An Introduction Broadly speaking, there are two approaches to demand forecasting- one is to obtain information about the likely purchase behavior of the buyer through collecting expert’s opinion or by conducting interviews with consumers, the other is to use past experience as a guide through a set of statistical techniques. Both these methods rely on varying degrees of judgment. The first method is usually found suitable for short- term forecasting, the latter for long-term forecasting. There are specific techniques which fall under each of these broad methods.
Simple Survey Method: For forecasting the demand for existing product, such survey methods are often employed. In this set of methods, we may undertake the following exercise.1) Experts Opinion Poll: In this method, the experts on the particular product whose demand is under study are requested to give their ‘opinion’ or ‘feel’ about the product. These experts, dealing in the same or similar product, are able to predict the likely sales of a given product in future periods under different conditions based on their experience. If the number of such experts is large and their experience-based reactions are different, then an average-simple or weighted –is found to lead to unique forecasts. Sometimes this method is also called the ‘hunch method’ but it replaces analysis by opinions and it can thus turn out to be highly subjective in nature.
2) Reasoned Opinion-Delphi Technique: This is a variant of the opinion poll method. Here is an attempt to arrive at a consensus in an uncertain area by questioning a group of experts repeatedly until the responses appear to converge along a single line. The participants are supplied with responses to previous questions (including seasonings from others in the group by a coordinator or a leader or operator of some sort). Such feedback may result in an expert revising his earlier opinion. This may lead to a narrowing down of the divergent views (of the experts) expressed earlier. The Delphi Techniques, followed by the Greeks earlier, thus generates “reasoned opinion” in place of “unstructured opinion”; but this is still a poor proxy for market behavior of economic variables.3) Consumers Survey- Complete Enumeration Method: Under this, the forecaster undertakes a complete survey of all consumers whose demand he intends to forecast, Once this information is collected, the sales forecasts are obtained by simply adding the probable demands of all consumers. The principle merit of this method is that the forecaster does not introduce any bias or value judgment of his own. He simply records the data and aggregates. But it is a very tedious and cumbersome process; it is not feasible where a large number of consumers are involved.
4) Consumer Survey-Sample Survey Method: Under this method, the forecaster selects a few consuming units out of the relevant population and then collects data on their probable demands for the product during the forecast period. The total demand of sample units is finally blown up to generate the total demand forecast. Compared to the former survey, this method is less tedious and less costly, and subject to less data error; but the choice of sample is very critical. If the sample is properly chosen, then it will yield dependable results; otherwise there may be sampling error. The sampling error can decrease with every increase in sample size5) End-user Method of Consumers Survey: Under this method, the sales of a product are projected through a survey of its end- users. A product is used for final consumption or as an intermediate product in the production of other goods in the domestic market, or it may be exported as well as imported. The demands for final consumption and exports net of imports are estimated through some other forecasting method, and its demand for intermediate use is estimated through a survey of its user industries.
Complex Statistical Methods: We shall now move from simple to complex set of methods of demand forecasting. Such methods are taken usually from statistics. As such, you may be quite familiar with some the statistical tools and techniques, as a part of quantitative methods for business decisions. (1) Time series analysis or trend method: Under this method, the time series data on the under forecast are used to fit a trend line or curve either graphically or through statistical method of Least Squares. The trend line is worked out by fitting a trend equation to time series data with the aid of an estimation method. The trend equation could take either a linear or any kind of non-linear form. The trend method outlined above often yields a dependable forecast. The advantage in this method is that it does not require the formal knowledge of economic theory and the market, it only needs the time series data.
(2) Barometric Techniques or Lead-Lag indicators method: This consists in discovering a set of series of some variables which exhibit a close association in their movement over a period or time. Eg. : It shows the movement of agricultural income (AY series) and the sale of tractors (ST series). The movement of AY is similar to that of ST, but the movement in ST takes place after a year’s time lag compared to the movement in AY. Thus if one knows the direction of the movement in agriculture income (AY), one can predict the direction of movement of tractors’ sale (ST) for the next year. Thus agricultural income (AY) may be used as a barometer (a leading indicator) to help the short-term forecast for the sale of tractors.
3) Correlation and Regression: These involve the use of econometric methods to determine the nature and degree of association between/among a set of variables. Econometrics, you may recall, is the use of economic theory, statistical analysis and mathematical functions to determine the relationship between a dependent variable (say, sales) and one or more independent variables (like price, income, advertisement etc.). The relationship may be expressed in the form of a demand function, as we have seen earlier. Such relationships, based on past data can be used for forecasting. The analysis can be carried with varying degrees of complexity. Here we shall not get into the methods of finding out ‘correlation coefficient’ or ‘regression equation’; you must have covered those statistical techniques as a part of quantitative methods. Similarly, we shall not go into the question of economic theory. We shall concentrate simply on the use of these econometric techniques in forecasting. The form of the equation may be: DX = a + b1 A + b2PX + b3Py
(4) Simultaneous Equations Method: Here is a very sophisticated method of forecasting. It is also known as the ‘complete system approach’ or ‘econometric model building’. In your earlier units, we have made reference to such econometric models. Presently we do not intend to get into the details of this method because it is a subject by itself. Moreover, this method is normally used in macro-level forecasting for the economy as a whole; in this course, our focus is limited to micro elements only. Of course, you, as corporate managers, should know the basic elements in such an approach.
Objectives of Demand Forecasting Short run forecasting Intermediate forecasting Long run forecasting
Need of Demand Forecasting1 . Helps in Production Planning2. Helps in Financial Planning3. Helps in Economic Planning4. Helps in Workforce Scheduling5. Helps in Decisions Making6. Helps in Controlling Business Cycles