What is Demand Forecasting?
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.
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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.
FAQs on Demand Forecasting
1. What is the significance of Demand Forecasting?
Maximum business decisions of an industrial company are made under the conditions of a huge amount of risk and uncertainty. But an organization can decrease the bad effects of such risks by properly determining and approximating the demand or sales prospects for its upcoming products and services.
Demand forecasting is a stepwise process that involves intercepting the demand for the product and services of an organization in the future which is under a set of uncontrollable forces and competitions. It helps to find businesses a proper equation between supply and demand. To do this work, the supply chain must have the confirmation that each unit of items produced pleases the customer demands without a surplus of production being left over.
2. What are the uses of Demand Forecasting?
Demand forecasting is a very important analytical tool. It is used in many fields, some of them are:
They are used in qualitative assessments, for example in gathering expert opinion and information regarding the perception of a product.
They are also used to study historical sales data in hindsight.
Demand forecasting helps a producer to plan his strategies of product development, inventory management, and assessing future needs of the company.
Demand forecasting is especially used in historical sales data.
3. Explain, with the help of an example, the demand forecasting method.
Demand forecasting method in simple terms refers to the process of assessing the demand of a product or service in the future to develop manufacturing and business strategies. Market needs are predicted in this process. We can understand this with the help of an example:
Suppose that a textile manufacturing company has sold 3000 units in the first month, 3280 units in the second month but only 2000 units during the third month. This means that there have been market fluctuations which have caused the sales to drop (between 2nd and 3rd month) but also increase (between 1st and 2nd month). Now it becomes important that the manufacturer assess the future needs for his product to either up the scale of garment production or reduce its production for cost-saving. This can be done with the help of “Demand forecasting”.
4. Mention the different types of demand forecasting commonly used. Name the most common method of demand forecast.
There are various methods by which manufacturing companies (for example, food, textile, etc.) gain insight into the future needs of the market. The survey method is the most commonly used demand forecasting method. However, during the demand forecasting process, one or more of the following methods can be used:
Predictive analysis is one step ahead of the traditional demand forecasting method. This method analyses demand by evaluating the reason why people buy a product. It then employs mathematical principles to predict consumer behavior by using both current and previously available data. Like traditional forecasting methods, the predictive analysis also aims to determine what the future demands will be but it also puts an emphasis on understanding the reason for this behavior.
In the Conjoint analysis method, surveys are conducted to receive consumer input about the most admired features of their products. These surveys evaluate consumers on how they would use and respond to certain product attributes.
In the Delphi method, the forecasts are formed from a group rather than from individuals. This method uses a panel of experts that provide their forecasts and justifications in an anonymous manner.
In the Client intent survey method, the supplier asks what the consumer is planning on purchasing in the future. This technique is used to understand what inspires the consumer to actually buy a product.
5. What are the factors that affect the process of demand forecasting?
Factors that affect the process of demand forecasting are as follows:
The first factor is the type of good/ service for which the forecast is being done. The past history (whether the product is new or well established) affects consumer behavior.
Level of Competition: In a highly competitive world the demand is also influenced by the novel strategies (e.g. discounts, etc.) of a competing brand.
Price of the Product: If the manufacturer intends to increase or decrease the product price, this will also sway the consumer behavior towards or away from the manufacturer.
Lastly, the use of technology and the economic standpoint of the market (such as a global recession or for example pandemic) can change the consumer needs and therefore the product demand.