Demand Forecasting Objectives

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UNIT IV

DEMAND FORECASTING

By

Carol Peters Prabhu

I BBM

Mahesh College of Management


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What is Demand Forecasting???

A forecast is a prediction or an estimation of a

future situation.

Demand forecasting means an estimation of thelevel of demand that might be realized in the future

under given circumstances.

It is an objective assessment of the future courseof demand.

It minimizes the uncertainties of the unknown

future.


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Objectives of Demand Forecasting

A study of the objectives of demandforecasting could be undertaken under

two heads:

1. Objectives of short-run forecastingand

2. Objectives of long- run forecasting.


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Objectives of short run forecasting:

1. To undertake Production Planning:

Necessary for the firm to have effective and efficient

production planning.

To avoid over production or under production.

2. To have Inventory Planning:

necessary to evolve suitable inventory policy.

necessary to control inventory by determining the futureresource requirements.

better inventory management.


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3. To evolve Pricing Policy:

An appropriate price policy is important to ensure

stability in the price level.

4. To estimate short run financial requirements:to estimate the short-term financial requirements of

the firm.

the firm can make necessary arrangements for raising

financial resources.


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5. To set sales target:possible to evolve a suitable sales strategy.

This will help the firm to fix incentives to the sales

personnel

realistic sales targets can be fixed for salesman on thebasis of short-term demand forecasting.


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6. To estimate short run manpower requirements:

to assess the man-power requirements.

The objective here is to avoid either surplus or shortageof man power.

7. To formulate advertisement policy:

necessary for a firm to evolve an effective andappropriate advertising and promotion policy.

the firm can fix its advertisement outlay.


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Objectives of long run demand forecasting

1. To estimate long run financial requirements: It can plan the

sources of long-term finance and mobilize these resources

accordingly.

2. To estimate long run manpower requirements:

to evolve an appropriate man power planning.

training and personnel development take a long time tocomplete.


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3. To determine the productive capacity:With the help of long-run demand forecasting it would

be possible for the firm to determine its productioncapacity.

It can take decisions relating t o expansion of the size of

its plant.

It can also plan a new unit, if needed.


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Evolutionary pproach

In this approach, the demand for the new product is projected as an outgrowth and

evolution of an existing product. For example, when the demand for LED and LCD

television sets in the demand for older versions of Television sets is off.

But, this approach is useful only when the new product is very close to the oldproduct.

Forecasting Demand for New Products

Joel Dean has suggested the following approaches to forecast demand for new

products:


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Substitute Approach This approach considers the new product as a substitute tothe old product. Since most of the new products are substitutes to old products,

demand for these products will have to be examined on a scientific basis.

Growth Curve Approach The demand for new product can be estimated on the

basis of the pattern of growth of the old products. For example, by analyzing the

growth curves of all cars, an empirical law of market development applicable to a new

brand of car may be formulated.


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Opinion Polling Approach

The approach consists of direct inquiry of the finalbuyers, then blow up the sample to full scale. This is widely used approach.

Sales Experience Approach In this approach, the new product is offered for

sales in a sample and there in the light of this experience, demand is estimated for a

fully developed market. Here what, is important is the selection of the sample

market.


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Vicarious Approach

This approach seeks to study the reaction of the

consumers indirectly. Specialized dealers are contracted because they know the

pulse of the customers.


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Plausibility

The method chosen to forecast demand must be such that the executives who use it are

able to understand it. In addition, they must be willing to have confidence in the

techniques used.

Simplicity

The method chosen to forecast demand should be simple enough for everyone to

understand and interpret. Use of sophisticated mathematical and econometric models,though may be useful, tend to make things too complicated.

Criteria of a Good Forecasting Method


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Economy

Economy in the method of forecasting relates to costs which will have to be

incurred on undertaking forecasting. The method chosen should be economical

in the sense that the costs incurred should be minimum and should not exceed

the benefit. Of course, as far as possible, accuracy should be maintained.

Accuracy

The method chosen to forecast demand should be closer to reality. It becomes

necessary to check the accuracy of past forecasts against present performance

and of present forecasts against future performance. It is desirable to have

comparisons of the model with what actually happens in reality.


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Availability Availability of relevant and adequate information and data is

another important criteria influencing effective demand forecasting. Thetechniques used should be such as to yield quick and desired results. Delays may

not be appreciated by the management.

Maintenance of Timeliness Due care should be exercised to maintain timelinessin forecasting. The forecast should be up-to-date as far as possible. Delay in

forecasting demand may make the forecasts ineffective and meaningless.


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Flexibility Business plans must consider the element of uncertainty

that is attached to the future. Therefore, it must provide a degree offlexibility in operation. This point has been stressed by Joel Dean.

Consistency The forecaster has to deal with various elements which

are independent. There should be scope for consistency. For example,the forecast level of Government expenditure must be consistent with

the total forecasts.


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Thank You

Documents

Demand Forecasting Objectives