Demand Forecasting: Methods and Benefits

Demand forecasting is an amalgamation of two words; the first one is known as demand, and another one is forecasting. The meaning of demand is the outside requirements of a manufactured product or a useful service. In general aspects, forecasting usually means making an approximation in the present for an event that would be occurring in the future. 

All the companies use these predictions to format their approach to marketing and sales. It contributes hugely towards increasing their profit margins. Here, we are stepping forward to elaborate on demand forecasting, its features and its usefulness. Moreover, we will also see its applications.

(Image will be Uploaded soon)

Definition of Demand Forecasting

Demand forecasting is a technique that is used for the estimation of what can be the demand for the upcoming product or services in the future. It is based upon the real-time analysis of demand which was there in the past for that particular product or service in the market present today. Demand forecasting must be done by a scientific approach and facts, events which are related to the forecasting must be considered.

Hence, in simple words, if someone asks what demand forecasting is, we can answer that after fetching information about different aspects of the market and demand which is dependent on the past, an attempt might be made to analyze the future demand. 

This whole concept of analyzing and approximations are collectively called demand forecasting. In order to understand it more clearly, we can consider the following equation so that we can understand the concept of demand forecasting more easily.

For example, if we sold 100,150, 200 units of product Z in January, February, and March respectively, now we can approximately say that there will be a demand for 150 units of product Z in April. However, there is also a clause that the condition of the market should remain the same.

Methods of Demand Forecasting

There are two main methods of demand forecasting: 1) Based on Economy and 2) Based on the period.

1. Based on Economy

There is a total of three methods of demand forecasting based on the economy:

• Macro-level Forecasting: It generally deals with the economic environment which is related to the economy as calculated by the Index of Industrial Production(IIP), national income and general level of employment, etc.

• Industry-level Forecasting: Industry-level forecasting usually deals with the demand issued for the industry’s products as a whole. We can consider the example where there is a demand for cement in India, Demand for clothes in India, etc.

• Firm-level Forecasting: It is a major type of demand forecasting. Firm-level forecasting means that we need to forecast the demand for a specific firm’s product. We can consider the following examples as Demand for Birla cement, Demand for Raymond clothes, etc.

2. Based on the Time

Forecasting based on time may be either short-term forecasting or long-term forecasting.

• Short-term Forecasting: It generally covers a short period which depends upon the nature of the industry. It is done generally for six months or can be less than one year. Short-term forecasting is apt for making tactical decisions.

• Long-term Forecasting: Long-term forecasts are generally for a longer period. It can be from two to five years or more. It gives data for major strategic decisions of the company. We can consider the example of the expansion of plant capacity or on opening a new unit of business, etc.

Steps Used in Demand Forecasting

The process of demand forecasting can be divided into five simple steps:

• Setting an Objective: The first step involves clearly deciding on the purpose of the analysis. That is, the manufacturers define their goals that are achievable through the analysis and compatible with their needs.

• Determining the Time Period: In this step, the manufacturer decides whether the analysis will be carried out for a short or long duration of time. Many forecasts run for a long duration as they offer more and consistent data.

• Selecting a Demand Forecasting Method: In the next step, the manufacturer decides along with the analysts which method will give the best results.

• Collection of Data: In the penultimate step, the data is collected according to the preconceived attributes for the analysis.

• Evaluation of Data: In the last step, the collected data is evaluated to obtain conclusions for the forecast.

Solved Example

Q. Which of the following is incorrect related to Demand Forecasting?

A. Predicts future demand for a product or service.

B. Based on the past demand for the product or service.

C. It is not based on scientific methods.

D. Helps in managerial decision-making.

Ans: The right option is C. 

Demand Forecasting is statistically based on scientific methods and proper judgment correctly predicts the future demand for a product or service. It gathers information about various aspects of the market like future changes in the selling price, product designs, changes in competition, advertisement campaigns, the purchasing power of the consumers, employment opportunities, population, etc.  

Fun Facts

Different approaches to Demand forecasts are done by the tech giant of the USA - Apple. They forecast the demand to actuate the quantity of the various products that it will manufacture such as iPhones, iPods, MacBooks, watches, Homepods, AirPods, etc. through a series of approaches. Moreover, the company predominantly uses consensus methods which are under the Judgmental approaches to determine their demand forecasts.