Demand forecasting

METHODS OF DEMAND FORECASTING

Mr. Nithin Kumar SRESEARCH SCHOLARTHE DEPARTMENT OF POST GRAUATE STUDIES AND RESEARCH IN ECONOMICSTUMKUR UNIVERSITY TUMKURKARNATAKA INDIA

METHODS OF DEMAND FORECASTING

• Demand forecasting is a difficult exercise.• There are various methods of demand

forecasting differing in terms of their accuracy and sophistication.

• The methods of demand forecasting may be broadly divided into two categories:

1. Survey Method

2. Statistical Method

Demand Forecasting

Survey method

Collective opinion

method

Delphi Method

Consumers’ interview method

S am p le su rv ey m eth o d

C o n su m ers’ en d -u se m eth o d

Test Marketing

Statistical method

Trend projection

method

Correlation and regression

method

Barometric technique

Survey Method

• The following are the important survey methods used for forecasting demand:

Collective opinion method Delphi method Consumers interview method Test marketing

Collective Opinion Method

• This method is also known as “Sales Force Opinion” or “Sales Force Polling” or “Reaction Survey” method.

• Under this method the responsibility for estimating the expected sales is placed on salesmen.

• Salesmen being closest to the consumers have the knowledge of the requirements of the consumers, their reactions to the product.

• These estimates of individual salesmen are consolidated to find out the total estimated sales.

Advantages of Collective Opinion Method

The method is simple and easy to be used.It involves minimum of statistical work and

hence, does not require any technical expertise.

It does not cost much.It is realistic because it is based on personal

and first hand knowledge of salesmen.It is useful in forecasting the sales of new

products.

Disadvantages of Collective Opinion Method

Being Subjective, the forecast is likely to be influenced by the personal bias of the salesmen.

Salesmen may understate the forecast if their sales quotas are to be based on it.

Its usefulness is limited to the short period only. The salesmen may not be aware of wider

economic changes which affect demand.

Delphi Method

• This technique was developed by Olaf Helmer, Dalkey and Gordon in the late 1940s.

• Under this method a panel of internal and external experts are selected and they kept physically away from each other.

• There is a coordinator who acts as an intermediary among the panellists.

CoordinatorInternal Experts External Experts

• Coordinator prepares a questionnaire and sends it to the panellists. They express their views anonymously.

• Each expert will be given an opportunity to react the reasons advanced by others.

• The process will be repeated until some sort of unanimity is among all experts or issue causing the disagreement are clearly defined.

• It is more popular in forecasting non-economic rather than economic variables.

Advantages of Delphi Method

1. It does not take much time.

2. The cost is low.

3. The method is useful for new products

Disadvantages of Delphi Method

• The opinions are subjective• Good and Bad estimates are given equal

weightage

Consumers’ interview method

• It is the most direct method of estimating the demand for the short period.

• It is also known as “Survey of Buyers” or “opinion Survey” method.

• In this method the consumers are contacted personally to know about their plans and preferences regarding the purchase of he product.

• Consumer survey method has three different types:

Consumer survey method

Complete enumeration

method

Sample survey method

Consumers’ end-use method

Complete enumeration method

• Under this method all the consumers of the product are interviewed and on the basis of the information collected, the demand forecast is made.

Sample survey method

• When the number of consumers is large, this method is used.

• In this method few selected consumers are interviewed.

• The selection of the consumer is done through random, stratified sampling technique.

• This method is based on the assumption that the selected sample represent the population.

End – use method

• The consumers end use method is used to obtain use wise or sector – wise demand forecasts.

• In this method it is possible to forecast demand separately for different sectors.

Advantages of Consumer survey method

This method is free from any personal bias of the forecaster.

The forecast is based on the first hand information from the consumers.

The sample survey is less costly and less time consuming than complete enumeration, but equally reliable if the sample is representative in character.

Disadvantages of Consumer survey method

The Complete enumeration method is very costly It is time consuming the manpower required for the survey is also large The method cannot be used if the number of consumers

is very large and scattered The method is not reliable because, In the case of household consumers, there is no

regularity of intentions Faced with multiple choices or alternatives, they cannot

predict their own choices.

Test marketing

• Test marketing is used to forecast the demand or sales for the new product

• In this method a test is selected. It may be a region, city or state which is the representative of the total market

• After the selection of test area product will be launched in the area

• If the product is successful in the test area, the forecast will be that similar levels of success will be achieved in the total market.

Advantages of Test marketing

• It is a real life experiment• It is possible to know the reactions of

consumers

Disadvantages of test marketing

• It is costly• It is time consuming• There is the danger of making of false forecasts

from the initial response of the consumers• It is difficult to select the test area which is

representative of the whole market• It is possible for rivals to immediately imitate the

product and take advantage of test marketing without incurring the cost of this exercise.

Statistical Methods• Most of the statistical methods are highly

complex and some of them require considerable knowledge of statistics and mathematics.

• Some of the important statistical techniques are as follows:1. Trend projection method

2. Correlation and regression method

3. Barometric technique

Trend Projection Method

• Data of a firm which has been in business for a long period of time are arranged chronologically which is called as the Time Series.

• Time series relating to sales represents the past pattern of demand for a particular product

• On the basis of such data future trend of sales or demand may be projected.

• The method rests on the assumption that the past trend will continue in the future also.

Advantages of Trend Projection Method

• It is a simple statistical technique• It is inexpensive• It does not require much time

Disadvantages of Trend Projection Method

• It can be used only if past data of sales are variable

• If there are too many irregular or random fluctuations in the time series data, the forecasting is difficult

Correlation and Regression Method

• This method makes use of statistical and econometric techniques to find out the nature and extent of relationship between variables.

• Under this method the relationship between the sales and other variables is determined on the basis of past data

• If there is only one independent variable in the functional relationship, it is called as the simple correlation

• Multiple correlation refers to the function in which there are several

• A regression equation is used to show the relationship between sales and several independent variables

• The aim of regression and correlation analysis is to separate and measure the relation between variation in sales and the corresponding changes in the main determinates of demand.

Advantages of Correlation and Regression Technique

• The forecast can be made quickly• It is inexpensive

Disadvantages of Correlation and Regression technique

• It is difficult to understand the method• It can be used only in the case of established

product

Barometric technique

• The use of economic indicators is described as the barometric technique

• It is an improvement over the trend projection method

• Barometric technique is based on the assumption that certain events occurring in the present can be used to predict the future.

• There are mainly three types of indicators Leading indicator Coincident indicator Legging indicator

Leading indicator

a present event may indicate a future change in the demand for a product.

Coincident indicator

these indicators coincide with the rise or fall of general economic activity

Legging indicatorsthese indicators move up and down behind other economic activity

• These indicators are not useful for forecasting and they are used to confirm or refute the validity of the leading indicators already used

Advantages of barometric technique

It is simpleThe forecast can be made quickly

Disadvantages of barometric technique

It is difficult to choose a relevant indicator for a particular product

Sometimes, even if an indicator is found out, change in fashions or tastes may render the indicator redundant overtime

Criteria for a good forecasting method

AccuracyPlausibilityEconomyAvailabilityDurabilityFlexibility