Demand forecasting refers to predicting the demand for future based on historical data and other information.
What is Demand Forecasting:
It is a process in which probable demand for a product or service is estimated for the future period of time. It implies the study of past demand which is used as historical data for that product or service in the present market conditions. It helps the business in the estimation of total sales and revenue by using scientific methods and facts in the foreseeable future. Critical business assumptions like turnover, profit margins, cash flow, capacity planning, capital expenditure, risk assessment etc. are dependent on it.
According to Cundiff and Still,
“Demand Forecasting is an estimate of sales during a specified future period based on the proposed marketing plan and a set of particular uncontrollable and competitive forces.”
According to Prof. Philip Kotler,
“ The company(sales) forecast is the expected level of company sales based on a chosen marketing plan and assumed marketing environment.”
In the words of Evan J. Douglas,
“Demand Forecasting may be defined as a process of finding values for demand in future.”
For Example: –
Some practical examples of demand forecasting are :
Example No. 1: –
Suppose, a manufacturing company had sales of 1200, 1400 and 1600 units during January, February and March. Now, it can be forecasted that approximately 1400 units would be demanded for next month based on the average sales of the last three month’s data assuming other things the same.
Example No. 2: –
A leading electronics company, while estimating the demand for its product for future period i.e. mobiles, refers to the last 12 months of actual sales of its product, and will conduct market research to know the market conditions i.e. features demanded by customers. If market research reveals the demand for new features in the existing product and the sales during the last 12 months is declining, it can easily be estimated that the demand for its product will fall down in future. Thus, the short term demand forecasting will be done accordingly for the purchase, production and inventory planning.
In simple words, demand forecasting refers to making estimations about future customer demand using historical data and other information. A correct demand forecasting provides valuable information to the business about their potential in their current market so that managers can make informed decisions about pricing, production planning, purchasing raw material, managing funds, business growth strategies and market potential. A Business can take help of specialized consultants or market agencies or go for making own estimates called guess estimates to forecast its demand.
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