Overview

Demand forecasting is the area of predictive analytics dedicated to understanding consumer

demand for goods or services. That understanding is harnessed and used to forecast consumer
demand. Knowledge of how demand will fluctuate enables the supplier to keep the right
amount of stock on hand. If demand is underestimated, sales can be lost due to the lack of
supply of goods. If demand is overestimated, the supplier is left with a surplus that can also be
a financial drain. Understanding demand makes a company more competitive in the
marketplace. Understanding demand and the ability to accurately predict it is imperative for
efficient manufacturers, suppliers, and retailers. To be able to meet consumers’ needs,
appropriate forecasting models are vital. Although no forecasting model is flawless,
unnecessary costs stemming from too much or too little supply can often be avoided using data
miningmethods. Using these techniques, a business is better prepared to meet the actual
demands of its customers.

Understanding Consumer Demand

DEMAND ANOMALIES
In demand forecasting, as with most analysis endeavors, data preparation efforts are critical.
Data is the main resource in data mining; therefore it should be properly prepared before
applying data mining and forecasting tools. Without proper data preparation, the old adage of
"garbage in, garbage out" may apply: useless data results in meaningless forecast models.
Major strategic decisions are made based on the demand forecast results. Errors and anomalies
in the data used to create forecast models may impact the model’s ability to forecast. These
errors give rise to the potential for bad forecasts, resulting in losses. With properly prepared
data, the best possible decisions can be made.

There are several sources for problems with data. Data entry errors are one possible source of
error that can adversely affect the demand forecasting efforts. Basic statistical
summaries and graphing procedures can often make these types of error apparent. Artificial
demand shifts are another error source. For example, consumer response to a promotional
offer may temporarily boost sales of an item. Without a similar promotion, the same increase
cannot be expected in the future. Some uncontrollable factors have the ability to influence
consumer demand as well. A factor such as economic conditions may tend to impact demand.
An unusually mild winter will likely cause lower energy demand. Accounting for these
influences of demand can help fine tune forecast modeling.
SEASONAL FLUCTUATIONS

Every business sees seasonal fluctuations. Holidays and weather changes influence products
and services that consumers want. While it is extremely important to account for how seasonal
changes affect demand, it may be possible to benefit further from this. Understanding how
seasonal factors affect consumers helps businesses position themselves to take advantage.
Forecasting Consumer Demand

ANALYSIS TOOLS

A wide variety of analysis tools can be used to model consumer demand - from traditional
statistical approaches to neural networks and data mining. Using these demand models enables
estimation of future demand: forecasting. Possibly, a combination of multiple types of modeling
tools may lead to the best forecasts.
Time series analysis is a statistical approach applicable for demand forecasting. This technique
aims to detect patterns in the data and extend those patterns as predictions. The ARIMA
model, or autoregressive integrated moving average, in particular is used both to gain
understanding of the patterns in data and to predict in the series. Different parameters are
used to detect linear, quadratic, and constant trends.
Other approaches for building forecast models are Neural Networks and Data Mining, which are
capable of modeling even very complex relationships in data. Demand forecasting is a very
complex issue for which these methods are well suited. Multilayer Perceptrons and Radial Basis
Function neural networks, Multivariate Adaptive Regression Splines, Machine Learning,
and Tree algorithms can all generate predictive models for this application.
StatSoft has a 35 part video series on data mining that demonstrates many of these approaches
for model building. While the video series mainly uses credit risk data, the series can help with
learning the concepts.

SYSTEMATIC PATTERNS VS. TRENDS

Generally, demand patterns consist of some basic classes of components, seasonality, and
trend. Seasonality refers to the portion of demand fluctuation accounted for by a reoccurring
pattern. The pattern repeats systematically over time. Trend is the portion of behavior that
does not repeat. For example, a trend may show a period of growth followed by a leveling off.
In retail sales, seasonality will likely find patterns that repeat every year. With sufficient data,
other seasonality trends may manifest across multiple years.
FORECASTING TECHNIQUES
Once adequate predictive models are found, these models can then be used to forecast
demand. A demand forecast model may actually be an ensemble of multiple models working
together. This technique of combining models often results in better predictive accuracy. When
one model gets off track, the ensemble as a whole counteracts.

As more data accumulate about consumer behavior, demand forecast models should be
updated. This will be a continual effort monitoring and modeling demand in order to be
constantly aware of changes. Failing to update forecast models and take advantage of all the
information available will likely prove to be a costly mistake.

INVENTORY MANAGEMENT

Using up-to-date demand forecast models, inventory management becomes a much simpler
task. The forecast models offer insight into when shifts will occur, but more importantly, how
big the shift will be. Using demand forecast models, inventory and human resources can be
properly planned and managed well in advance and with fewer surprises.
(http://www.statsoft.com/Textbook/Demand-Forecasting)

Demand Forecasting

Demand forecasting is a combination of two words; the first one is Demand and another
forecasting. Demand means outside requirements of a product or service. In general, forecasting
means making an estimation in the present for a future occurring event. Here we are going to
discuss demand forecasting and its usefulness.

It is a technique for estimation of probable demand for a product or services in the future. It is
based on the analysis of past demand for that product or service in the present market condition.
Demand forecasting should be done on a scientific basis and facts and events related to
forecasting should be considered.

Therefore, in simple words, we can say that after gathering information about various aspect of
the market and demand based on past, an attempt may be made to estimate future demand. This
concept is called forecasting of demand.
For example, suppose we sold 200, 250, 300 units of product X in the month of January, February
and March respectively. Now we can say that there will be a demand of 250 units approx. of
product X in the month of April, if the market condition remains the same.

Usefulness of Demand Forecasting

Demand plays a vital role in decision making of a business. In competitive market conditions, there
is a need to take correct decision and make planning for future events related to business like sale,
production etc. The effectiveness of a decision taken by business managers depends upon the
accuracy of the decision taken by them.

Demand is a most important aspect for a business for achieving its objectives. Many decisions of
business depend on demand like production, sales, staff requirement etc. Forecasting is the
necessity of business at an international level as well as domestic level.

Demand forecasting reduces risk related to business activities and helps it to take efficient
decisions. For firms having production at the mass level, the importance of forecasting had
increased more. A good forecasting helps a firm in better planning related to business goals.

There is a huge role of forecasting in functional areas of accounting. Good forecast helps in
appropriate production planning, process selection, capacity planning, facility layout planning, and
inventory management etc. Demand forecasting provides a reasonable data for the organization’s
capital investment and expansion decision. It also provides a way for the formulation of suitable
pricing and advertisement strategies.

Following is the significance of Demand Forecasting:

 Fulfilling objectives of the business

 Preparing the budget

 Taking management decision

 Evaluating performance etc.

Moreover, forecasting is not completely full proof and correct. It thus helps in evaluating various
factors which affect demand and enables management staff to know about various forces relevant
to the study of demand behavior.

The Scope of Demand Forecasting

 The scope of demand forecasting depends upon the operated area of the firm, present as well as
what is proposed in the future. Forecasting can be at international level if the area of operation is
international. If the firm supplies its products and services in the local market then forecasting will
be at local level.

The scope should be decided considering time and cost involved in relation to the benefit of the
information acquired through the study of demand. Cost of forecasting and benefit flows from
such forecasting should be in a balanced manner.

Types of Forecasting

There are two types of forecasting:

 Based on Economy

 Based on the time period

1. Based on Economy

There are three type of forecasting based on the economy:

i. Macro-level forecasting: It deals with the general economic environment relating to the
economy as measured by the Index of Industrial Production(IIP), national income and
general level of employment etc.

ii. Industry level forecasting: Industry level forecasting deals with the demand for industry’s
products as a whole. For example demand for cement in India, demand for clothes in India
etc.

iii. Firm-level forecasting: It means forecasting the demand for a particular firm’s product. For
example, demand for Birla cement, demand for Raymond clothes etc.

2. Based on the Time Period

Forecasting based on time may be short-term forecasting and long-term forecasting

i. Short-term forecasting: It covers a short period of time, depending upon nature of the
industry. It is done generally for six months or less than one year. Short-term forecasting is
generally useful in tactical decisions.
ii. Long-term forecasting casting: Long-term forecasts are for a longer period of time say, two
to five years or more. It gives information for major strategic decisions of the firm. For
example, expansion of plant capacity, opening a new unit of business etc.

Solved Example For You

Q. Which of the following is not correct about demand forecasting?

a. Predicts future demand for a product or service.

b. Based on the past demand for the product or service.

c. It is not based on scientific methods.

d. Helps in the managerial decision making.

Ans: The correct option is C. Demand Forecasting is based on scientific methods and proper
judgment in order to correctly predict the future demand for a product or service. It gathers
information about various aspects of the market like future changes in the selling price, product
designs, changes in competition, advertisement campaigns, the purchasing power of the
consumers, employment opportunities, population, etc. All the information gathered is
scientifically analyzed so as to forecast the future demand for the product.

(https://www.toppr.com/guides/business-economics/theory-of-demand/demand-forecasting/)

Definition: Demand Forecasting refers to the process of predicting the future demand for the
firm’s product. In other words, demand forecasting is comprised of a series of steps that
involves the anticipation of demand for a product in future under both controllable and non-
controllable factors.

The business world is characterized by risk and uncertainty, and most of the business decisions
are taken under this scenario. An organization come across several risks, both internal or
external to the business operations such as technology, attrition, unrest, employee grievances,
recession, inflation, modifications in the government laws, etc.

Predicting the future demand for a product helps the organization in making decisions in one
of the following areas:

 Planning and scheduling the production and acquiring the inputs accordingly.
 Making the provisions for finances.
  Formulating a pricing strategy.
 Planning advertisement and implementing it.
Demand forecasting holds significance in the businesses where large-scale production is
involved. Since the large-scale production requires a long gestation period, a good deal of
forward planning should be done. Also, the potential future demand should be estimated to
avoid the conditions of overproduction and underproduction. Most often, the firms face a
question of what would be the future demand for their product as they have to acquire the
input (labor and raw material) accordingly.

The objective of demand forecasting is attained only when the forecasting is done
systematically and scientifically. Thus, the following steps in demand forecasting are followed
to facilitate a systematic estimation of future demand for product:

1. Specifying the Objective

2. Determining the Time Perspective
3. Choice of method for Demand Forecasting
4. Collection of Data and Data Adjustment
5. Estimation and Interpretation of Results

Thus, demand forecasting is a systematic process that assumes greater significance in large-
scale producing firms. Demand forecasting may not be a serious issue for the small scale firms
which supply a small portion of total demand or produces the product that caters to the short
demand or seasonal demand. Such firms can plan their production on the basis of the business
skills and their past experiences.

(https://businessjargons.com/demand-forecasting.html)

Methods of Demand Forecasting

Definition: Demand Forecasting is a systematic and scientific estimation of future demand for a
product. Simply, estimating the sales proceeds or demand for a product in the future is called
as demand forecasting.

There are several methods of demand forecasting applied in terms of; the purpose of
forecasting, data required, data availability and the time frame within which the demand is to
be forecasted. Each method varies from one another and hence the forecaster must select that
method which best suits the requirement.
 The methods of forecasting can be classified into two broad categories:

1. Survey Methods: Under the survey method, the consumers are contacted directly and are
asked about their intentions for a product and their future purchase plans. This method is often
used when the forecasting of a demand is to be done for a short period of time. The survey
method includes:

 Consumer Survey Method

 Opinion Poll Methods

2. Statistical Methods: The statistical methods are often used when the forecasting of demand is
to be done for a longer period. The statistical methods utilize the time-series (historical) and
cross-sectional data to estimate the long-term demand for a product. The statistical methods
are used more often and are considered superior than the other techniques of demand
forecasting due to the following reasons:

 There is a minimum element of subjectivity in the statistical methods.

 The estimation method is scientific and depends on the relationship between the dependent
and independent variables.
 The estimates are more reliable
 Also, the cost involved in the estimation of demand is the minimum.
The statistical methods include:

 Trend Projection Methods

 Barometric Methods
 Econometric Methods
These are the different kinds of methods available for demand forecasting. A forecaster must
select the method which best satisfies the purpose of demand forecasting.

(https://businessjargons.com/methods-of-demand-forecasting.html)

PDF

Demand Forecasting
(http://www.economicsdiscussion.net/demand-forecasting/demand-forecasting-concept-
significance-objectives-and-factors/3557)
(http://www.me.nchu.edu.tw/lab/CIM/www/courses/Production%20Engineering/Chapter3.%20D
emnand%20Forecasting.pdf)
(http://forecastingprinciples.com/files/pdf/DemandForcasting.pdf)

Lead time Forecasting

(www.dtic.mil/dtic/tr/fulltext/u2/736848.pdf)
(focusedobjective.com/wp.../05/LKUK-Cycle-Time-Forecasting-Troy-Magennis.pdf)
( https://pdfs.semanticscholar.org/fce7/7c8f70fc46a8b7ea1f305e7f97e4f8ebd2f2.pdf)

Ware house flow

(https://www.vkok.ee/logontrain/wp-content/uploads/2014/03/Riga-2-july-2014.pdf)
( https://www.veeqo.com/wp-content/uploads/2018/04/Warehouse-Management-PDF.pdf)
(https://www.researchgate.net/publication/228980842_Warehousing_efficiency_in_a_small_war
ehouse)

Stock Rotation
(http://www.chiltern.gov.uk/media/10187/Shelf-Life-and-Stock-
Rotation/pdf/Shelf_Life_and_Stock_Rotation.pdf?m=636340686485500000)
(https://www.iddba.org/training-materials/pdfs/jg-fifo.aspx?ext=.pdf)
(http://docs.business.auckland.ac.nz/Doc/Zhou-anzamsymposium2014_submission_132-EA-
final.pdf)

RRL AND THEORETICAL FRAMEWORK

http://shodhganga.inflibnet.ac.in/bitstream/10603/112815/10/10_chapter%203.pdf