Demand Estimation and Forecasting

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CHAPTER 1
INTRODUCTION
Demand forecasting refers to the prediction or estimation of a future situation under given constraints. 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. Pricing is one of the four Ps of the marketing mix. The other three aspects are product, promotion, and place. It is also a key variable in microeconomic price allocation theory. Price is the only revenue generating element amongst the 4ps, the rest being cost centers. Pricing is the manual or automatic process of applying prices to purchase and sales orders, based on factors such as: a fixed amount, quantity break, promotion or sales campaign, specific vendor quote, priceprevailing on entry, shipment or invoice date, combination of multiple orders or lines, and many others. Automated systems require more setup and maintenance but may prevent pricing errors. A market entry strategy is the planned method of delivering goods orservices to a target market and distributing them there. When importing or exporting services, it refers to establishing and managing contracts in a foreign country. NECESSITY FOR FORECASTING DEMAND Often forecasting demand is confused with forecasting sales. But, failing to forecast demand ignores two important phenomena. There is a lot of debate in the demand planning literature as how to measure and represent historical demand, since the historical demand forms the basis of forecasting. Should we use the history of outbound shipments or customer orders or a combination of the two to proxy for demand. Stock effects The effects that inventor y levels have on sales. In the extreme case of stock-outs, demand coming into your store is not converted to sales due to a lack of availability. Demand is because the desired sizes are no longer available. For example, when a consumer electronicsretailer does not display a particular flat-screen TV, sales for that model are typically lower than the sales for models on display. And in fashion retailing, once the stock level of a particular sweater falls to the point where standard sizes are no longer available, sales of that item are diminished. Market response effects The effect of market events that are within and beyond a retailer’s control. Demand for an item will likely rise if a competitor increases the price or if you promote the item in your weekly circular. The resulting sales increase reflects a change in demand as a result of consumers responding to stimuli that potentially drive additional sales. Regardless of the stimuli, these forces need to be factored into planning and managed within the demand forecast. In this case demand forecasting uses techniques in causal modeling. Demand forecast modeling considers the size of the market and the dynamics of market share versus competitors and its effect on firm demand over a period of time. In the manufacturer to retailer model, promotional events are an important causal factor in influencing demand.These promotions can be modeled with intervention models or use a consensus process to aggregate intelligence using internal collaboration with the Sales and Marketing functions.

METHODS
METHODS OF FORECASTING
SURVEY METHOD | STATISTICAL METHOD |
1.Survey of buyer’s intentions| 1.Trend projection method| 2.Expert opinion method or Delphi Method| 2.Moving averages method| 3.Controlled Experiments| 3.Regression analysis| 4.Simulated market situations | 4.Barometric method |

No demand forecasting method is 100% accurate. Combined forecasts improve accuracy and reduce the likelihood...
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