Demand Forecasting
Demand Forecasting
Forecasting is important for business planning. Demand forecasting means predicting the future demand for a product. The success of a business manager depends on how accurately he can predict the future demand for a product. This is more important where production is on a large scale and production processes require long gestation periods. The problem of forecasting may be of a serious nature for small firms where the supply is a very small contribution to the total demand and the products provide services of short-term nature. Even for short-term forecasting it is difficult to obtain the necessary information and for long-term forecasting it is even more difficult or to calculate how changes in specific demand variables like price, advertising expenditure, credit terms, etc. will affect the demand. A number of forecasting techniques have been developed by economics. Each technique has its own limitations and importance.
Need for Demand Forecasting
Business managers need various forecasts. They have to forecast demand, supply, prices, profits, costs and investments. Here we cannot give much importance to demand and sales forecasts alone. Sales are the main means of earning revenue. Therefore, sales forecasts are important for production planning, inventory planning and profit planning. People’s cooperation is necessary for production. Similarly, machines, materials, money and finance are also needed. Manpower planning, working capital management and financial arrangements all depend on sales forecasts. Therefore, demand forecasts are very important for corporate planning.
It should be kept in mind that the purpose of forecasting is not to collect additional data for the future with complete accuracy, rather our purpose is to express the possibilities of what can happen in a particular situation. In other words, it is not the exact future but the possible future which is created by our forecast. These forecasts cannot eliminate any problem, but they can definitely reduce the uncertainty of the future so that policy decisions related to business operations can be taken at that time and action plans can be adopted accordingly. When you do not forecast, you often assume that the business conditions are repeating, but this is not true, because changes are natural in a dynamic world. Although it is not possible to identify the rapid changes in advance in a completely correct manner, some estimate of them can definitely be made through forecasts. Therefore, forecasting is a function of this assessment. In a way, it is an attempt to reach as close as possible to the reality. It is an action that motivates to shape the possible form of business. If there is very little difference between the possible state and the actual state, then such a forecast is more reliable. If you do not have a reliable forecast of demand, the whole business becomes meaningless. Sales forecast guides business policy decisions. Without forecast, the future planning of an industrial unit will become directionless.
Forecasting is done for both short and long term. In short term forecasting, seasonal behaviour is of utmost importance. Such forecasting is helpful in deciding appropriate policy to deal with problems like accumulation of excess stock or delay in fulfilling orders. Long term forecasting is helpful in making proper planning related to capital. Long term planning helps in achieving proper level of points like wastage of material, labour hours and capacity. Similarly, long term forecasting plays an important role in deciding appropriate production policy, controlling inventory and reducing cost of raw material, deciding appropriate price policy and planning future financial requirements.
