Demand Forecasting is an important tool for business decision-making and future business planning. This involves the determination of the level of production, manpower requirements, equipment, and inventory levels.
It tries to evaluate the magnitude and significance of forces that will affect future operating conditions in an enterprise or business organization.
All these decisions are basically related to the size of production which in turn can be determined from the potential demand for the product.
A poor job of demand forecasting will lead to ineffective production and to an inventory that is either too large or too small.
What are the Objectives of Demand Forecasting?
The following are the major objectives of demand forecasting:
1. Formulation of Production Policy
Sales forecasts help in formulating suitable production policies so that there may not be any gap between the demand and supply of products this can for ensure.
2. Regular Supply of Material
By determining the desired volume of production on the basis of sales forecasts, One can evaluate the necessary raw material requirements in the future so as to ensure the regular and continuous supply of the material as well as control the size of inventory at an economic level.
3. Maximum Utilization of Machines
The operations can be so planned that the machines are utilized to their maximum capacity.
There are many benefits of sales forecasting.
4. Regular Availability of Labour
Skilled and unskilled workers can be properly arranged to meet the production schedule requirement.
5. Price Policy Formulation
Sales forecast enables the management to formulate some appropriate pricing mechanisms so that the level of price does not fluctuate too much in periods of depression or inflation.
6. Proper Control of Sales
Sales forecasts are calculated region wise and then the sales targets for various territories are fixed accordingly.
This letter becomes the basis to evaluate sales performance.
7. Arrangement of Finance
On the basis of sales forecasts, one can determine the financial requirements of the enterprise for the production of the desired output.
This can lead to minimizing the cost of procuring finance.
8. To Decide on Production Capacity
The size of the plant should be such that the output confirms sales requirements.
The 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 desired capacity.
9. Labour Requirement
Expenditure on labor is one of the most important components of 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.
10. 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 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 the sales forecasting mechanism.
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:
1. Much Extensive
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.
2. Unrealistic Assumptions
Most of the methods of demand forecasting are based on several assumptions.
Such assumptions are related to past and present happening of events which may not prove correct in the future as well.
The conclusions drawn from so many assumptions will not give reliable and accurate results.
3. Less Reliability
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 reliability and accuracy.
Less the reliability less will be the reliability of data and the conclusions will not be correct.
4. Requires Careful use
Demand forecasting may be 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 for demand forecasting depends upon the nature of forecasting and the availability of resources.
- Experience the best conjecture.
- Survey method based on buyers’ opinions.
- 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, we can say that demand forecasting is very important in any business enterprise.