DEMAND ESTIMATION AND FORECASTING

DEMAND ESTIMATION AND FORECASTING

Demand Estimation

Business enterprise needs to know the demand for its product. An existing unit must know current demand for its product in order to avoid underproduction or over production. The current demand should be known for determining pricing and promotion policies so that it is able to secure optimum sales or maximum profit. Such information about the current demand for the firm‟s product is known as demand estimation.

Demand Estimation is the process of finding current values of demand for various values of prices and other determining variables.

Steps in Demand Estimation

1.      Identification of independent variables such as price, price of substitutes, population, percapita income, advertisement expenditure etc.,

2.      collection of data on the variables from past records, publications of various agencies etc.,

3.      Development a mathematical model or equation that indicates the relationship between independent and dependant variables.

4.      Estimation of the parameters of the model. I.e., to estimate the unknown values of the parameters of the model.

5.      Development of estimates based on the model.

Tools and techniques for demand estimation includes;

1.      Consumer surveys.

2.      Consumer clinics and focus groups

3.      Market Experiment.

4.      Statistical techniques.

Demand Forecasting.

Accurate demand forecasting is essential for a firm to enable it to produce the required quantities at the right time and to arrange well in advance for the various factors of production. Forecasting helps the firm to assess the probable demand for its products and plan its production accordingly.

Demand Forecasting refers to an estimate of future demand for the product. It is an “objective assessment of the future course of demand”. It is essential to distinguish between forecast of demand and forecast of sales. Sales forecast is important for estimating revenue, cash requirements and expenses. Demand forecast relate to production inventory control, timing, reliability of forecast etc...

Levels of Demand forecasting

Demand forecasting may be undertaken at three different levels;

1. Macro level – Micro level demand forecasting is related to the business conditions prevailing in the economy as a whole.

2. Industry Level – it is prepared by different trade association in order to estimate the demand for particular industries products. Industry includes number of firms. It is useful for inter-industry comparison.

3.  Firm level – it is more important from managerial view point as it helps the management in decision making with regard to the firms demand and production.

Types of Demand Forecasting. 

Based on the time span and planning requirements of business firms, demand forecasting can be classified into short term demand forecasting and long term demand forecasting.

Short term Demand forecasting: Short term Demand forecasting is limited to short periods, usually for one year. Important purposes of Short term Demand forecasting are given below;

1.      Making a suitable production policy to avoid over production or underproduction.

2.      Helping the firm to reduce the cost of purchasing raw materials and to control inventory.

3.      Deciding suitable price policy so as to avoid an increase when the demand is low.

4.      Setting correct sales target on the basis of future demand and establishment control. A high target may discourage salesmen.

5.      Forecasting short term financial requirements for planned production.

6.      Evolving a suitable advertising and promotion programme.

Long term Demand Forecasting:  this forecasting is meant for long period. The important purpose of long term forecasting is given below;

1.      Planning of a new unit or expansion of existing on them basis of analysis of long term potential of the product demand.

2.      Planning long term financial requirements on the basis of long term sales forecasting.

3.      Planning of manpower requirements can be made on the basis of long term sales forecast.

4.      To forecast future problems of material supply and energy crisis.

Demand forecasting is a vital tool for marketing management. It is also helpful in decision making and forward planning. It enables the firm to produce right quantities at right time and arrange well in advance for the factors of production.