What is Demand Forecasting? Demand forecasting is an attempt to estimate the future level of demand on the basis of past as well as present knowledge and experience, to avoid both under production and overproduction. It may be based on estimates of demand potential of the entire industry. The demand forecasting serves as the reference point for all marketing control efforts. It is indispensable in modern business.Demand Forecasting Definition Demand forecasting is an estimate of sales during a specified future period based on proposed marketing plan and a set of particular uncontrollable and competitive forces. — — Cundiff and Still Demand forecasting may be defined as the process of finding values for demand in future time periods — Evan J. DouglasImportance of Demand Forecasting Demand forecasting is vital to the management of every business. It enables an organisation to mitigate business risks and make effective business decisions. Moreover, demand forecasting provides insight into the organisation's capital investment and expansion decisions. Importance of Demand forecasting are: 1. Producing the desired output 2. Assessing the probable demand 3. Forecasting sales figures 4. Better control 5. Controlling inventory 6. Assessing manpower requirement 7. Ensuring stability 8. Planning import and export policiesProducing the desired output Demand forecasting enables an organisation to produce the pre-determined output. It also helps the organisation to arrange for the various factors of production (land, labour, capital, and enterprise) beforehand so that the desired quantity can be produced without any hindrance. Assessing the probable demand Demand forecasting enables an organisation to assess the possible demand for its products and services in a given period and plan production accordingly. In this way, demand forecasting avoids dependence on merely making assumptions for demand.Forecasting sales figures Sales forecasting refers to the estimation of sales figures of an organisation for a given period. Demand forecasting helps in predicting the sales figures by considering historical sales data and current trends in the market. Better control In order to have better control on business activities, it is important to have a proper understanding of cost budgets, profit analysis, which can be achieved through demand forecasting.Controlling inventory As discussed earlier, demand forecasting helps in estimating the future demand for an organisation's products or services. This, in turn, helps the organisation to accurately assess its requirement for raw material, semi- finished goods, spare parts, etc. Assessing manpower requirement Demand forecasting helps inaccurate estimation of the manpower required to produce the desired output, thereby avoiding the situations of under-employment or over- employment.Ensuring stability Demand forecasting helps an organisation to stabilise their operations by initiating the development of suitable business policies to meet cyclical and seasonal fluctuations of an economy. Planning import and export policies At the macro level, demand forecasting serves as an effective tool for the government in determining the import and export policies for the nation. It helps in assessing whether import is required to meet the possible deficit in domestic supply.Steps in Demand Forecasting To achieve the desired results, it is important that demand forecasting is done systematically. Demand forecasting involves a number of steps, which are shown in Figure: 1. Specifying the objective 2. Determining the time perspective 3. Selecting the method for forecasting 4. Collecting and analysing data 5. Interpreting outcomesLet us discuss these steps in detail. Specifying the objective The purpose of demand forecasting needs to be specified before starting the process. The objective can be specified on the following basis: ¢ Short-term or long-term demand for a product ¢ Industry demand or demand specific to an organisation ¢ Whole market demand or demand specific to a market segmentDetermining the time perspective Depending on the objective, the demand can be forecasted for a short period (2-3 years) or long period (beyond 10 years). If an organisation performs long-term demand forecasting, it needs to take into consideration constant changes in the market as well the economy.Selecting the method for forecasting There are various methods of demand forecasting, which have been discussed later in the chapter. However, not all methods are suitable for all types of demand forecasting. Depending on the objective, time period, and availability of data, the organisation needs to select the most suitable forecasting method. The selection of demand forecasting method also depends on the experience and expertise of the demand forecaster. Collecting and analysing data After selecting the demand forecasting method, the data needs to be collected. Data can be gathered either from primary sources or secondary sources or both. As data is collected in the raw form, it needs to be analysed in order to derive meaningful information out of it. waInterpreting outcomes After the data is analysed, it is used to estimate demand for the predetermined years. Generally, the results obtained are in the form of equations, which need to be presented ina comprehensible format.Limitations of Demand Forecasting Limitations of Demand Forecasting are: 1. Lack of historical sales data 2. Unrealistic assumptions 3. Cost incurred 4. Change in fashion 5. Lack of expertise 6. Psychological factorsLack of historical sales data Past sales figures may not always be available with an organisation. For example, in case of a new commodity, there is unavailability of historical sales data. In such cases, new data is required to be collected for demand forecasting, which can be cumbersome and challenging for an organisation. Unrealistic assumptions Demand forecasting is based on various assumptions, which may not always be consistent with the present market conditions. In such a case, relying on these assumptions may produce incorrect forecasts for the future.Cost incurred Demand forecasting incurs different costs for an organisation, such as implementation cost, labour cost, and administrative cost. These costs may be very high depending on the complexity of the forecasting method selected and the resources utilised. Owing to limited means, it becomes difficult for new startups and small-scale organisations to perform demand forecasting. Change in fashion Consumers’ tastes and preferences continue to change with a change in fashion. This limits the use of demand forecasting as it is generally based on historical trend analysis.Lack of expertise Demand forecasting requires effective skills, knowledge and experience of personnel making forecasts. In the absence of trained experts, demand forecasting becomes a challenge for an organisation. This is because if the responsibility of demand forecasting is assigned to untrained personnel, it could bring huge losses to the organisation. Psychological factors Consumers usually prefer a particular type of product over others. However, factors, such as fear of war and changes in economic policy, could affect consumers’ psychology. In such cases, the outcomes of forecasting may no longer remain relevant for the time period.