Demand Forecasting

Topics: Forecasting, Supply and demand, Price elasticity of demand Pages: 12 (4039 words) Published: April 5, 2013

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. Knowledge of how demand will fluctuate enables the supplier to keep the right amount of stock on hand. If demand is underestimated, sales can be lost due to the lack of supply of goods. If demand is overestimated, the supplier is left with a surplus that can also be a financial drain. Understanding demand makes a company more competitive in the marketplace. Understanding demand and the ability to accurately predict it is imperative for efficient manufacturers, suppliers, and retailers. To be able to meet consumers’ needs, appropriate forecasting models are vital. Although no forecasting model is flawless, unnecessary costs stemming from too much or too little supply can often be avoided using data mining methods. Using these techniques, a business is better prepared to meet the actual demands of its customers. MEANING, NATURE AND THE ROLE PLAYED BY DEMAND FORECAST IN THE OPERATIONS OF BUSINESS-

Estimates of expected future conditions are called forecasts and estimates of expected future demand conditions are called demand forecasts. Precise forecasts of future developments are clearly impossible. Expectations depend on the assumption made. The reliability of the forecasts hence depends on the reliability of the assumption. The assumptions and methods employed in forecasting depend upon the nature of the planning required. There are two major types of planning which require the use of forecasts. They are (1) Short term planning and (2) long-term planning. In industrially well developed countries, these grow out of planning which the need to predict short-term and long-term changes in demand conditions facing industries. This has been so because demand conditions were always more uncertain than supply in industrially advance countries. In recent times forecasting has come to play an important role in business decision –making. Accompany is in business to serve its customer’s needs in some way or the other. Its survival and prosperity depends on its ability and willingness to adopt its operations to customer’s needs, to creator simulate the need. And serve it adequately and efficiently when the need arises. Demand forecasts serves as the link between the evaluation of external factors in the economy which influence the business and the management of the company’s internal affairs. The very term “planning” is intimately connected with forecasting because it is concerned with the future. More often than not, one finds forecasting decisions which have an important influence on production planning operations being made by store-keepers or stockroom clerks with little or no procedural or policy guidance. Determination of the types of forecasts required and establishment of procedures governing generation of these forecasts are fundamental steps in the organization of well-conceived production control system. For production planning purpose it is particularly important to distinguish between forecasts of sales may be important for estimating revenue, cash requirements, and expenses, a production planning system is designed primarily to react to customer demand. Demand may differ from sales for a variety of reasons. For example, there may be substantial lag between customer orders and billings, or sales may understate demand to the extent that the manufacturing and distribution system is unable to cope up with the volume of customer demand. The particular characteristics of demand forecasts demand are pertinent of production and inventory...
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