LECTURE 3.

By Prof
Nyandemo

DEMAND
ANALYSIS AND
FORECASTING
In our discussions today our focus shall be on the following key
strategic issues;

a)The meaning of demand forecasting

b)The key components of demand forecasting

c)The objectives of demand forecasting .

d)Critical steps involved in demand forecasting

e) Criteria for a good demand forecast.

e).Factors likely to limit the quality of a good demand forecast

f)Approaches of undertaking a forecast for new products

introduced into the market

g).Techniques of demand forecasting.

 . The following are the components of a demand forecasting
system,
i) Market research operations inorder to get relevant and
reliable information about trends in the market.
ii) Data processing and analyzing systems to estimate and
evaluate the sales performance in various markets at
given intervals.
iii) Placing/interpreting the findings for use by management.

Definition • According to Cundiff and Still, “ Demand forecasting is an

estimate of sales during a specified future period which is
tied to a proposed marketing plan and which assumes a
certain set of uncontrollable and competitive forces”.

• Demand forecasting is the process

of projecting/predicting the
anticipated future demand of goods
and services including establishing
the research agenda for the firm.
(Singh&Nyandemo).
 Forecasts are becoming the lifeline of businesses in the world
where tidal waves of change are sweeping the most established
firms.
The survival of any business in a competitive market environment
rests squarely on market analysis and demand forecasting.
The sales forecasts are therefore critical in developing business plans
alongside marketing and advertisement strategies as well as
production schedules/timetables.
It equally forms the basis of predictions in terms of sales and
profits.
OBJECTIVES OF DEMAND FORECASTING

1. Formulation of various production policies like;

• Estimating the rightful quantities to produce into the market thereby
avoiding over or under supply.
• Formulating pricing policies.
• Planning on investment levels.
• Establishing production timetables and smoothening the supply chain.
• Establishing the research and development agenda for the firm.
• Establishing production capacities for the firm and its optimal size level.
2. Formulating pricing policies for the firm
3. Creating various action plans for the
firm like;
•Sales promotion and advertisement
strategies.
•Research and development agenda for
the firm.
• Adjusting the firm’s operational size.
4. Enables firms to smoothen their
production time-tables and supply
chain.
5. It enables firms to determine the
amount of inputs required to produce
some given levels of output.
Ultimately this enables firms to plan
for their procurements of inputs.
6. Forecasts are supposed to provide
warning signals on issues the firm
management is required to address
for improvement.
7.Establishing the firm’s financial
requirements.
 CRITICAL STEPS IN UNDERTAKING A GOOD DEMAND FORECASTING

Normally before forecasts are done companies or firms have to

undertake environmental , industry and company`s assement.
In order to carry out a good demand forecast which is accurate and
relevant, there is need to strictly follow the following critical steps
1. Establish the objectives of the forecast.
2. Decide the time frame of the forecast I. e whether short-time,
medium or long-term.
3. Determine the nature and scope of the forecast (, sectoral,
regional, sub-regional, and international)
4.Identify and study different variables that are likely to
influence or affect the demand of the good or service in
the market.(e.g. on clothing and umbrellas check the
weather patterns).
5. Collect the necessary data about the market.
(Population size, level of competition, consumers tastes
and preferences, modes of transport and channels of
distribution , weather forecasts etc.)
6. Select the appropriate technique/s for the forecast.
7.Analyze and interpret the data for use
d interpret the data and information and make
appropriate decisions.
• In the real practical situation, the figure below should
be used as a guideline.

A7777.nalyse and interpret the data and information and make appropriate decisions.

• In the real practical situation, the figure below should be used as a guideline.
 NOTE
Your efforts of undertaking the forecast should impress upon;

• Accuracy-here relate past forecasts with the present

ones..
• Plausability - here the management should have a
good understanding about the techniques used and
the outcomes.
• Simplicity . The techniques and procedures applied
should be easier to understand and follow.
• It needs to be data based.
• It needs to accommodate change and enhance
flexibility
• Need to be economical.
.
FACTORS LIKELY TO LIMIT THE QUALITY OF A GOOD DEMAND FORECAST.

1. Abrupt changes in consumers tastes and preferences

i.e. either in favor or not in favor.
2. Non-availability of past historical data of the product
or service.
3. Governmental interference which can either be seen
to encouraging or discouraging consumption through
either taxation, increasing tariffs, imposing total ban,
restrictive measures in trading or selling, or through
subsidies and tax exemptions).
4. Changes in the patterns of consumer
behavior.
5. Abrupt changes in the
macro-economic variables within the
economy i.e. levels of inflation, taxation,
interest rates and the general status of
the economy-improving or worsening.
6. Internal changes in the management
of the firm or organization.(for better or
worse).
7. Use of the inappropriate strategies and
techniques in forecasting
APPROACHES USED IN UNDERTAKING A DEMAND FORECAST FOR A
TOTALLY NEW PRODUCT IN THE MARKET.
In view of the fact that the product is new in the market
and there is are no past records about the previous sales
volumes there is need to study and analysis the economic
and competitive characteristics of the new product in
order to arrive at the new demand projections.
This will definitely require a combination of approaches so
that they can complement and supplement the
information obtained from each other. These approaches
are mutually exclusive hence desirable to combine them.
These approaches include;
1. Evolutionaryapproach. Here one needs to project the
demand of the new product as an outgrowth of an existing
product in the market.
2. Substitution approach. In this approach one need to
analyses the new product as a substitute for some existing
product. The total market demand for the existing similar
product should relate to the new product on the basis on the
projected market share.
3. Growth curve approach. Here one need to estimate the rate
of growth and the ultimate level of demand for the new
product on the basis of the pattern of growth is established.
4. Opinion Polling approach. In this approach, demand
for the new product is estimated by direct inquiry of the
ultimate purchasers either by use of samples or full-scale
inquiries.
5.Vicarious approach. Here the consumer reaction to the
new product is surveyed indirectly through the eyes of
specialized dealers who are well informed about
consumer ’ s needs and alternative opportunities.
6. Sales experience approach. In this method the new
product is offered for sale in a sample market. The
estimates obtained can be extrapolated to arrive at the
total demand in similar markets within the country
METHODS OF DEMAND FORECASTING
 Year 2017 2018 2019 2020 2021 2022 2023
THE Exports 120 140 150 170 170 200 227
LINEAR (000)
METHOD

•From the given data below project the

trend value of export sales for country
X for the year 2024
•
 SOLUTION

YEAR EXPORTS T ST T2
2017 120 1 120 1
2018 140 2 280 4
2019 150 3 450 9

2020 170 4 680 16

2021 170 5 850 25
• Note: Sales a + bx
∑S= Na +bx
∑ST = at + b∑T2
1177 = 7a + 28b……. (I)
5169 = 28a + 140b…… (ii)
• By solving them simultaneously
4708 = 28a + 112b
5169 = 28a + 140b
-461 = -28b
-28 -28
This method has the following
advantages:
• There is no need to conduct any
sample survey, as only past
information about sales is required.
• Method is simple and easy to
understand
• Under normal situations the method
is likely to give reliable and accurate
results.