Methods of Demand Forecasting

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What is Demand Forecasting?

The art of predicting the demand for a service or product in the future market is known as demand forecasting. This forecast is based on historical data, past customer behaviour trends, and patterns of the present market. In short, it is the scientific estimation of future demand for products and not just merely guessing it. It also gives crucial insights to cash flows, risk maintenance, budgeting, margins, inventory turnover, and more. There is no perfect demand forecasting method so every company needs a prediction solution. Here we shall discuss some of those methods. The efficiency of these methods can be increased by making them more accurate with the application of various methodologies.

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Various Demand Forecasting Methods

Forecasting the demand is not easy. Proper scientific formulas and sound judgment are required to accurately forecast the demand for a service or product in the future. Let us take a look at the various methods of demand forecasting.

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  • Method of Collective Opinion

Here the estimated sales for the future are predicted by the salesperson of a firm, from a particular region. All these individual estimates are combined to calculate the total estimated sales. The consumers are closest to the salesperson. Hence it is believed that they would understand the needs and trends amongst customers much better.

The estimates are based on market competition, product usage, customer behaviour, advertisements, the population of the region, and more. This method is not scientific as it depends on the experience of the salesperson and his personal opinions on customer relations.


  • Barometric Method

This method uses the projection of past demand for products and services into the future. The future trends are predicted with the help of economic indicators. The various types of economic indicators include lagging indicators, leading indicators, and coincident indicators.

The ones that move up or down in the lead of some other series are the leading indicators. The ones that follow the change after a time gap are the lagging indicators. While the ones that move up and down depending on economic activities are the coincident indicators.


  • Method of Expert Opinion

Demand forecasting can also be done with the help of the market experts as they know about the demand affecting factors in detail. The Delphi Technique is one such method. It is a pretty reasonable and speedy technique where the experts are provided with a critical questionnaire from which they are supposed to forecast the demand. They are provided with data to conclude. However, they are also required to provide suitable reasons for how they concluded.


  • Method of Market Experimentation

This method is a time consuming and expensive one in which market studies are conducted based on consumer trends and patterns. Certain factors are considered constant as some determinants may vary while doing calculations.


  • Buyer's Choice Survey

One of the best demand forecasting methods is asking the customers about the needs and expectations regarding the kind of products they are expecting. Whenever the forecast is to be made within a short period, customers should be directly interviewed. On the other hand, the businesses should not depend on the customer views as they may misjudge the demands or change their preferences with time. Hence, use your judgment while forecasting also.


  • Statistical Methods

These are the most bias-free, reliable, and scientifically proven methods. The two most famous types of statistical methods are trend projection and regression analysis methods. These are entirely dependent on future demand predictions.

 

Solved Examples


Q1. What are the Major Types of Statistical Forecasting?

Answer: Statistical Forecasting is basically of six types in general. They are linear regression, multiple linear regression, time series analysis, productivity ratios, and stochastic analysis.

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Q2. Name Four Common Types of Forecasting.

Answer: The main four forms of forecasting are econometric models, the Delphi method, judgmental forecasting, and the time series model.


Fun Facts

  • Forecasting is broadly classified into qualitative and quantitative forecasting.

  • Cash flow statements, income statements, and balance sheets are the three fundamental components of financial forecasting.

  • Often we tend to apply wrong planning for strategic decision making. These are one of the biggest challenges in demand forecasting.

  • It is not like only the customers need the products; the business also needs the customers. Hence, they continuously interact with their consumers to make them happy and satisfy their needs. This place is where survey forecasting comes into play.

FAQ (Frequently Asked Questions)

1. Give Some Demand Forecasting Examples in Light of Statistical Forecasting.

Answer: Statistical methods are the most trusted demand forecasting method as they are scientific and unbiased. Let us take a look at them.

  • Regression analysis: The quantity is known as the dependent variable. While the price of goods, income, price of substitute goods, and related stuff are independent variables. Regression develops a linear relationship between these two variables. The equation is Y= a+bX, where Y is the forecast demand. 

  • Method of trend projection: Here, the past sales data of a company is arranged chronologically to form a timeline series. This series depicts past trends from which future trends can be predicted. It is assumed that past trends will continue in the future also.

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2. How Can Customer Surveys be Done?

Answer: Customer surveys can be taken in many ways. The most popular methods are-

  • End-User Process: Here, the consumers and end-users are identified. The amount of intake of the product is fixed, output targets are estimated, and these norms help to forecast the demand of the inputs.

  • Complete or Full Enumeration Process: Here, all the end-users or buyers are asked about their personal buying preferences, needs, and trends. 

  • Sample Survey Method: Here, the salesperson scientifically chooses some specific potential buyers from previous buying data. These buyers are called for personal interviews, and they are asked for their choices and buying preferences. 

      These are just a few methods and there are plenty more that can be used.

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