Pgdm - Demand Forecasting

8/2/2019 Pgdm - Demand Forecasting

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Demand forecasting occupies a very important place inbusiness planning.

If any firm collects information for understanding/knowing thecurrent demand is known as demand estimation (within a year).

Whereas, if the firm is interested to about the future demand isknown as demand forecasting (above one year/next five years/tenyears/more).

Two types of Demand Forecasting exist :Passive - prediction without positive action.Active – prediction with positive action.



Importance/Purpose of Demand

Forecasting (DF)Demand of the product is an important activity of the firm to avoid overproduction/underproduction.

Short Term:

Helps to formulate appropriate production policy.To reduce the cost of raw materials and control inventories.To determined appropriate correct price policy and fix sales targets.To arrange for short-term financial requirements.

Long Term:

Plan for a new unit/expansion of existing unit.Plan for product diversification (changes).To plan for long term financial requirements-equity capital – bonds – debentures, etc.To plan for manpower requirements .



Factors considered for DF:Time period.Level of DF: macro, industry / firm.

Nature of DF.Nature of Product.Nature of competition.Selection of appropriate method.Interpretation of the results obtained.



Methods of DF:Direct methods :Consumer survey method.

Experts opinion /collective opinion method.Controlled Market Experiments method.Indirect methods :

Trend projection method.Test marketing method.Economic Indicator method.



Direct methods

Consumer survey method (CSM) :

Survey of buyer’s intentions-done throughpersonal interviews, mail/postal survey,telephonic interviews.Questionnaires – quality, design, packing, etc.Done through trained, reliable and experienced

investigators.Simple and easy – can explain the product andnote down the opinion directly.



Sub-types of consumer survey are (CSM) :Complete enumeration survey : Aggregate of potential buyers-probabledemand.Adv: All can be contacted-accuracy-useful for new products.Disadv: Expensive and time consuming when consumers are spreadover large area.

Sample survey: Popular in DF. Few customers selected randomly-interviewed – average of demand is calculated. Multiply the averagewith total consumers for aggregate demand.Adv: less costly and less time consuming- accuracy depends uponinvestigators and experts.

Disadv: Very often inaccuracy results- developing countries-noexperts.



Limitations of CSM :

Expensive and time consuming.

No personal meeting-no explanation- thoughcostless in mail/postal-no correct information.No telephonic interview in UDCs/DCs.

Not possible long questions.Only in producers goods, not in consumer.Goods .



Experts opinion /collective

opinion method (EOM)DF is based on expert opinion.Certain categories –knowledge of the market and thepossible consumers’ response of the market – contacted.

Example: Sales man, Market Consultants, Professionalexperts, marketing managers, etc.Give information on changing trends-reactions tochanges, prices, quality, etc.

Data collected, compiled, tabulated, computerized andDF trends are drawn for the product-Use QT- accuracy.



Adv of EOM :simple- less costly-forecast the current demand-

short run. Useful when introducing new product-knowledge of experts will help.Disadv of EOM :Biased-no knowledge-incorrect information.Cannot predict about the changes of otherfactors of demand.



Controlled Experiments Method

(CEM):This includes study of only particular factor of demand.One factor-experiment is conducted-other factors remainingconstant- consumer behavior.Example: price reduction-sales at different prices in different

markets-response of buyers/ Advertisement campaign and sales indifferent markets – Sales promotion schemes and sales in differentmarkets, etc.Adv of CEM : Study of different market conduct.Limitations of CEM : Very expensive- time consuming- extendedover a period of time-compelled to observe other impact (quality

change/other variable)-Risky-needs homogeneous market/areas (common background, tast,preferences, etc)Unpopular in UDCs, Less followed in DCs.



Indirect methodsThis is also called as Statistical Methods.Trend Projection Method (TPM):Past data/information is used to project the future sales.Need for gathering past information-use of statisticaldata-regular intervals (different points of time)- timeseries data.For sales, production, imports, exports, etc –at least 5years.New firms-similar data from other established firms in thesame industry-project its sales.



Adv of TPM : simple and easy- less expensive.

Limitations of TPM: Only predict the demand- not theexact quantity- based on market experts opinion – salesforecast may be false.Based on the assumption- past will be followed in future.Will consumer demand the same product?

Not possible for new product.TPM is used only in well established companies whohave a long record for remaining in the business.



Test Market Method (TMM):Useful for DF that is demand potential of new product.

Introduced in certain limited area/market/city –responses andreactions of the consumers.

Positive and encouraging-launch in full scale.

Adv of TMM : Advance response of the product in the market – helpin quality changes-knowledge of consumers’ taste and preference-useful for new products.Limitations of TMM : Expensive and time consuming-no immediateresponse-no guarantee that the same will prevail in all the markets-rival firms will not allow to do test market or establish the newproduct.



Economic Indicator Method (EIM):An economic indicator is selected and thenDemand is forecasted.Example:Percentage of old People/percentage of smallbabies/youths/females/in total population.Adv of EIM: Most reliable of DF.

Limitations of EIM: Difficult for new products-correct economic indicator is necessary.



CRITERIA for Good DF:Accuracy (correctness).Simplicity (simple).

Economy (beneficial).Effective (meaningful results).Durability/Flexibility (Permit changes).Maintenance of timeliness.





Steps in Demand Estimation



Different forecasts(different products)

For New Products.

For Non-durable products.For Consumer Durables.



By

Dr. Thirumagal Pillai

Documents

Pgdm - Demand Forecasting