Methods of Demand Forecasting (Established Products)
Several methods are employed for forecasting demand. All these methods can be grouped into survey method and statistical method.
Under this method, information about the desire of the consumers and opinions of experts are collected by interviewing them. This can be divided into four types;
1. Opinion Survey method: This method is also known as Sales- Force –Composite method or collective opinion method. Under this method, the company asks its salesmen to submit estimate for future sales in their respective territories. This method is more useful and appropriate because the salesmen are more knowledgeable about their territory.
2. Expert Opinion: Apart from salesmen and consumers, distributors or outside experts may also be used for forecast. Firms in advanced countries like USA, UK etc...make use of outside experts for estimating future demand. Various public and private agencies sell periodic forecast of short or long term business conditions.
3. Delphi Method: It is a sophisticated statistical method to arrive at a consensus. Under this method, a panel is selected to give suggestions to solve the problems in hand. Both internal and external experts can be the members of the panel. Panel members are kept apart from each other and express their views in an anonymous manner.
4. Consumer Interview method: Under this method a list of potential buyers would be drawn and each buyer will be approached and asked about their buying plans. This method is ideal and it gives firsthand information, but it is costly and difficult to conduct. This may be undertaken in three ways:
A) Complete Enumeration – In this method, all the consumers of the product are interviewed.
B) Sample survey - In this method, a sample of consumers is selected for interview. Sample may be random sampling or Stratified sampling.
C) End-use method – The demand for the product from different sectors such as industries, consumers, export and import are found out.
It is used for long term forecasting. In this method, statistical and mathematical techniques are used to forecast demand. This method is relies on past data. This includes;
1. Trent projection method: Under this method, demand is estimated on the basis of analysis of past data. This method makes use of time series (data over a period of time). Here we try to ascertain the trend in the time series. Trend in the time series can be estimated by using least square method or free hand method or moving average method or semi-average method.
2. Regression and Correlation: These methods combine economic theory and statistical techniques of estimation. in this method, the relationship between dependant variables(sales) and independent variables(price of related goods, income, advertisement etc..) is ascertained. This method is also called the economic model building.
3. Extrapolation: In this method the future demand can be extrapolated by applying binomial expansion method. This is based on the assumption that the rate of change in demand in the past has been uniform.
4. Simultaneous equation method: This means the development of a complete economic model which will explain the behaviour of all variables which the company can control.
5. Barometric techniques: Under this, present events are used to predict directions of change in the future. This is done with the help of statistical and economic indicators like:
Construction contract, Personal income Agricultural income Employment
Bank deposit etc…