Demand forecasting is the art as well as the science of predicting the likely demand for a product or service in the future. This prediction is based on past behavior patterns and the continuing trends in the present. Hence, it is not simply guessing the future demand but is estimating the demand scientifically and objectively. Thus, there are various methods of demand forecasting which we will discuss here.
Methods of Demand Forecasting
There is no easy or simple formula to forecast the demand. Proper judgment along with the scientific formula is needed to correctly predict the future demand for a product or service. Some methods of demand forecasting are discussed below:
1] Survey of Buyer’s Choice
When the demand needs to be forecasted in the short run, say a year, then the most feasible method is to ask the customers directly that what are they intending to buy in the forthcoming time period. Thus, under this method, potential customers are directly interviewed. This survey can be done in any of the following ways:
- Complete Enumeration Method: Under this method, nearly all the potential buyers are asked about their future purchase plans.
- Sample Survey Method: Under this method, a sample of potential buyers are chosen scientifically and only those chosen are interviewed.
- End-use Method: It is especially used for forecasting the demand of the inputs. Under this method, the final users i.e. the consuming industries and other sectors are identified. The desirable norms of consumption of the product are fixed, the targeted output levels are estimated and these norms are applied to forecast the future demand of the inputs.
Hence, it can be said that under this method the burden of demand forecasting is on the buyer. However, the judgments of the buyers are not completely reliable and so the seller should take decisions in the light of his judgment also.
The customer may misjudge their demands and may also change their decisions in the future which in turn may mislead the survey. This method is suitable when goods are supplied in bulk to industries but not in the case of household customers.
2] Collective Opinion Method
Under this method, the salesperson of a firm predicts the estimated future sales in their region. The individual estimates are aggregated to calculate the total estimated future sales. These estimates are reviewed in the light of factors like future changes in the selling price, product designs, changes in competition, advertisement campaigns, the purchasing power of the consumers, employment opportunities, population, etc.
The principle underlying this method is that as the salesmen are closest to the consumers they are more likely to understand the changes in their needs and demands. They can also easily find out the reasons behind the change in their tastes.
Therefore, a firm having good sales personnel can utilize their experience to predict the demands. Hence, this method is also known as Salesforce opinion or Grassroots approach method. However, this method depends on the personal opinions of the sales personnel and is not purely scientific.
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3] Barometric Method
This method is based on the past demands of the product and tries to project the past into the future. The economic indicators are used to predict the future trends of the business. Based on future trends, the demand for the product is forecasted. An index of economic indicators is formed. There are three types of economic indicators, viz. leading indicators, lagging indicators, and coincidental indicators.
The leading indicators are those that move up or down ahead of some other series. The lagging indicators are those that follow a change after some time lag. The coincidental indicators are those that move up and down simultaneously with the level of economic activities.
4] Market Experiment Method
Another one of the methods of demand forecasting is the market experiment method. Under this method, the demand is forecasted by conducting market studies and experiments on consumer behavior under actual but controlled, market conditions.
Certain determinants of demand that can be varied are changed and the experiments are done keeping other factors constant. However, this method is very expensive and time-consuming.
5] Expert Opinion Method
Usually, market experts have explicit knowledge about the factors affecting demand. Their opinion can help in demand forecasting. The Delphi technique, developed by Olaf Helmer is one such method.
Under this method, experts are given a series of carefully designed questionnaires and are asked to forecast the demand. They are also required to give the suitable reasons. The opinions are shared with the experts to arrive at a conclusion. This is a fast and cheap technique.
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6] Statistical Methods
The statistical method is one of the important methods of demand forecasting. Statistical methods are scientific, reliable and free from biases. The major statistical methods used for demand forecasting are:
- Trend Projection Method: This method is useful where the organization has a sufficient amount of accumulated past data of the sales. This date is arranged chronologically to obtain a time series. Thus, the time series depicts the past trend and on the basis of it, the future market trend can be predicted. It is assumed that the past trend will continue in the future. Thus, on the basis of the predicted future trend, the demand for a product or service is forecasted.
- Regression Analysis: This method establishes a relationship between the dependent variable and the independent variables. In our case, the quantity demanded is the dependent variable and income, the price of goods, the price of related goods, the price of substitute goods, etc. are independent variables. The regression equation is derived assuming the relationship to be linear. Regression Equation: Y = a + bX. Where Y is the forecasted demand for a product or service.
Solved Example on Methods of Demand Forecasting
Which of the following are the techniques of the Trend Projection Method of forecasting?
- Barometric method
- Expert Opinion Method
- Market Experiment Method
- Graphical Method and Fitting trend equation.
Ans: The correct option is D. Under the Graphical Method of trend projection, the data of the time series are plotted on a graph. The direction of the curve shows the trend. If the curve is moving upwards it shows an increase in future demand. However, this method is not very reliable.
Fitting trend equation or Least Square Method is based on the assumption that the past trend will continue in the future. This method is a procedure for fitting a line to a set of observed data points mathematically so that the sum of the squared differences between the calculated and observed value is minimized. A trend that best fits the data is found out and demand is forecasted accordingly.