Demand Estimation and Forceasting

Topics: Time series, Forecasting, Time Pages: 10 (2701 words) Published: September 22, 2012
ROLL NO. – 65PGDM – A25 / 9 / 12|

Demand forecasting is the activity of estimating the quantity of a product or service that consumers will purchase. Demand forecasting involves techniques including both informal methods, such as educated guesses, and quantitative methods, such as the use of historical sales data or current data from test markets. Demand forecasting may be used in making pricing decisions, in assessing future capacity requirements, or in making decisions on whether to enter a new market.

The methods used may be divided broadly into two categories, qualitative and quantitative. Demand forecasting is full of uncertainties due to changing conditions. Consumer behavior is unpredictable as it is motivated and influenced by a multiplicity of forces. Every method developed for forecasting has its advantages and disadvantages and selection of the right method is crucial to make as accurate as possible forecast. A right combination of quantitative and qualitative methods is to be used.

* Qualitative Techniques
Qualitative techniques are generally used when there is insufficient data available for quantitative analysis. They are also known as subjective methods as they are dependent upon intuition based on experience, intelligence, and judgment. They are also preferred for giving a quick estimate and cost savings. Some of these techniques are as follows –

1. Survey Method –
The information about future demand of goods is obtained directly through a survey method. They are important for short term forecasts. Firms generally use them while introducing a new product into the market. It involves conducting consumer interviews, mailing questionnaires to consumers in order to judge their intentions about their demand for goods. Sometimes the employees, distributors and partners involved in the sales are interviewed. This is known as sales force composite method or collective opinion method. The salespersons are asked to report their estimates of expectations of sales in their territories. A similar exercise is done with the retailers and the wholesalers of the company. The average values thus obtained, from sales executives, marketing managers, business and managerial economists and other members of the trade, reflect the estimate of forecast. Survey methods are dogged by numerous problems that are normally associated with surveys. There is always a risk of subjectivity, bias and over estimation or optimism about future (or a tendency to over report the expected sales), which may lead to a wrong forecast. The consumers picked for survey may not take the survey seriously or may not be a representative population sample.

2. Expert’s Opinion Method –
This method is also known as the Delphi Method. Under this method a group of experts are repeatedly questioned for their opinion/comments on some issues and their agreements and disagreements are clearly identified. This involves a number of rounds involving their ‘interrogation, response and feedback’. In the first round they are asked for information necessary for forecast. The subsequent rounds involve questioning until a complete consensus is reached. The experts belong to a heterogeneous group with diverse background. This technique is used in technological forecasting, defense strategies, education and manpower planning, business demand forecasting etc. This method has problems associated with selection of an appropriate expert panel, their timing schedules, time taken between different rounds and also the fact that the final result is not quantitative in nature. It is only a reasonable guess.

3. Consumer’s Interview Method –
The consumers are contacted personally to know about their plans and preferences regarding the consumption of the product. All the potential buyers are...
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