Demand forecasting is used to estimate future demand for a product or service based on an analysis of past demand and current market conditions. There are several statistical methods used for demand forecasting, including trend projection, which fits a trend line to past sales data to project future trends. The barometric technique uses current economic and statistical indicators to predict future changes in demand. Econometric models use a system of independent regression equations to model relationships between economic variables and forecast demand.

1. IPS ACADEMY, IBMR
DEPARTMENT OF MANAGNMENT
SUBJECT: GLOBAL MARKET RESEARCH AND DEMAND FORECASTING
TOPIC: DEMAND FORECASTING
SUBMITTED BY: SUBMITTED TO:
MRS. GUNJA TAKUR Varunapriya(45)
BFT5th Sem

2. DEMAND FORECASTING
• Demand forecasting is a combination of two words; the first one is
Demand and another forecasting. Demand means outside requirements of
a product or service. In general, forecasting means making an estimation
in the present for a future occurring event. Here we are going to discuss
demand forecasting and its usefulness.
• It is a technique for estimation of probable demand for a product or
services in the future. It is based on the analysis of past demand for that
product or service in the present market condition. Demand forecasting
should be done on a scientific basis and facts and events related to
forecasting should be considered.
• Therefore, in simple words, we can say that after gathering information
about various aspect of the market and demand based on the past, an
attempt may be made to estimate future demand. This concept is called
forecasting of demand.
• For example, suppose we sold 200, 250, 300 units of product X in the
month of January, February, and March respectively. Now we can say that
there will be a demand for 250 units approx. of product X in the month of
April, if the market condition remains the same.

3. Usefulness of Demand
• Demand plays a vital role in the decision making of a business. In
Forecasting competitive market conditions, there is a need to take correct
decision and make planning for future events related to business like a
sale, production, etc. The effectiveness of a decision taken by business
managers depends upon the accuracy of the decision taken by them.
• Demand is the most important aspect for business for achieving its
objectives. Many decisions of business depend on demand like
production, sales, staff requirement, etc. Forecasting is the necessity of
business at an international level as well as domestic level.
• Demand forecasting reduces risk related to business activities and helps it
to take efficient decisions. For firms having production at the mass level,
the importance of forecasting had increased more. A good forecasting
helps a firm in better planning related to business goals.
• There is a huge role of forecasting in functional areas of accounting. Good
forecast helps in appropriate production planning, process selection,
capacity planning, facility layout planning, and inventory management,
etc.
• Demand forecasting provides reasonable data for the
organization’s capital investment and expansion decision. It also provides a
way for the formulation of suitable pricing and advertisement strategies.

4. Types of Forecasting
• Based on Economy
• Based on the time period
• 1. Based on Economy
• There are three types of forecasting based on the economy:
• Macro-level forecasting: It deals with the general economic environment relating
to the economy as measured by the Index of Industrial Production(IIP), national
income and general level of employment, etc.
• Industry level forecasting: Industry level forecasting deals with the demand for the
industry’s products as a whole. For example demand for cement in India, demand
for clothes in India, etc.
• Firm-level forecasting: It means forecasting the demand for a particular firm’s
product. For example, demand for Birla cement, demand for Raymond clothes, etc.
• 2. Based on the Time Period
• Forecasting based on time may be short-term forecasting and long-term
forecasting
• Short-term forecasting: It covers a short period of time, depending upon the
nature of the industry. It is done generally for six months or less than one year.
Short-term forecasting is generally useful in tactical decisions.
• Long-term forecasting casting: Long-term forecasts are for a longer period of time
say, two to five years or more. It gives information for major strategic decisions of
the firm. For example, expansion of plant capacity, opening a new unit of business,
etc.

5. Solved Example on Demand
Forecasting
• Q. Which of the following is not correct about demand
forecasting?
• Predicts future demand for a product or service.
• Based on the past demand for the product or service.
• It is not based on scientific methods.
• Helps in the managerial decision making.
• Ans: The correct option is C. Demand Forecasting is based on
scientific methods and proper judgment in order to correctly
predict 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. All the information
gathered is scientifically analyzed so as to forecast the future
demand for the product.

6. SATISTICAL METHOD OF DEMAND
FORECASTING

7. • (i) Trend Projection Method:
• A firm existing for a long time will have its own data regarding sales for
past years. Such data when arranged chronologically yield what is referred
to as ‘time series’. Time series shows the past sales with effective demand
for a particular product under normal conditions. Such data can be given
in a tabular or graphic form for further analysis. This is the most popular
method among business firms, partly because it is simple and inexpensive
and partly because time series data often exhibit a persistent growth
trend.
• Time series has got four types of components namely, Secular Trend (T),
Secular Variation (S), Cyclical Element (C), and an Irregular or Random
Variation (I). These elements are expressed by the equation O = TSCI.
Secular trend refers to the long run changes that occur as a result of
general tendency.
• Seasonal variations refer to changes in the short run weather pattern or
social habits. Cyclical variations refer to the changes that occur in industry
during depression and boom. Random variation refers to the factors which
are generally able such as wars, strikes, flood, famine and so on.
• When a forecast is made the seasonal, cyclical and random variations are
removed from the observed data. Thus only the secular trend is left. This
trend is then projected. Trend projection fits a trend line to a
mathematical equation.

8. The trend can be estimated by using any one of the following
methods:
• (a) The Graphical Method,
• (b) The Least Square Method.
• a) Graphical Method:
• This is the most simple technique to determine the
trend. All values of output or sale for different years are
plotted on a graph and a smooth free hand curve is
drawn passing through as many points as possible. The
direction of this free hand curve—upward or
downward— shows the trend. A simple illustration of
this method is given in Table 2.
• In Fig. 1, AB is the trend line which has been drawn as
free hand curve passing through the various points
representing actual sale values.

9. • (b) Least Square Method:
• Under the least square method, a trend line can be fitted to the time
series data with the help of statistical techniques such as least square
regression. When the trend in sales over time is given by straight line, the
equation of this line is of the form: y = a + bx. Where ‘a’ is the intercept
and ‘b’ shows the impact of the independent variable. We have two
variables—the independent variable x and the dependent variable y. The
line of best fit establishes a kind of mathematical relationship between
the two variables .v and y. This is expressed by the regression у on x.
• In order to solve the equation v = a + bx, we have to make use of the
following normal equations:
• Σ y = na + b ΣX
• Σ xy =a Σx+b Σx2
• (ii) Barometric Technique:
• A barometer is an instrument of measuring change. This method is based
on the notion that “the future can be predicted from certain happenings
in the present.” In other words, barometric techniques are based on the
idea that certain events of the present can be used to predict the
directions of change in the future. This is accomplished by the use of
economic and statistical indicators which serve as barometers of economic
change.

10. • (iv) Econometric Models:
• Econometric models are an extension of the regression
technique whereby a system of independent regression
equation is solved. The requirement for satisfactory use of
the econometric model in forecasting is under three heads:
variables, equations and data.
• The appropriate procedure in forecasting by econometric
methods is model building. Econometrics attempts to
express economic theories in mathematical terms in such a
way that they can be verified by statistical methods and to
measure the impact of one economic variable upon
another so as to be able to predict future events.
•