A forecast is a prediction or estimation of a future
situation. A demand forecast means estimation of
the demand for the good in question in the forecast period. Good production and sales planning require
forecasts of the business conditions and their relation to demand.
In order to do business planning and scheduling operations the importance of the information regarding sales or demand is increasingly realized. Sales are the primary source of revenue for the business. Demand forecasts are essential for the business firms to avoid situations of underproduction and over-production and to acquire inputs and plan their production accordingly.
Sales forecasts are needed to determine the quantum of production. In this chapter we have discussed the meaning of demand forecasting, distinction between demand forecasting and demand estimation, objectives and process of demand forecasting and various techniques of demand forecasting.For genuine forecasts, the forecast period is a future period and they are referred to ex-ante forecasts. The forecasts for present and past period, which are carried out to test and reliability of the predicting model, are called ex-post forecasts.
Demand forecasts may be attempted for the total market as well as for market segments. Similarly firm demand and industry demand are forecast. Demand forecasts are also classified into active and passive forecasts. Active forecasts consider the likely changes in the relevant variables in future in estimating the future demand. Passive forecasts refer to the estimation of future demand if things continue the way they have been in the past. Thus, it is clear that it is the active forecasts are more meaningful, though passive forecasts assess the impact of new policies on the market.
Forecasts can broadly be classified into two categories: Passive forecasts and Active forecasts. Passive forecasts predict the future situation based on the assumption that the firm need not change the course of its action and active forecasts estimate the future situation under the condition of likely future changes in the actions by the firm. For example, if Tata Tea takes no policy action to influence its future sales, the estimation of sales may be called a passive sales forecast. On the other hand, if the company formulates and takes strategic decisions and actions to influence the future sales, it will be terms active forecasts. In general, a business would be interested in both passive and active forecasts. Often business firms like to forecast the sensitivity of their demand taking in to account changes taking place in a host of their alternative policy variables like sales at different prices of the product itself, prices of substitutes and complements, varying advertisement expenditure.
A. Short term
1. Helps in reducing costs of raw materials and control inventories,
2. Make arrangements for short terms financial requirements.
3. Establish targets and to provide incentives to sales force.
4. Make arrangements for appropriate promotional efforts such as advertising and sales campaign etc. 5. Formulate pricing policies for achieving desired results.
6. Demand forecasting assists in production planning and scheduling operations to avoid overproduction and underproduction.
B. Long term
In order to do business planning and scheduling operations the importance of the information regarding sales or demand is increasingly realized. Sales are the primary source of revenue for the business. Demand forecasts are essential for the business firms to avoid situations of underproduction and over-production and to acquire inputs and plan their production accordingly.
Sales forecasts are needed to determine the quantum of production. In this chapter we have discussed the meaning of demand forecasting, distinction between demand forecasting and demand estimation, objectives and process of demand forecasting and various techniques of demand forecasting.For genuine forecasts, the forecast period is a future period and they are referred to ex-ante forecasts. The forecasts for present and past period, which are carried out to test and reliability of the predicting model, are called ex-post forecasts.
Demand forecasts may be attempted for the total market as well as for market segments. Similarly firm demand and industry demand are forecast. Demand forecasts are also classified into active and passive forecasts. Active forecasts consider the likely changes in the relevant variables in future in estimating the future demand. Passive forecasts refer to the estimation of future demand if things continue the way they have been in the past. Thus, it is clear that it is the active forecasts are more meaningful, though passive forecasts assess the impact of new policies on the market.
Forecasts can broadly be classified into two categories: Passive forecasts and Active forecasts. Passive forecasts predict the future situation based on the assumption that the firm need not change the course of its action and active forecasts estimate the future situation under the condition of likely future changes in the actions by the firm. For example, if Tata Tea takes no policy action to influence its future sales, the estimation of sales may be called a passive sales forecast. On the other hand, if the company formulates and takes strategic decisions and actions to influence the future sales, it will be terms active forecasts. In general, a business would be interested in both passive and active forecasts. Often business firms like to forecast the sensitivity of their demand taking in to account changes taking place in a host of their alternative policy variables like sales at different prices of the product itself, prices of substitutes and complements, varying advertisement expenditure.
DEMAND ESTIMATION VS. DEMAND FORECASTING
A business firm needs to know
the demand for its product. The existing firm must know current demand, say,
over a month or a half year or a year for its product not only to avoid the
conditions of underproduction and overproduction but also determine its pricing
and promotional policies, etc. so that it is able to secure optimum sales. Such
estimation about the current demand for a firm’s product is called Demand Estimation. Demand estimation may be explained as the process of finding current values of demand for various values of prices and other determining variables. Demand estimation for a firm’s product is for a short period. The firms may not be much interested in short term estimation. They may be interested in production planning, new product development, long term financial investment for expansion or in new schemes or long term human resource requirements. These decisions have effects over a long period of time. These plans may have long gestation period and a high degree of uncertainty. For example, large steel plants require ten to fifteen years for construction. It is, therefore, necessary to forecast demand five year, ten year or even more hence and so on. This is known as demand forecasting. Demand forecasting may be understood as the process of finding values for demand in future time periods. Demand forecasting is for a long period. Demand forecasting is also known as Business forecasting.
OBJECTIVES OF DEMAND FORECASTING
The short term and long term objectives of demand forecasting may be described as follows:A. Short term
1. Helps in reducing costs of raw materials and control inventories,
2. Make arrangements for short terms financial requirements.
3. Establish targets and to provide incentives to sales force.
4. Make arrangements for appropriate promotional efforts such as advertising and sales campaign etc. 5. Formulate pricing policies for achieving desired results.
6. Demand forecasting assists in production planning and scheduling operations to avoid overproduction and underproduction.
B. Long term
The following are the important long- term objectives of demand forecasting.
1. Frequently, the objective of forecasting is to predict demand
2. Forecasts can also provide information on the proper product mix
3. Long term demand forecasting tries to achieve the objective of ascertaining future demand for the product so that the firm can plan for new units, new projects, new plants, expansion of existing scale of operations.
4. Demand forecasting is also significant for preparing plans for long-term financial requirements and take steps for arranging these finances.
5. Demand forecasting helps the firm in planning for long- term human resource planning with training programs well in time for future expansion programs and also for adapting itself to new products likely to come up in the market.
2. Forecasts can also provide information on the proper product mix
3. Long term demand forecasting tries to achieve the objective of ascertaining future demand for the product so that the firm can plan for new units, new projects, new plants, expansion of existing scale of operations.
4. Demand forecasting is also significant for preparing plans for long-term financial requirements and take steps for arranging these finances.
5. Demand forecasting helps the firm in planning for long- term human resource planning with training programs well in time for future expansion programs and also for adapting itself to new products likely to come up in the market.
6. It also helps in developing different processes if there is going to be a heavy growth in the demand for the product.
7. Forecasting is an important management activity. Major decisions in large businesses almost always are based on forecasts of some sort. In certain cases, the forecast may be more than an intuitive assessment of the future by those involved in the decision. In other cases, the forecast may have required deliberate effort.
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