Demand Forecasting is the process when we analyze our previous year’s sales and then predicting the future demand for a product.
There are 2 types of Demand Forecasting that we are going to discuss:
1. Short Term Forecasting: In this type of forecasting we make forecasting for a smaller period of time i.e. from 3 to 6 Months. Short term forecasting is usually done keeping a short goal in mind.
Ex – Discounts on certain goods so that their demand can be increased in market
2. Long-Term Forecasting: In this type of forecasting we make forecasting for a longer period that is mostly for more than 1 year. Long term forecasting is done when a company is going to launch a new product.
Ex – Company launching new product so that product can compete in the market
Demand Forecasting methods that we use:
1. Consumer Survey – Consumer survey is performed by almost every company just to check the mood of the customers and it becomes very important when we have to forecast. Consumer Survey can be done in 2 ways:
(i). Complete Enumeration: When every single is asked about its choices, preferences, and other data then it is called complete enumeration. Companies usually avoid this because it takes a lot of time and it requires a lot of money.
(ii). Survey Method: this method is mostly adopted by the companies as the sample data collected for the survey was more relevant and more accurate if collected properly. It doesn’t take much time and money as compared to complete enumeration.
2. Expert Opinion – In this forecasting we call the experts from the specific field who can help the company to predict the specific need and demand of the consumer. These people are highly professional and market experts.
(i). Delphi Method – In this method we call multiple experts and ask them to predict demand for a company after telling the information about the company’s product. These experts will give their opinions and then we choose the closest option that we have got from the majority of experts.
3. Test Marketing /Market Experiment – Test marketing is done to see whether people are showing their interest or not in buying the product.
(i). Pilot Survey – In Pilot Survey we put the product in Shopping malls or stores such as Big Bazar or Reliance Mart and then after some time we analyze the results. If people show their interest in buying the product, it is a good sign for a product. But if the product performed bad, changes are made accordingly.
(ii). Controlled Experiment – In this, some people are selected and the products are given to them to use for a particular period of time. Sometimes the company also pays the consumer just to use the product and then feedback is taken. If everything goes as per plan, it can be implemented on a larger scale.
4. Time Series – Time series are related to time as its name reflects. This demand is analyzed according to the period of time.
(i). Trends – In this demand is forecasting is done for a longer period of time and for long term impacts.
(ii). Seasonal Variation: In this demand, forecasting is predicted as per the season. Ex- In winters, people buy woolen clothes so the company will try to meet the demand by producing more woolen clothes.
(iii). Cyclic Variation – In this demand forecasting, predictions are made on the basis of a particular period of time. Ex- if a company manufactures salt and Navratri is looming on the head, Company start making rock salt as its sale will rise.
(iv). Random Fluctuation – Random fluctuation is completely unpredictable and it’s really very hard to find the demand pattern. Ex- A company manufactures sanitizer and due to Chinese Corona Virus the demand suddenly rises and it is really difficult for the company to notice this pattern.
(v). Naïve Model – In this demand forecasting, we forecast demand as per the exact figure of last year’s demand. It is very easy to use and easy to implement. Ex- Last year 100 units are sold, so this year also demand forecasting is done on the basis of these 100 units.
(vi). Propitiate change model – This model is quite similar to the Naïve model & it can be best understood by the following example.
Ex – This year sale = 100, Last year sale = 80
Then to calculate Propitiate Change Model:
100 + (100-80) = 120
Formula : This year sale + (This year sale – Last year sale)
5. Econometrics – When we forecast the demand with the help of Economics theory and using Statics from Mathematics then that is called Econometrics.
Formula: Q! = a + b(Ps) + c(Pc)
Where Q is the independent Variable and a,b,c are the causes.
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