# Marketing Mngmt - Demand Forecasting

Demand forecasting is an assumption of demand in future. By using demand forecasting, a company makes suitable plans for upcoming challenges or demands and takes suitable action to tackle that them.

Demand forecasting can be divided into the following two major types −

• Short run forecasting − is made to fulfill short-term targets, like preparation of suitable sales policies to increase the sales or proper planning for inventory as per the required demand.

• Long run forecasting − is assumption made for long-term targets like planning of capital or assets.

Short run and long run demand forecasting is used as per the requirement of the enterprise. These forecasting types are explained in further section.

## Steps in Demand Forecasting

Following factors should be considered for assumption and fulfillment of short and long term demand forecasting.

• Identifying the most relevant method for forecasting.

• Predicting factors involved, which affect the demand of the product.

• Acquiring the data about the factors that affect demand.

• Finding the most suitable relation among independent variables and dependent variables.

• Preparing the demand forecast and analyzing the results.

• Demand forecasting can be accomplished by following the above steps.

The tools or methods used to forecast demand are of the following two types −

• Quantitative techniques

• Qualitative techniques

## Quantitative Techniques

These techniques are used for both short run and long run forecasting; however, for short and long run forecasting, this method can further be sub divided as per forecasting type. The following are the tools for short-run forecasting −

### Moving Average Method

This method is used to plot a trend in the demand. In this, average demand of different time frame is taken (for example, 2 years, 3years, etc.) for getting an assumption of future demand.

Example − Find the 3 yearly moving averages of the following −

Year Production
1999 42
2000 46
2001 47
2002 39
2003 54
2004 65
2005 66
2006 60

### Solution

Year Production 3 Yearly MT 3 Yearly MA
1999 42
2000 46 136 45.33
2001 48 133 44.33
2002 39 141 47
2003 54 158 52.67
2004 65 185 61.67
2005 60

### Exponential Smoothing Method

This method is mostly used for short-term forecasting. It is derived from moving average and modified. It is based on weighted averaged of observed value. It smoothens the trend where weighted value remains between 0 and 1.

• St = W.Yt + (1-W). St-I [St= Current smoothened value (predicted)]

• Yt = Current observed value.

• W = weighted value or rate of trend.

### Time Series Analysis

Time series analysis is commonly used for long term demand forecasting. The following are some of its components −

• Seasonal variation

• Cyclical variation

• Random variation

• Irregular variation

To measure the components of time series, the following three methods are used −

• Semi Average Method

• Moving Average Method

• Method of Least Square

These methods can be used for time series analysis as per demand forecasting requirement of an enterprise.

### Econometrics Method

This method for demand forecasting is an analytical method. In this method, different methods of economics and mathematics are used to forecast the demand.

This method provides the liberty to assume multiple variables so it is more accurate in real business situations.

This method is based on the following criteria −

• Demand for a product is based on several factors.

• The determinants are independent variables but the demand is the dependent variable.

• There is a constant interaction between demand and its determinants.

• There is a constant interaction between the independent variables. The independent variables are divided into two types − Exogenous (non-economics) and Endogenous (economics).

This type of interaction can be estimated by statistical method. The forecast is divided into the set of linear or non-linear equations. These principles should be taken into consideration while using the econometrics method for demand forecasting.

## Qualitative Techniques

Let us now discuss some of the qualitative techniques of Demand Forecasting −