DEMAND FORECASTING

Meaning of Demand Forecasting...

• Forecasting is the basis of corporate long-term planning.

• “Forecast” means to predict future. Demand Forecasting refers to the prediction or estimation of future situation under given constraints.

Definition…

According to Prof. Norman Gaitheer and Greg Frazier, “Forecasting is estimating the future demand for products and services and the resources necessary to produce these outputs”.

Objectives of Demand Forecasting…

A. Short term Objectives: 1. Regular availability of labour2. Price policy formulation3. Proper control of sales4. Arrangement of finance5. Regular supply of raw material6. Formulation of production policyB. Long term Objectives:7. Labour requirements8. Arrangement of finance9. To decide about expansion

Types of Demand Forecasting…1. Short term Demand Forecasting : It is concerned

with the short time period and is required for current production scheduling.

2. Long term Demand Forecasting : It is needed for capacity expansion i.e. growth of the firm, recruitment, and diversification policies.

3. Medium term Demand Forecasting : Its need is felt by a firm when the industry to which

the firm belongs, is subjected to the trade cycle of a medium term.

DETERMINANTS…

1. Durable consumer goods :A. Change in size and characteristics of populationB. Saturation limit of the marketC. Existing stock of the goodsD. Tastes and scales of preference of consumersE. Income level of consumers2. Non-durable consumer goods :F. Disposable incomeG. PriceH. Size and characteristics of population3. Capital(producer’s) goods

METHODS ORTECHNIQUESOF DEMAND FORECASTING

This method uses the most direct approach to demand forecasting by directly asking the consumers about their future consumption plan.

In this method, the burden of forecasting goes to the buyers.

This method is very simple and free from statistical burden.

CONSUMERS’S SURVEY METHOD

• It is of three types 1. Complete Enumeration Survey:- In the complete

enumeration survey, the probable demand of all the consumer s for the forecast period are summed up to have the sales forecast for the forecast period

2. Survey :The probable demand expressed by each selected unit is summed up to get the total demand of sample units in the forecast period

3. End Use Method :- the sale of the product under consideration is projected on the basis of demand survey of the industries using this

product as an intermediated product.

The opinion poll methods aims at collecting opinions of those who are supposed to process knowledge of all market

Eg:- Sales Representative, Sale Executives, Professional Marketing Experts & Consultants

OPINION POLL METHOD

The opinion method consists of • Expert opinion method : In this method expert’s opinion is sought on the future demand for product

• Delphi method : It can make more realistic forecast. A panel of experts are asked sequential question and from responses new questionnaire is produced.

• Market studies & experiments :

• In the theory of demand forecasting the statistical techniques have proved to be useful.

• Statistical techniques are used to maintain objectivity as well as precision in demand forecasting

• Its explained which utilize historical & cross section data for estimating long term

demand.

STATISTICAL METHODS

Its considered to be superior techniques1. The element of subjectivity is minimum2. Method of estimation is scientific3. Estimation is based on the theoretical

relationship between the dependent & independent variables

4. Estimation are relatively more reliable5. Estimation involves smaller cost.

• Its consists of following techniques1. Trend projection method :-Graphical method-Fitting trend equation least square method-Box Jenkins method2. Barometric method :-Leading series-Coincidental series-Lagging series3. Econometric method :-Regression method-Simultaneous equation method

Demand forecasting of

new product

Life cycle segmentation analysis : Each product has a life cycle of Introduction, growth, maturity, saturation & decline. Since the business tactics differ at each stage, we should know when the product will be at one stage of cycle. But since total market also has its segments, life cycle for same products may proceed at different rates in different market segments. There are 5 stages in product life cycle :- a) Introduction b) Growth c) Maturity d) Saturation e) Decline

Porter’s five force model

1) Risk of entry by potential competitors : Potential competitors are those firms which have the capacity to compete the business of existing firms. Hence, established firms try their best to discourage potential competitions because their entry into market reduces market share of established firms by competing for price cutting or benefits at same price. Risk of entry of potential competitors represents a threat when it is high. Hence, company creates some barriers like :- a) Brand Loyalty b) Cost Advantage c) Economies of scale d) Policies of the Government e) Developed channels of distribution

2) Rivalry among established companies : The companies engaged in producing & selling the same product are competing with each other. They enjoy different roles as leader, challenger, niche-players. If competitive force is strong, it is a threat. If it weak, it provides an opportunity for the established company to raise product & earn profits. EG : PEPSI & COCA-COLA.Rivalry of firms depend on 3 factors :- a) Industry Competitive Structure b) Demand Conditions c) Height of exit Barriers

3) Bargaining Power of Buyers : Buyers are viewed as competitive threat when they force down prices or ask for superior quality & better after sale services. According to Porter, buyers are more powerful in following situation :- a) When buyers are composed of small firms & their number is high and buyers are few in numbers & large in size. b) When buyers purchase goods in bulk. c) When suppliers are dependent on buyers for large orders. d) When buyers purchase raw material from several companies. e) When buyer can supply his own needs.

4) Bargaining power of suppliers : When the suppliers are able to force up the prices & the firm has to reduce the quality supplied, it is more a threat. The suppliers are more powerful in following situation :- a) When the supplier’s product have a few substitutes. b) When firms industry is not as substantial & significant. c) When supplier’s product are differentiated widely & company is dependent upon its suppliers. d) When suppliers can integrate vertically forward into industry & can do the business of buyer’s firm directly. e) When buyer is not in a position to integrate vertically backward & fails to produce raw materials at its own.

5) Threats of close substitute : Substitute products are those products that serve similar consumer needs. There are many good substitutes developed by modern technology. The producer of juice from fruits & sold in bottles has the substitute of cold drinks. Beverages like tea can be substituted by coffee. Existence of close substitutes represents strong competitive threat that limits price fixation power of the firm. The competitive weapons used are :- a) Competing by Quality b) Competing by Cost c) Competing by Flexibility d) Competing by speed e) Competing by Location f) Competing by Technology g) Competing on HRM h) Vertical Integration I) Inventory system as Competitive Tool