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Economics

Demand Forecasting – Understanding Predictions

March 13, 2022
Singhvi Online 1demand

DEMAND FORECASTING

Forecasting of demand is an art and science of predicting the probable demand for a product or service at some future date on the basis of certain past behaviour patterns of some related events and prevailing trends in the present.

BASICS

  • Forecast means to predict.
  •  So what is demand forecasting? It is forecasting demand for a product. 
  • What is the process of forecasting, i.e, how is forecasting done? 

It uses experiences and present information to predict future probability.

  • Answering questions such as :
What Will be the Future Demand?How Will it be met?What are the Factors ?

Before understanding the meaning of Demand Forecasting, consider the following example:

EXAMPLE

We are in the profession of Coaching  CA Foundation students. We teach Economics. Now we want to teach Law. So what would we do? We would calculate the total number of prospective students who would be joining the law batch i.e, we calculate the probable demand for law students for a batch to be conducted in future and while calculating the students we would also consider prevailing trends i.e., nowadays, how many students are joining economics? We also consider certain past behavior patterns, like after enrolling, How many students actually join? 

MEANING

  • Forecasting of demand is an art and science of predicting the probable demand for a product or service at some future date on the basis of certain past behavior patterns of some related events and prevailing trends in the present.
  • Demand forecasting is not simple guessing. It refers to estimating demand scientifically and objectively on the basis of certain facts and events related to forecasting.
  • Demand forecasting refers to knowing or measuring the status or nature of an event before it occurs.

Consider the following example to have a holistic view of usefulness of demand forecasting:

EXAMPLE:

We are in the business of making chocolates. So we need to know how many chocolates or say units of chocolates do we need to produce in a year? So what do we do? We predict the demand. After our forecast we came to know that the demand for the number of chocolate units is 2,00,000/- units. Thus, it helps us in planning as well as decision making. We can plan directly to put 2,00,000 units in the machine i.e., mass production. Thus, wastage is minimum. We can also budget i.e., find resources @cheapest price for 2,00,000 units. Eg. say if we could produce only 1,80,000 units in a year . next year we would directly produce 22,00,000 units . Thus, there would be proper inventory management. Now, since we know exactly how much quantity is to be produced so accordingly we can invest in capital as per our production capacity. If we know our demand is going to fall, we can invest in advertisement strategies accordingly. As we know the demand , we can set up the  prices accordingly.

USEFULNESS OF DEMAND FORECASTING

  • The significance of demand forecasting  in the context of business policy decisions can hardly be overemphasized.
  • It plays a vital role in the process of planning and decision making whether at the national or at the level of a firm.
  • The importance of demand forecasting has increased all the more because of mass production and production in response to demand.
  • A good forecasting helps in:
Efficient production planningProcess selectionCapacity planningFacility layoutInventory management
  • Helps marketing personnel in making key marketing  decisions.
  • It provides necessary information for formulation of suitable advertisement and pricing strategies.

EFFECTIVENESS OF DEMAND FORECASTING

  • Effectiveness of demand forecasting depends upon the level of accuracy with which the future events can be predicted.
  • A good forecasting enables the firm to perform efficient business planning.
  • A firm can plan production scheduling in advance and obtain all necessary inputs for production such as inputs and finances.
  • Capital investments can be aligned to demand expectations thus, checking the possibility of :
OverproductionUnder productionExcess of unused capacitiesIdle resources

INTERPRETATION:

  • No forecast is completely fool proof and correct.
  • However, the process of forecasting helps in evaluating various forces which affect demand and is in itself a rewarding activity as it enables the forecasting authority to know about the various forces relevant to the study of demand behaviour.

Thanks for Reading, Always Welcome