DEMAND ESTIMATION & FORECASTING

Need, types

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What is Demand Forecasting

Demand forecasting is estimation of future situation, under given situation.

Forecasts needed for planning in areas of Production,manpower planning,inventory planning Forecasts help to reduce (they do not eliminate) the degree of risk & uncertainity

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Types of forecast

Economic & non economic forecast Micro and macro forecast Active and passive forecast Short run vz long run forecast Forecast for durable/non durable consumer vz capital goods

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Steps of forecasting
1. 2.

3. 4.

Identification of objective Determine the nature of goods under consideration Select a proper method of forecast Interpret results

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Step 1: Identify Objective

Time period Level of forecast macro, industry, firm etc General purpose vs specific Forecast of established vz new product Type of good Miscellaneous factors

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Step 2 :Determine nature of good

Durable Consumer good- pop., saturation limit of market, existing stock of good, replacement vs new demand, income level, consumer credit available, tastes and preferences Non durable consumer good disposable income, price, population Capital goods replacement vs new demand

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Step 3: Select a proper method

2 approaches to business forecasting 1.OPINION POLLING - To obtain information about intention of consumers by means of market research, surveys etc. 2.STATISTICAL METHODS- To use past experience as a guide and extrapolate past rends to estimate the level of future demand

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Methods of demand forecasting

Opinion polling method Consumers survey I. Complete enumeration II. Sample survey III. End use-input-output

Statistical method Barometric technique Regression method Trend projection Econometric modelling

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END-USE METHOD:

The sale of the product under consideration is projected on the basis of demand survey of the industries using this product as an intermediate product. Demand for the final product is the end-use demand of the intermediate product used in the production of this final product.
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ADVANTAGES OF COMPLETE ENUMERATION METHOD: It gives an unbiased information If all the consumers give correct information, the forecast will be accurate DISADVANTAGES: It is an expensive method It is time consuming The authenticity of data is doubtful ( consumers may misjudge or withheld data)

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ADVANTAGES OF SAMPLE SURVEY

It takes less time, money and labour compared to census method It yield precise results because of deployment of specially trained investigators. DISADVANTAGES: The authenticity of data is doubtful In some cases sample survey method cannot be applied.

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ADVANTAGES OF END-USE METHOD:

Provides use-wise or sector wise demand force Does not require historical data If the number of end users of a product is limited, it will be convenient to use this method.

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DISADVANTAGES

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It requires every industry to furnish its plan of production correctly and well ahead of time. Individual industry will have to rely on some other method to estimate the future demand of its product for final consumption. Only the intermediate demand or the input demand part of total demand for a commodity can be predicted.
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Barometric technique

The basic approach of barometric technique is to construct an index of relevant economic indicators and to forecast future trends on the basis of movements in the index of economic indicators.

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Leading series: It consists of indicators which move up or down ahead of some other series. Some example of leading indicators are i) index of net business investment ii) index in the prices of materials. 5/4/2012

Coincident series: It consists of indicators which move up or down simultaneously with the level of general economic activities.

Examples are i) no. of employees in the nonagricultural sector ii) rate of unemployment. Lagging series: It consists of indicators which follow a change after some time lag. Eg . Labour cost per unit of output. LIMITATIONS: i) It is used only for short term forecasting. ii) A leading indicator of the variable to be forecast is not always available.

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Trend Projection
This is based on assumption that future events are continuation of past events Trend series 4 components trend, cyclical, seasonal & irregular ADVANTAGES: 1) It is simple 2) It often yields good forecasts. DRAWBACKS: 1) It assumes that the past rate of the change of the variable under forecast will continue in the future. 2)Not appropriate for short run forecasts. 3) Cannot explain the turning point of the business cycles.

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Simple regression analysis

One may be interested in estimating or predicting the value of one variable given the variable of the other Y=a+bX One may like to know how advertising expenditure and sales are related.To see the effect, one may do a regression analysis

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Regression method
1.Specify the model 2.Data on each variable should be obtained 3.Decide the functional form of demand 4.Test the results LIMITATIONS: 1) It consists of a single equation 2) It assumes one way causation. Only the independent variable causes variation in the dependent 5/4/2012 variable and not vice versa.

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Econometric modelling
Econometric models seek to identify and measure the relative importance of various determinants of demand to be forecasted. Highly sophisticated forecasting method Single equation model Simultaneous equation model: The main limitation of the model is that use of this method is sometimes hampered by nonavailability of adequate data.
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