is no longer important because it has already become low; product
differentiation in quality, packaging or advertising become important.
 Decline: The problem now is to find new product uses and advertise them; quality and service
will have some impact, but price very little impact.
 Bounding curves method: Bounding curves show the outermost limits of change in the
market share which have occurred for existing brands. According to this method,
taking the market share data of all the exiting brands, the firm will forecast the
demand for its new product.