Demand Forecasting

Demand forecasting is a combination of two words; the first one is Demand and another forecasting.
Demand means outside requirements of a product or service. In general, forecasting means making
estimation in the present for a future occurring event.
It is a technique for estimation of probable demand for a product or services in the future. It is based
on the analysis of past demand for that product or service in the present market condition. Demand
forecasting should be done on a scientific basis and facts and events related to forecasting should be
considered.

Therefore, in simple words, we can say that after gathering information about various aspect of
the market and demand based on the past, an attempt may be made to estimate future demand. This
concept is called forecasting of demand.

For example, suppose we sold 200, 250, 300 units of product X in the month of January, February,
and March respectively. Now we can say that there will be a demand for 250 units approx. of
product X in the month of April, if the market condition remains the same.

Demand forecasting reduces risk related to business activities and helps it to take efficient decisions.
For firms having production at the mass level, the importance of forecasting had increased more. A
good forecasting helps a firm in better planning related to business goals.

There is a huge role of forecasting in functional areas of accounting. Good forecast helps in
appropriate production planning, process selection, capacity planning, facility layout planning, and
inventory management, etc.

Demand forecasting provides reasonable data for the organization’s capital investment and

expansion decision. It also provides a way for the formulation of suitable pricing and advertisement
strategies.

Following is the significance of Demand Forecasting:

 Fulfilling objectives of the business

 Preparing the budget
 Taking management decision
 Evaluating performance etc.
Moreover, forecasting is not completely full of proof and correct. It thus helps in evaluating various
factors which affect demand and enables management staff to know about various forces relevant to
the study of demand behavior.
 The Scope of Demand Forecasting
The scope of demand forecasting depends upon the operated area of the firm, present as well as
what is proposed in the future. Forecasting can be at an international level if the area of operation is
international. If the firm supplies its products and services in the local market then forecasting will
be at local level.

The scope should be decided considering the time and cost involved in relation to the benefit of the
information acquired through the study of demand. Cost of forecasting and benefit flows from such
forecasting should be in a balanced manner.

Types of Forecasting
There are two types of forecasting:

 Based on Economy
 Based on the time period
1. Based on Economy
There are three types of forecasting based on the economy:

i. Macro-level forecasting: It deals with the general economic environment relating to the

economy as measured by the Index of Industrial Production(IIP), national income and general
level of employment, etc.
ii. Industry level forecasting: Industry level forecasting deals with the demand for the
industry’s products as a whole. For example demand for cement in India, demand for clothes
in India, etc.
iii. Firm-level forecasting: It means forecasting the demand for a particular firm’s product. For
example, demand for Birla cement, demand for Raymond clothes, etc.
2. Based on the Time Period
Forecasting based on time may be short-term forecasting and long-term forecasting

i. Short-term forecasting:  It covers a short period of time, depending upon the nature of the
industry. It is done generally for six months or less than one year. Short-term forecasting is
generally useful in tactical decisions.
ii. Long-term forecasting casting: Long-term forecasts are for a longer period of time say, two
to five years or more. It gives information for major strategic decisions of the firm. For
example, expansion of plant capacity, opening a new unit of business, etc.
Techniques & Methods of Demand Forecasting
Different organisations rely on different techniques to forecast demand for their products or
services for a future time period depending on their requirements and budget.
 Methods of demand forecasting are broadly categorised into two types. Let us discuss these
techniques & methods of demand forecasting in detail:
1. Qualitative Techniques
o Survey Methods

2. Quantitative Techniques
o Time Series Analysis
o Smoothing Techniques
o Barometric Methods
o Econometric Methods
Methods of Demand Forecasting
Qualitative Techniques
Qualitative techniques rely on collecting data on the buying behavior of consumers from
experts or through conducting surveys in order to forecast demand. These techniques are
generally used to make short term forecasts of demand.
Qualitative techniques are especially useful in situations when historical data is not available; for
example, introduction of a new product or service. These techniques are based on experience,
judgment, intuition, conjecture, etc.
Survey Methods
Survey methods are the most commonly used methods of forecasting demand in the short run.
This method relies on the future purchase plans of consumers and their intentions to anticipate
demand.
Thus, in this method, an organization conducts surveys with consumers to determine the demand
for their existing products and services and anticipate the future demand accordingly. The two
types of survey methods are explained as follows:
 Complete enumeration survey: This method is also referred to as the census method of
demand forecasting. In this method, almost all potential users of the product are contacted and
surveyed about their purchasing plans.

Based on these surveys, demand forecasts are made. The aggregate demand forecasts are
attained by totaling the probable demands of all individual consumers in the market.

 Sample survey: In this method, only a few potential consumers (called sample) are selected
from the market and surveyed. In this method, the average demand is calculated based on the
information gathered from the sample.
Opinion poll
Opinion poll methods involve taking the opinion of those who possess knowledge of market
trends, such as sales representatives, marketing experts, and consultants.
The most commonly used opinion polls methods are explained as follows:
 Expert opinion method: In this method, sales representatives of different organizations get in
touch with consumers in specific areas. They gather information related to consumers’ buying
behavior, their reactions and responses to market changes, their opinion about new products,
 etc.

 Delphi method: In this method, market experts are provided with the estimates and
assumptions of forecasts made by other experts in the industry. Experts may reconsider and
revise their own estimates and assumptions based on the information provided by other experts.

 Market studies and experiments: This method is also referred to as market experiment

method. In this method, organisations initially select certain aspects of a market such as
population, income levels, cultural and social background, occupational distribution, and
consumers’ tastes and preferences.

Among all these aspects, one aspect is selected and its effect on demand is determined while
keeping all other aspects constant.

Quantitative Techniques
Quantitative techniques for demand forecasting usually make use of statistical tools. In these
techniques, demand is forecasted based on historical data.
These methods are generally used to make long-term forecasts of demand. Unlike survey
methods, statistical methods are cost effective and reliable as the element of subjectivity is
minimum in these methods. Let us discuss different types of quantitative methods:
Time Series Analysis
Time series analysis or trend projection method is one of the most popular methods used by
organizations for the prediction of demand in the long run. The term time series refers to a
sequential order of values of a variable (called trend) at equal time intervals.
Using trends, an organization can predict the demand for its products and services for the
projected time. There are four main components of time series analysis that an organization must
take into consideration while forecasting the demand for its products and services. These
components are:
 Trend component: The trend component in time series analysis accounts for the gradual shift
in the time series to a relatively higher or lower value over a long period of time.

 Cyclical component: The cyclical component in time series analysis accounts for the regular
pattern of sequences of values above and below the trend line lasting more than one year.

 Seasonal component: The seasonal component in time series analysis accounts for regular
patterns of variability within certain time periods, such as a year.

 Irregular component: The irregular component in time series analysis accounts for a short
term, unanticipated and non-recurring factors that affect the values of the time series.

Smoothing Techniques
In cases where the time series lacks significant trends, smoothing techniques can be used for
demand forecasting. Smoothing techniques are used to eliminate a random variation from the
historical demand.
This helps in identifying demand patterns and demand levels that can be used to estimate future
demand. The most common methods used in smoothing techniques of demand forecasting are
simple moving average method and weighted moving average method.