The formulation of appropriate and useful production policy is an important aspect of a business organization. This involves determination of level of production, manpower requirements, equipment and inventory levels. Demand Forecasting: Meaning, Objectives, Methods, Importance & Steps.
All these decisions are basically related to the size of production which in turn can be determined from potential demand for the product. Thus, the starting point of all these decisions is the product Demand forecast for a specified period.
To know what a business should perform, we must know its future sales. In the absence of this information, both short and long-term planning with rest on a Foundation much less substantial than sand. A poor job of demand forecasting will lead to an ineffective production and to an inventory that is either too large or too small.
Meaning of Demand Forecasting
In literary terms Forecasting mean prediction. Forecasting may be defined as a technique of translating past experience into the prediction of things to come. It tries to evaluate the magnitude and significance of forces that will affect future operating conditions in an enterprise.
Thus, Demand forecasting is essential for new as well as all firms to avoid overproduction and under production.
As such, Demand Forecasting is a projection of firm’s expected level on a chosen marketing plan and assumed marketing environment.
Due to dynamic nature of market phenomenon demand forecasting has become a continuous process and requires regular monitoring of the situation.
In Management circles, Demand forecasting, Sales forecasting are used interchangeably. sales forecasts first approximation in production planning. These provide foundations upon which plans may rest and adjustments may be made. “Sales forecast is an estimate of cells in monetary or physical units for a specified future period under a proposed business plan or programme or under assumed set of economic and other environmental forces, planning premises outside the business organization for which the forecast or estimate is made”
Thus, The demand forecast is an estimate of future demand for product based on same past information, The prevailing situation and prospects of future. It is based on an effective information system and is valid only for some specified period.
The following are the main components of Demand forecasting system:
- Market research operations to get the relevant and reliable information about the trends in the market.
- A data processing and analysis system to estimate and evaluate the sales performance in various markets.
- Proper coordination of steps.
Definition of demand forecasting
Some of the definitions of demand forecasting are given below:
“The company (sales) forecast is the expected level of company sales based on a chosen marketing plan and assumed marketing environment”. – Philip Kotler
“Sales forecast is an estimate of sales during the specified future period, Which estimate is tied to a proposed marketing plan and which assumes a particular set of uncontrollable and competitive forces”. – Cundiff and Still
Objectives of Demand Forecasting
Demand forecasting can be divided into two categories namely
- Short-term objectives
- Long-term objectives
Short term objectives
Formulation of production policy
Sales forecasts help in formulating suitable production policy so that there may not be any gap between demand and supply of product this can for the ensure:
Regular supply of Material
by the determination of the desired volume of production on the basis of sales forecasts, One can evaluate the necessary raw material requirements in future so as to ensure regular and continuous supply of the material as well as controlling the size of inventory as economic level.
Maximum utilization of Machines
The operations can be so planned that the machines are utilized to its maximum capacity.
Regular availability of labor
Skilled and unskilled workers can be properly arranged to meet the production schedule requirement.
Price policy formulation
Sales forecast enables the management to formulate some appropriate pricing mechanism so that the level of price does not fluctuate too much in the periods of depression of inflation.
Proper control of Sales
Forecasts are calculated region wise and then the sales targets for various territories are fixed accordingly. This letter on becomes the basis to evaluate sales performance.
Arrangement of Finance
On the basis of sales forecast, one can determine the financial requirements of the enterprise for the production of desired output. This can lead to minimizing the cost of procuring finance.
If the period of a forecast is more than one year then it is termed as long-term forecast. The following are the main objectives of such forecasts:
To decide about the production capacity
The size of the plant should be such that the output confirms with sales requirements. Too small or Too large size of the plant may not be in the economic interest of the enterprise. By studying the demand pattern for the product and the forecasts for the future enterprise can plan for a plant/output of Desire capacity.
Expenditure on labor is one of the most important components is the cost of production. Reliable and accurate sales forecasts can help the management to access the appropriate labor requirements. This can ensure the best facility and no hindrances in the production processes.
long-term finances on reasonable
Long-term Production Planning can help the management to arrange for long-term finances on reasonable terms and conditions.
The analysis of Long-Term sales is more significant than short-term sales. Long-term sales forecasts help the management to take some policy decisions on of great significance and any error committed in this may be very difficult or expensive to be rectified.
Thus, The overall success of an enterprise mainly depends on the quality and reliability of sales forecasting mechanism. Demand Forecasting: Meaning, Objectives, Methods, Importance & Steps.
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Importance of demand forecasting
1. Control and coordination
Production and distribution are two main activities of the business enterprise. Sales forecasts try to maintain a balance between production and distribution policy of the enterprise with the decentralization of functions and increase the size of organizations, Forecasting of sales is of Great Value for control and coordination of various activities.
2. To take suitable decisions
An efficient demand forecast has the management to take suitable decisions regarding plant capacity, raw material requirements, space and building needs and availability of labor and capital. production schedules can be prepared unconformity with demand requirements minimizing inventory, production, and other related costs.
Demand forecasting also helps in awaiting the performance of sales departments.
3. Effective tool in the hands of management
Demand forecasting is the necessary and effective tool in the hands of management of an enterprise to have finished goods of right quality and quantity at right time with minimum cost.
4. Estimating its financial requirements
Demand forecasting is also very useful for a firm in estimating its financial requirements. Cash requirements depend on sales level and production operations. Moreover, it also required some time to get funds on reasonable terms, sales forecasts will, Therefore unable arrangement of sufficient funds on reasonable terms well in advance.
5. Essential for old and new firms
Demand forecasting is essential for both the old and new firms. It is much more important where the firm is engaged in the large-scale production and there is a long gestation period in the production process. In such circumstances, an idea about future demand is necessary to avoid under production and overproduction.
6. Guideline for demand forecast
Demand forecasts for a particular product also provide a guideline for demand forecast of related industries. For example, me demand forecast for the automobile industry also helps The Tyre industry in estimating the demand for 2 wheelers 3 wheelers and 4 wheelers.
7. At the micro level
At the micro level, Demand forecasting is useful the government also for determining the targets of imports and exports for different commodities and planning the international business.
Features of Demand forecasting method
Good forecasting method should process the following salient features:
Any method of demand forecasting can be said well only when it is it has the merit of simplicity. The application and understanding of the method should be simple.
A method by which we can get the accurate forecasting will be more useful. It will help business managers to take decisions during upward and downward fluctuations in trade cycles.
The method of demand forecasting should be such on which the business managers can rely and can take business decisions accordingly. Thus, The reliability of the method will also make it more accurate in drawing inferences. Such method will also be accepted Generally.
A method of demand forecasting should have the feature of flexibility so that necessary changes may be made during the study period when there are fluctuations in economic activities.
The method of demand forecasting should possess the merit of the economy. It means it should not be expensive. There should be less time, money and energy involved while calculating the demand forecasting.
A good method of demand forecasting should have Universal applicability. It should provide the same results Inferences in different situations provided the variables included in the study are the same.
Availability of information
A good method demand forecasting is one in which the information to be collected is easily available and when required. All the variables should be quantifiable. In such a situation the business managers can take decisions in time. also, learn Managerial Economist: Responsibilities, Functions, and Role.
limitations of Demand Forecasting
Demand forecasting is used in trade, modern business, and industry. The various methods of demand forecasting are good but the overall study of demand forecasting reveals that it has the following limitations:
Most of the methods of demand forecasting require more time, money and energy in the collection of data and information from money. Hence, an ordinary firm of small means cannot use the methods of demand.
Most of the methods of demand forecasting are based on several assumptions. Such assumptions are related to the past and present happening of events which may not prove correct in future as well. The conclusions drawn from so many assumptions will not give reliable and accurate results.
Demand forecasting is based on data. If the data are unreliable, the analysis and influences will also not be correct. There is a direct relationship between the reliability and accuracy. Less the reliability less will be the reliability of data and the conclusions will not be correct.
Requires careful use
Demand forecasting maybe for short and long periods. Its objectives vary from one period to another, from one level of forecasting to another. Hence, the use of facts based on different methods of forecasting should carefully be used. Carelessness in using the method will not serve the purpose.
Methods of demand forecasting
There are various methods of demand forecasting. The choice of techniques of demand forecasting depends upon the nature of forecasting and availability of resources.
- Experience best conjecture.
- Survey method based on buyers opinion.
- Graphics method.
- Collective opinion best method.
- Trend projection method.
- A method based on economic indicators.
- Econometric method.
Steps in demand forecasting
- Determination of objectives.
- The scope of demand forecasting.
- Determination of time period.
- Determination of the factors affecting demand.
- Collection of data.
- Knowledge of market conditions.
- Type of forecasting.
- Nature of commodity.
- Method of forecasting.
- Conclusion and inference.
- Review of performance.
Thus, Now You know well about Demand Forecasting: Meaning, Objectives, Methods, Importance & Steps.
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