demand forecasting

1. METHODS OF DEMAND FORECASTING
Mr. NithinKumarS
RESEARCHSCHOLAR
THE DEPARTMENTOF POSTGRAUATE STUDIES
AND RESEARCHIN ECONOMICS
TUMKURUNIVERSITY
TUMKUR
KARNATAKA
INDIA

2. METHODS OF DEMAND FORECASTING
• Demand forecasting is a difficult exercise.
• There are various methods of demand
forecasting differing in terms of their accuracy
and sophistication.
• The methods of demand forecasting may be
broadly divided into two categories:
1. Survey Method
2. Statistical Method

3. Demand
Forecasting
Survey method
Collective
opinion
method
Delphi Method
Consumers’
interview
method
Complete
enumeration
method
Sample survey
method
Consumers’
end-use
method
Test
Marketing
Statistical
method
Trend
projection
method
Correlation
and regression
method
Barometric
technique

4. Survey Method
• The following are the important survey
methods used for forecasting demand:
Collective opinion method
Delphi method
Consumers interview method
Test marketing

5. Collective Opinion Method
• This method is also known as “Sales Force
Opinion” or “Sales Force Polling” or “Reaction
Survey” method.
• Under this method the responsibility for
estimating the expected sales is placed on
salesmen.
• Salesmen being closest to the consumers have the
knowledge of the requirements of the consumers,
their reactions to the product.
• These estimates of individual salesmen are
consolidated to find out the total estimated sales.

6. Advantages of Collective Opinion
Method
The method is simple and easy to be used.
It involves minimum of statistical work and
hence, does not require any technical expertise.
It does not cost much.
It is realistic because it is based on personal
and first hand knowledge of salesmen.
It is useful in forecasting the sales of new
products.

7. Disadvantages of Collective Opinion
Method
Being Subjective, the forecast is likely to be
influenced by the personal bias of the
salesmen.
Salesmen may understate the forecast if their
sales quotas are to be based on it.
Its usefulness is limited to the short period
only.
The salesmen may not be aware of wider
economic changes which affect demand.

8. Delphi Method
• This technique was developed by Olaf Helmer,
Dalkey and Gordon in the late 1940s.
• Under this method a panel of internal and
external experts are selected and they kept
physically away from each other.
• There is a coordinator who acts as an
intermediary among the panellists.
CoordinatorInternal Experts External Experts

9. • Coordinator prepares a questionnaire and
sends it to the panellists. They express their
views anonymously.
• Each expert will be given an opportunity to
react the reasons advanced by others.
• The process will be repeated until some sort
of unanimity is among all experts or issue
causing the disagreement are clearly defined.
• It is more popular in forecasting non-economic
rather than economic variables.

10. Advantages of Delphi Method
1. It does not take much time.
2. The cost is low.
3. The method is useful for new products

11. Disadvantages of Delphi Method
• The opinions are subjective
• Good and Bad estimates are given equal
weightage

12. Consumers’ interview method
• It is the most direct method of estimating the
demand for the short period.
• It is also known as “Survey of Buyers” or
“opinion Survey” method.
• In this method the consumers are contacted
personally to know about their plans and
preferences regarding the purchase of he
product.

13. • Consumer survey method has three different
types:
Consumer
survey
method
Complete
enumeration
method
Sample
survey
method
Consumers’
end-use
method

14. Complete enumeration method
• Under this method all the consumers of the
product are interviewed and on the basis of the
information collected, the demand forecast is
made.

15. Sample survey method
• When the number of consumers is large, this
method is used.
• In this method few selected consumers are
interviewed.
• The selection of the consumer is done through
random, stratified sampling technique.
• This method is based on the assumption that
the selected sample represent the population.

16. End – use method
• The consumers end use method is used to
obtain use wise or sector – wise demand
forecasts.
• In this method it is possible to forecast demand
separately for different sectors.

17. Advantages of Consumer survey
method
This method is free from any personal bias of
the forecaster.
The forecast is based on the first hand
information from the consumers.
The sample survey is less costly and less time
consuming than complete enumeration, but
equally reliable if the sample is representative
in character.

18. Disadvantages of Consumer survey
method
The Complete enumeration method is very costly
It is time consuming
 the manpower required for the survey is also large
The method cannot be used if the number of consumers
is very large and scattered
The method is not reliable because,
 In the case of household consumers, there is no
regularity of intentions
 Faced with multiple choices or alternatives, they cannot
predict their own choices.

19. Test marketing
• Test marketing is used to forecast the demand or
sales for the new product
• In this method a test is selected. It may be a
region, city or state which is the representative of
the total market
• After the selection of test area product will be
launched in the area
• If the product is successful in the test area, the
forecast will be that similar levels of success will
be achieved in the total market.

20. Advantages of Test marketing
• It is a real life experiment
• It is possible to know the reactions of
consumers

21. Disadvantages of test marketing
• It is costly
• It is time consuming
• There is the danger of making of false forecasts
from the initial response of the consumers
• It is difficult to select the test area which is
representative of the whole market
• It is possible for rivals to immediately imitate the
product and take advantage of test marketing
without incurring the cost of this exercise.

22. Statistical Methods
• Most of the statistical methods are highly
complex and some of them require
considerable knowledge of statistics and
mathematics.
• Some of the important statistical techniques
are as follows:
1. Trend projection method
2. Correlation and regression method
3. Barometric technique

23. Trend Projection Method
• Data of a firm which has been in business for a
long period of time are arranged chronologically
which is called as the Time Series.
• Time series relating to sales represents the past
pattern of demand for a particular product
• On the basis of such data future trend of sales or
demand may be projected.
• The method rests on the assumption that the past
trend will continue in the future also.

24. Advantages of Trend Projection
Method
• It is a simple statistical technique
• It is inexpensive
• It does not require much time

25. Disadvantages of Trend Projection
Method
• It can be used only if past data of sales are
variable
• If there are too many irregular or random
fluctuations in the time series data, the
forecasting is difficult

26. Correlation and Regression Method
• This method makes use of statistical and
econometric techniques to find out the nature and
extent of relationship between variables.
• Under this method the relationship between the
sales and other variables is determined on the
basis of past data
• If there is only one independent variable in the
functional relationship, it is called as the simple
correlation
• Multiple correlation refers to the function in
which there are several

27. • A regression equation is used to show the
relationship between sales and several
independent variables
• The aim of regression and correlation analysis
is to separate and measure the relation between
variation in sales and the corresponding
changes in the main determinates of demand.

28. Advantages of Correlation and
Regression Technique
• The forecast can be made quickly
• It is inexpensive

29. Disadvantages of Correlation and
Regression technique
• It is difficult to understand the method
• It can be used only in the case of established
product

30. Barometric technique
• The use of economic indicators is described as
the barometric technique
• It is an improvement over the trend projection
method
• Barometric technique is based on the
assumption that certain events occurring in the
present can be used to predict the future.

31. • There are mainly three types of indicators
 Leading indicator
 Coincident indicator
 Legging indicator
Leading indicator
a present event may indicate a future change in the
demand for a product.
Coincident indicator
these indicators coincide with the rise or fall of general
economic activity
Legging indicators
these indicators move up and down behind other economic
activity
• These indicators are not useful for forecasting and they are
used to confirm or refute the validity of the leading
indicators already used

32. Advantages of barometric technique
It is simple
The forecast can be made quickly

33. Disadvantages of barometric
technique
It is difficult to choose a relevant indicator for
a particular product
Sometimes, even if an indicator is found out,
change in fashions or tastes may render the
indicator redundant overtime

34. Criteria for a good forecasting
method
Accuracy
Plausibility
Economy
Availability
Durability
Flexibility