Introduction and Methods of Forecasting

The success of many companies depends on how well they are forecasting their demand. It is one of the important tools for any organization. Estimating the need for future during the present times is called the demand forecasting.

Introduction to Forecasting

Forecasting is done to understand the demand that may arise in the future based on the present sales. That is why forecasting is often referred to as demand forecasting. For predicting the future, past demands along with the present demand are considered.

Also, this forecasting is done scientifically. It is done on the events. Thus, facts related to it are considered. Therefore an estimate can be made to forecast future demand. This is done by gathering knowledge about various aspects of the market. Thus, this is the concept that we use for forecasting.

In the current situation, there is a need to take the right decisions. Because the market is very competitive. Thus, it becomes important to make the right planning for business events. Also, this decision taken by the managers is based on its accuracy. Thus, demand becomes important to achieve business objectives.

Methods of Forecasting

There is no one such method that can successfully predict the demand of a company. So, some of the methods that can be useful for forecasting are:

Collective Opinion Method

This method is generally used by the salesman of a company. They use it successfully predict the sales of a company in the region. Thus, for predicting future sales, individual estimates are calculated. Then based on several factors like product designs, selling price, ad campaigns, etc these demands are reviewed.

The main principle in this method is that salesman are the closest to the customers. Thus, they can easily find out the reason for the changing preferences of a customer.

Statistical Method

This is one of the important methods used for forecasting. Also, this method is reliable, scientific, and free from any kind of bias. There is a major statistical method used. They are regression analysis and trend projection method.

In regression analysis, a relationship is established between the independent and dependent variables. For forecasting, the dependent variable is the quantity demanded. While independent variables are the price of goods, income, etc. The relationship here is assumed to be linear.

In trend projection method, the organization uses the past data. Thus, in this method, the data that has been accumulated over the past sales are used. It is arranged in a chronological order to obtain a time series. Thus, a past trend is depicted and based on that, the future trends are predicted. Also, it is assumed that the past trend will continue in the future.

Survey of Buyer’s Choice

When the demand is to be forecasted for a short period of one year than the best method is to ask the customer what they are preferring to buy. Thus, every potential customer under this method is directly interviewed. There are three ways to the survey in this method.

First, you have to start with a complete enumeration method. Here all the potential customers are asked about their future buying plans. Then it is followed by a sample survey method. In this, a sample of buyers is selected scientifically. Only these people are interviewed.

The last one is the end use method. This method is specifically used for forecasting the demand for various inputs.

Practice Questions on Forecasting

Q. Which one of the following methods are used by the salesperson to forecast the demand?

A. Survey of buyer’s choice

B. Regression analysis

C. Trend projection method

D. Collective opinion method

Answer: D. Collective opinion method