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Module 3

Demand forecasting is the process of using historical sales data to estimate future customer demand. It provides estimates of the amount of goods and services customers will purchase. There are different types of demand forecasting including active, passive, short term, medium/long term, external macro level, and internal business level forecasting. Demand forecasting is important for production planning, sales forecasting, controlling the business, inventory control, economic planning, and growth/investment programs. Demand can be forecasted using qualitative methods like Delphi technique and sales force opinion, or quantitative methods like trend projection, barometric technique, and econometric forecasting. The objectives of demand forecasting include financial, pricing, manufacturing, sales/marketing, capacity

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CASANES DIANA P.
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32 views

Module 3

Demand forecasting is the process of using historical sales data to estimate future customer demand. It provides estimates of the amount of goods and services customers will purchase. There are different types of demand forecasting including active, passive, short term, medium/long term, external macro level, and internal business level forecasting. Demand forecasting is important for production planning, sales forecasting, controlling the business, inventory control, economic planning, and growth/investment programs. Demand can be forecasted using qualitative methods like Delphi technique and sales force opinion, or quantitative methods like trend projection, barometric technique, and econometric forecasting. The objectives of demand forecasting include financial, pricing, manufacturing, sales/marketing, capacity

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CASANES DIANA P.
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© © All Rights Reserved
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FORECASTING & DEMAND

PLANNING
DEMAND FORECASTING

• Is the process in which historical sales data is used to develop an


estimate of an expected forecast of customer demand.
• Demand Forecasting provides an estimate of the amount of goods
and services that its customers will purchase in the foreseeable
future
TYPES OF DEMAND FORECASTING

• Active Demand Forecasting- takes into account not only historical sales
data but also external market forces and trends.
• Passive Demand Forecasting-
-This is a rare type of forecasting limited to small and local businesses. Simple
extrapolations of historical data is carried out with minimal assumptions.
- carried out for scaling and diversifying businesses with aggressive growth plans
in terms of marketing activities, product portfolio expansion and consideration of
competitor activities and external economic environment.
TYPES OF DEMAND FORECASTING

• Short-term Demand Forecasting


- carried out for a shorter term period of 3 months to 12 months. In the
short term, the seasonal pattern of demand and the effect of tactical decisions
on the customer demand are taken into consideration.
• Medium to Long Term Demand Forecasting
- typically carried out for more than 12 months to 24 months in
advance.
-Long-term Forecasting drives the business strategy planning, sales
and marketing planning, financial planning, capacity planning, capital
expenditure, etc.
TYPES OF DEMAND FORECASTING

• External Macro level Demand Forecasting


- deals with the broader market movements which depend on the macroeconomic
environment.
-External Forecasting is carried out for evaluating the strategic objectives of a
business like product portfolio expansion, entering new customer segments,
technological disruptions, a paradigm shift in consumer behavior and risk mitigation
strategies.

• Internal business level Demand Forecasting


- deals with internal operations of the business such as product category, sales division,
financial division, and manufacturing group. This includes annual sales forecast, estimation of
COGS, net profit margin, cash flow, etc.
IMPORTANCE OF DEMAND FORECASTING

• 1) Production Planning: Expansion of output of the firm should be


abased on the estimates of likely demand, otherwise there may be
overproduction and consequent losses may have to be faced.
• 2) Sales Forecasting: Sales forecasting is based on the demand
forecasting. Promotional efforts of the firm should be based on the sales
forecasting.
• 3) Control of Business: For controlling the business, it is essential to
have a well conceived budgeting of costs and profits that is based on the
forecast of annual demand.
IMPORTANCE OF DEMAND FORECASTING

• 4) Inventory Control: A satisfactory control of business inventories, raw


materials, intermediate goods, finished product, etc. requires satisfactory
estimates of the future requirements which can be traced through demand
forecasting.
• 5) Economic Planning and Policy Making: The government can
determine its import and export policies in view of the long-term demand
forecasting for various goods in the country.
• 6) Growth and Long- term Investment Programs: Demand forecasting
is necessary for determining the growth rate of the firm and its long-term
investment programs and planning.
Demand Forecasting methods

• demand can be forecasted using:


(A) Qualitative methods or (B) Quantitative methods as
explained below:
Demand Forecasting methods: Qualitative methods:

• The Delphi Technique: A panel of experts are appointed to


produce a Demand Forecast. A consequent forecast is again made
by all experts and the process is repeated until all experts reach a
near consensus scenario.
• Sales Force Opinion: The Sales Manager asks for inputs of
expected demand from each Salesperson in their team. Each
Salesperson evaluates their respective region and product
categories and provides their individual customer demand.
• Market Research: In market research technique, customer-specific
surveys are deployed to generate potential demand.
Demand Forecasting methods: Quantitative
methods

• Trend projection method: Trend projection method can be


effectively deployed for businesses with a large sales data history of
typically more than 18 to 24 months.
• Barometric technique: based on the principle of recording events
in the present to predict the future.
• Econometric forecasting technique: Econometric forecasting
utilizes autoregressive integrated moving-average and complex
mathematical equations, to establish relationships between demand
and factors that influence the demand.
Demand Forecasting objectives

Objectives of Demand Forecasting include:


• Financial planning
• Pricing policy
• Manufacturing policy,
• Sales and Marketing planning,
• Capacity planning and expansion,
• Manpower planning and Capital expenditure.

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