Read this article to get study notes on Demand Forecasting:- 1. Meaning of Demand Forecasting 2. Objects of Demand Forecasting 3. Importance 4. Steps.
Notes on Demand Forecasting
1. Meaning of Demand Forecasting:
The formulation of appropriate and useful production policy is an important aspect for an enterprise. This involves determination of level of production, manpower requirements, equipment and inventory levels etc. All these decisions are basically related to the size of production, which in turn can be determined from potential demand for the product.
Thus the starting point of all decisions related to production strategy is the product demand forecast for a specified period. To know what a business should perform we must know its future sales. In the absence of this information, both short and long term planning will rest on a foundation which is much less substantial than sand.
A poor job of demand forecasting will lead to an ineffective production planning and to words an inventory that is either too large or too small.
In literary sense forecasting mean prediction. Forecasting may be defined as a technique of translating past experience into prediction of things too comes. It tries to evaluate the magnitude and significance of forces that will affect future operating conditions in an enterprise.
In the words of Garfield, “Production is an integral part of any scientific generalization as to the relationship between two or more factors. The generalizations must hold not only with regard to the past observations but also for all future observations related to the same phenomenon. Productions even more organically related to those generalizations which establish a definite time sequence in the occurrence of certain factors.”
Due to dynamic nature of market phenomenon demand forecasting has become a continuous process and requires regular monitoring of the situation.
Demand forecasts are first approximations in production planning. These provide foundations upon which plans may rest and adjustments may be made, “Demand forecast is an estimate of sales in monetary or physical units for a specified future periods under a proposed business plan or programme or under an assumed set of economic and other environmental forces, planning premises outside the business organization for which the forecasting or estimate is made“.
Sales forecast is an estimate based on some past information, the prevailing situation and prospects of future. It is based on an effective system and is valid only for some specific period.
The following are the main components of a sales forecasting system:
(i) Market Research Operations to get the relevant and reliable information about the trends in market,
(ii) A data processing and analysing system to estimate and evaluate the sales performance in various markets.
(iii) Proper co-ordination of steps (i) and (ii) and then to place the findings before management for making final decisions.
2. Objects of Demand Forecasting:
The objectives of demand forecasting can be divided in two categories namely:
A. Short term objectives,
B. Long term objectives.
A. Short Term Objectives:
(a) Formulation of Production Policy:
Demand forecasts help in formulating suitable production policy so that there may not be any gap between demand and supply of product.
This can further ensure:
(i) Regular Supply of Material:
By the determination of desired volume of production on the basis of demand forecasts, one can evaluate the necessary raw material requirements in future so as to ensure regular and continuous supply of the material as well as controlling the size of inventory at economic level.
(ii) Maximum Utilization of Machines:
The operations can be so planned that the machines are utilized to its maximum capacity.
(iii) Regular Availability of Labour:
Skilled and unskilled workers can be properly arranged to meet the production schedule requirement.
(b) Price Policy Formulation:
Sales forecasts enable the management to formulate some appropriate pricing mechanism, so that the level of price does not fluctuate too much in the periods of depression or inflation.
(c) Proper Control of Sales:
Sales forecasts are calculated region wise and then the sales targets for various territories are fixed accordingly. This later on becomes the basis to evaluate sales performance.
(d) Arrangement of Finance:
On the basis of demand forecast, one can determine the financial requirements of the enterprise for the production of desired output. This can lead to minimise the cost of procuring finance.
B. Long Term Objectives:
If period of a forecast is more than a year then it is termed as long term forecasting.
The following are the main objectives of such forecasts:
(i) To Decide about the Production Capacity:
The size of the plant should be such that the output conforms to sales requirement. Too small or too large size of the plant may not be in the economic interest of the enterprise. By studying the demand pattern for the product and the forecasts for future the enterprise can plan for a plant/output of desired capacity.
(ii) Labour Requirements:
Expenditure on labour is one of the most important components in cost of production. Reliable and accurate demand forecasts can ensure best labour facility and no hindrances in the production process.
(iii) Long term production planning can help the management to arrange for long-term finances.
The analysis of long term sales is more significant than short term sales. Long term sales forecast help the management to take some policy decisions of great significance and any error committed in this may be very difficult expensive to be rectified.
Thus the overall success of an enterprise mainly depends on the quality and reliability of demand forecasting.
3. Importance of Demand Forecasting:
Production and distribution are two main activities of a business enterprise. Demand forecasts tries to maintain a balance between production and distribution policies of the enterprise. With decentralization of functions and increase in the size of the organizations, forecasting of demand is of great value for proper control and co-ordination of various activities.
An efficient demand forecast helps the management to take suitable decisions regarding plant capacity, raw-material requirements, space and building needs and availability of labour and capital. Production schedules can be prepared in conformity with demand requirements minimizing inventory, production and other related costs.
Demand forecasting is a necessary and effective tool in the hands of the management of an enterprise to have finished goods of the right quality and quantity at the right time with minimum cost.
4. Steps in Demand Forecasting:
The following are the main steps in demand forecasting:
(i) Determine the objective of the forecast.
(ii) Select the period over which the forecast is to be made.
(iii) Select the techniques to be used forecasting.
(iv) Collect the information to be used.
(v) Make the forecast.