Demand Forecasting

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Objectives (Importance) of Demand Forecasting

Demand forecasting is an inseperable part of a modern day business management. The business houses spend large amounts of money on demand forecasting. The importance of Demand Forecasting arises from out of the objectives served by it. The prominent objectives can be described as follows 1. Planning production :- In a modern economy, the production of any commodity is uindertaken in anticipation of demand. The firm produces in advance and keeps the product ready. It is displayed and advertised so as to attract buyers. If the quantity sold is less than the quantity produced, the firm will go into a loss. On the other hand, if the quantity produced is less than what is demanded, the producer misses the chance of producing more, selling more and earning more. Hence, every firm makes an attempt to forecast demand and produce accordingly. If the producer anticipates a demand for X units of the commodity, he will arrange to produce X units or a little more. Thus, the chances of making a profit depends upon the accuracy of demand forecasting. 2. For Ordering Inputs :- This is an extension of the first objective. After ascertaining the quantity of the commodity likely to be demanded, the producing firm can calculate the quantities of the different inputs which it will require for producing the fixed commodity. It is necessary to order the inputs well in time that enables the producer to get the inputs at proper prices. If the inputs are purchased in excess quantities, the producer will have to store them – that will increase the cost of storage and perhaps a deterioration in the quality of the commodity. If the quantities of the inputs purchased are less than required, the production programme may be held up. Hence, demand forecasting is the base on which the producer takes decisions about the quanitities of the inputs to be purchased. 3. To arrange for working capital :- A firm requires working capital for purchasing inputs, for payment of wages and salaries, for electricity bills etc. The working capital is required as and when the production progresses but the firm has to make arrangements for getting the required amount of money well in time. It may get funds at reasonable rates of interest provided arrangements are made in advance to procure them. The firm requires estimates of demand for arranging the required amount of working capital. 4. To Fix Targets of Sales:- A modern firm producing a commodity on a large scale appoints sales representatives and gives them targets of sales which they have to attain. These targets are based upon demand forecasting . if a sales representative attains the targets, his performance is described as satisfactory. 5. For Price Fixation :- The price of a commodity depends upon cost on one side and demand for the commodity on the other side. The average cost of production depends upon the quantity produced and the quantity produced depends upon the likely demand. Thus, demand forecasting enables the firm to fix up the size of the firm which helps in determining the average cost. Once, the average cost is found out , the firm can fix the price after taking into consideration the likely demand.


The methods used for demand forecasting may be conveniently clubed into two categories. Survery Methods
They care classified into the following categories

A) Consumer’s Survery
The firm tries to contact every probable consumer of the commodity and find out the number of consumers likely to purchase the concerned commodity and the quantity likely to be pruchased. Cionsumer survery can be undertaken in different ways.

I) A Complete Survey :- Under this method, the firm contacts every probable consumer through representatives and collects information. This type of survey gives more accurate results but it is expensive. II) Sample Survey :- The firm takes out some samples of the...
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