Suppose you are the Marketing Manager of Bayer & Company, Ahmedabad, which are the techniques you will apply in forecasting demand of a product yet to be manufactured.
The firm must plan for the future. Planning for the future involves forecasting. A forecast is an estimation or prediction about situations which are most likely to occur in near or distant future. No businessman can afford to ignore forecasting if he wants to thrive and prosper in his business. The firm has to forecast the future level of demand for its product under different possible circumstances; such as prices, competition, promotional activities and general economic activity. Similarly forecasting will be necessary with reference to costs under changing conditions of availability of raw materials and their respective prices, changing technology, wage rates, labour training and capital acquisition programmes. Forecasting does play a key role in managerial decisions and hence forecasting is emphasized in the study of managerial economics. The objective of business forecasting is to minimize risk and the margin of uncertainty in business.
Techniques of Demand Forecasting
Many techniques are available that can be used in forecasting economic variables. Some forecasting techniques are quantitative, others are qualitative. When quantitative information is not quite available then qualitative technique is to be relied upon for getting the required forecasts.
There are, as such, two approaches to demand forecasting. First is to obtain information about the intentions of the spenders through collecting experts’ opinion or by conducting interviews with the consumers. Second is to use past experience as the guide and using or projecting the past statistical relationships to obtain the expected level of future demand. The first method is also considered to be qualitative and is mostly used for short-term forecasting; whereas the second method is quantitative and is used for long-term forecasting. We can forecast the demand for existing product by using any one or even mix of the above methods, but to forecast demand for new product we have to use survey method only because the new product has no past or historical data to offer.
How is demand forecast determined?
There are two approaches to determine demand forecast – (1) the qualitative approach, (2) the quantitative approach. The comparison of these two approaches is shown below: Description| Qualitative Approach| Quantitative Approach| Applicability| Used when situation is vague & little data exist (e.g., new products and technologies)| Used when situation is stable & historical data exist(e.g. existing products, current technology)| Considerations| Involves intuition and experience| Involves mathematical techniques| Techniques| Jury of executive opinionSales force compositeDelphi methodConsumer market survey| Time series modelsCausal models| Qualitative Forecasting Methods
Your company may wish to try any of the qualitative forecasting methods below if you do not have historical data on your products' sales. Qualitative Method| Description|
Jury of executive opinion| The opinions of a small group of high-level managers are pooled and together they estimate demand. The group uses their managerial experience, and in some cases, combines the results of statistical models.| Sales force composite| Each salesperson (for example for a territorial coverage) is asked to project their sales. Since the salesperson is the one closest to the marketplace, he has the capacity to know what the customer wants. These projections are then combined at the municipal, provincial and regional levels.| Delphi method| A panel of experts is identified where an expert could be a decision maker, an ordinary employee, or an industry expert. Each of them will be asked individually for their estimate of the demand. An iterative process is conducted until...