Demand Forecasting – Meaning, Importance, Methods And Objectives

Forecasting of demand has gained much importance in almost each and every business activity. So, most of the business firms put their best efforts to make an accurate demand forecasting. Demand forecasting refers to the prediction of future level of demand for a product or a service on the basis of the trends of its demand in the past. As demand is directly related to sales, so, demand forecasting is also known as ‘sales forecasting.

Importance Of Demand Forecasting

In the present time, the importance of demand forecasting has increased a lot. It is due to its utility. The utility of ‘Demand Forecasting’ is clear from the following points:

(1) Useful in Planning : In the modern times, most of the firms prepare their business plans on the basis of forecasts of demand for their  products. In this way, it proves to be very helpful in decision-making and formulation of policies.

(2) Mass Production : Demand forecasting provides a prior idea about the fact that which goods are going to be in much demand in future. It  leads to a mass production of such goods. Mass production is useful for both the producers and the customers. On one hand, producers enjoy economies of large scale production and on the other, customers get goods at reasonable prices.

(3) Research and Development: Demand forecasting is also useful in the sense that it makes the business firms to undertake research and development activities. Such activities are undertaken on the basis of predictions of demand in future. As a result of research and development activities, new products are made available in the market.

(4) Optimal Utilization of Resources: If production is done in a haphazard way and under an environment of uncertainty, then a number of resources are wasted but this type of wastage is minimised due to demand forecasting because the resources are employed in the production of such goods only which are going to be demanded in the market. Thus, demand forecasting is helpful in optimal utilization of resources.

(5) Development of Economy: The development of economy as a whole may also be viewed as an outcome of demand forecasting. In fact, demand forecasting creates an environment of certainty in the business world which attracts more investments. As a result of increase in investment, the economy develops at a faster rate.

(6) Price Stability : The major cause of fluctuations in prices is under or over supply of goods. This situation takes place due to imperfect knowledge of demand conditions but as a result of demand forecasting, demand for various goods can be estimated more accurately and the supply can be made accordingly. In this way, a stability in the price level may also be maintained.

(7) Increase in Knowledge : Demand forecasting is also helpful in increasing the knowledge of the marketing managers. With the help of demand forecasting, they can know about the various determinants of market demand.  Thus, by influencing these determinants, they may also be able to influence the market demand.

Methods Of Demand Forecasting

(I) Consumer’s Survey Method : This is such a method of demand forecasting under which personal interviews, surveys through telephone or posts, views of trained as well as experienced buyers etc are recorded. A questionnaire is prepared for a proper analysis of the results of survey. Some imaginary questions are asked from the consumers and sometimes, their answers are also imaginary which do not reflect right views. Its main reason is that the buyers try to please the researcher and change their views at the time of actual purchase.

(ii) Regression : Regression is very important tool of estimating the value of one variable on the basis of given value of other related variable. Thus, after establishing a relationship between the demand for a product and its price, the demand for the product can be easily forecasted if the price is given.

(iii) Time-Series Analysis: This method of demand forecasting is of much significance for the firms which are functioning in the market for a considerable period of time. On the basis of the data of this period, the firm can prepare a time-series of the demand for its product in various years. The analysis of this time-series is very helpful in demand forecasting.

(iv) Method of Least Squares : This is a mathematical method of forecasting the demand. This method assumes that the rate of change in variable remains constant over years. On the basis of this assumption, a trend is established. This trend functions as a base to forecast the future demand for the product.

Objectives Of Demand Forecasting

(1) Short Term Objectives: The short term objectives of forecasting are for a period from 3 months to 1 year. Which period is to be selected from it, it depends on the nature of business. Generally, a period of one year is selected. In short term, a firm makes demand forecasting for meeting the following objectives:

(i) The firm determines an appropriate price policy in order to maintain continuous demand for its product.

(ii) The firm makes forecasting in order to meet its financial requirements.

(iii) The firm makes a production schedule by making short term forecasts for avoiding the problem of over production.

(2) Long-Term Objectives: The objectives of long term forecasting are for a period from 1 year to 20 years. These objectives depend upon the nature of goods and industry. The concept of demand forecasting is more appropriate for long term as compared to short-term because large fluctuations take place in the future. The long-term forecasts are made by a firm for the following objectives:

(i) A prior notice is required for the planning of long-term financial requirements. So, the firms make long-term sales forecasts for meeting these requirements.

(ii) The efficient as well as trained employees and trade authorities are needed for a change in production technique in the long-term. So, long term planning are made for human resource planning.