Demand Forecasting

(Submitted to department of professional studies as part 1 st semester CIA)

Group Number
A-3
Aprameya - 2322213
Chris - 2322220
Danny- 2322221
Jayanath - 2322224
Gowri - 2322225
Hadin - 2322226
Jessica - 2322229
Class: BCOM IAF

Submitted to
Tista Kundu
Economics faculty

Department of Professional Studies

Christ University, Bengaluru,
Yeshwanthpur Branch-560058
2023-24
Demand forecasting
Introduction:
Demand is said to be the quantity of goods and services that consumers are willing and able to
purchase at the current prevailing market price. Demand forecasting in simple terms is the
process of estimating the future demand for products or services. In the critical aspects of the
business demand forecasting helps to make informed decisions about production, marketing,
inventory management, pricing, and resource allocation.
Few importance of demand forecasting:
• Planning: Demand forecasting provides valuable and key information about the quantity
of goods or services that consumers are likely to purchase soon. Which in turn helps the
business to produce the product according to the demand, company can align its
production with forecasted demand, which helps the company to reduce its
underproduction and overproduction situation.
• Pricing Strategies: Accurate demand forecasting helps to set appropriate pricing
strategies. When the product's demand is predicted to be high, firms may increase prices
severely to maximize their revenue. Inversely when the demand is predicted to be lower,
pricing may be adjusted to increase the sales. So, understanding the demand trends plays
a key role in pricing of the product or service.
• Risk Management: By studying the changes in demand, business can manage risks
dynamically. They can prepare for periods of high demand, seasonal fluctuations, and
develop strategies to manage the impact of economic downfalls or economic shocks.
Features of demand forecasting:
• Historical data analysis: Analyzing historical sales and demand data is a crucial starting
point for demand forecasting. By studying past trends and patterns, valuable insights can
be gained regarding future demand.
• Market research: Market research plays a crucial role in gathering data about consumer
preferences, economic indicators, and competitive analysis. This information is essential
for informing demand forecasts and understanding external factors that can impact
market demand
• Data Sources: When it comes to demand forecasting, there are several data sources that
can be utilized. These include sales records, customer surveys, social media insights, and
economic indicators. Note that the accuracy of these forecasts heavily relies on
availability and quality of data being used.
• Quantitative and Qualitative methods: Demand forecasting utilizes both quantitative and
qualitative methods. Quantitative methods involve analyzing data using techniques like
time series analysis and regression analysis. On the other hand, qualitative methods rely
on expert judgement and market research. Integrating these two approaches can result in
more precise and reliable predictions.
Managerial application
In the short run:
Demand forecasts for short periods are made on the assumption that the company has a given
production capacity and the period is too short to change the existing production capacity.
• It would be one year period.
• Production planning: It helps in determining the level of output at various periods and
avoiding under or over production.
• Sales forecasting: It helps the company to set realistic sales targets for everyone
salesperson and for the company.
• Helps in estimating short run financial requirements: It helps the company to plan the
finances required for achieving the production and sales targets.
In the long run:
Long run forecasting of probable demand for a product of a company is generally for a
3 to 5 or 10 years.
1. Business planning
It helps to plan expansion of the existing unit or a new production unit. Capital budgeting
of a firm is based on long run demand forecasting.
2. Financial planning:
It helps to plan long-run financial requirements and investment programs by floating
shares and debentures in the open market.
3. Manpower planning:
It helps in preparing long term planning for imparting training to the existing staff and
recruiting skilled and efficient labor force for its long run growth.
4. Establishment of stability in the working of the firm:
Fluctuations in production cause ups and downs in business which retards smooth
functioning of the firm. Demand forecasting reduces production uncertainties and helps
in stabilizing the activities of the firm.

Stages in demand forecasting:

Demand forecasting is a complex process that involves several stages. Let us elaborate on each
of these stages in greater detail:
Statement of theory and hypothesis:
The objective for which the demand forecasting is to be done must be clearly specified. The
objective may be defined in terms of; long-term or short-term demand, the whole or only the
segment of a market for a firm’s product, overall demand for a product or only for a firm’s own
product, firm’s overall market share in the industry, etc. The objective of the demand must be
determined before the process of demand forecasting begins as it will give direction to the whole
research.
Model Specification:
Once the objective is set and the time perspective has been specified the method for performing
the forecast is selected. There are several methods of demand forecasting falling under two
categories; survey methods and statistical methods. The Survey method includes consumer
survey and opinion poll methods, and the statistical methods include trend projection, barometric
and econometric methods. Each method varies from one another in terms of the purpose of
forecasting, type of data required, availability of data and period within which the demand is to
be forecasted. Thus, the forecaster must select the method that best suits his requirement.
Data Collection:
Once the method is decided upon, the next step is to collect the required data either
primary or secondary or both. The primary data is first-hand data which has never
been collected before. While the secondary data are the data already available. Often,
data required is not available and hence the data is to be adjusted, even manipulated, if
necessary, with a purpose to build data consistent with the data required. There are
two types of data
Time Series: Data are based on historical observations taken sequentially in time.
These observations are used to derive relevant statistics, characteristics, and insight
from the data. The data points that may be collected using time series data may be
sales prices, manufacturing cost and their corresponding time intervals. That is
weekly, monthly, quarterly, annually.
Cross-sectional data: It refers to the data collected on a single entity at different
periods of time. Cross-sectional data using demand forecasting usually depicts a data
point gathered from an individual from an industry or area.

Estimation of parameters:
Once the required data is collected and the demand forecasting method is finalized,
the fifth step is to estimate the demand for the predefined years of the period. Usually,
the estimates appear in the form of equations, and the result is interpreted and
presented in the easy and usable form. Once the model is specified. Then the data can
be obtained and computed to determine the effects the independent variables have on
the dependent variable in focus. Using the linear regression model as an example of
estimating parameters, the following steps are taken.

Yi=α+βiXi+ϵ
𝑛𝜖𝑥𝑦−𝜖𝑥𝜖𝑦 𝜀𝑦 𝛽1𝜀𝑥
𝛽1 = 𝑛𝜀𝑥 2−(𝜀𝑥)2 𝛼= −
𝑛 𝑛

Checking the Accuracy of the Model:

• The accuracy of the forecasting model needs to be tested and validated. This is
typically done using historical data that was not used in the model development
process.
• Common validation techniques include measuring forecast errors, such as
Mean Absolute Error (MAE) or Mean Squared Error (MSE), to evaluate the
model's performance.

Hypothesis Testing:
• Once the model has been determined, the model is used to test the theory.
• The results should describe what is trying to be achieved and determine if
the theories or hypothesis is true or false.
• This should enable managers to make an informed decision regarding the
optimal price and production levels for the new product.

Forecasting:
The ultimate step is to then forecast demand based on the data set and model
created to forecast demand estimation of a chosen variable are used to determine
the effects it has on demand. Regarding the estimation of the chosen variable, a
regression model can be used. Once validated, the forecasts are integrated into the
organization's operational and strategic processes. This includes inventory
management, production planning, procurement, marketing, and resource
allocation.

An illustration of demand forecasting using regression model:

Statement of Hypothesis:
Suppose you work for a company that manufactures and sells smartphones. You
want to forecast the demand for your smartphones for the next quarter based on
several factors, including price, advertising expenditure, and the overall economic
condition.

Data Collection:

• Dependent Variable (Y): The number of smartphones sold in each quarter.

• Independent Variables (X):
• Price: The price of the smartphone.
• Advertising Expenditure: The amount spent on advertising and marketing.
• Economic Index: An economic indicator reflecting the overall economic
condition.

Data Preparation:

• Collect historical data for the past few quarters, including the number of
smartphones sold, price, advertising expenditure, and economic index for
each quarter.
• Organize the data in a spreadsheet or dataset where each row represents a
quarter, and columns represent the variables (Y, X1, X2, X3).

Regression Analysis:

• Perform a multiple linear regression analysis using statistical software or

tools like Excel, R, or Python.
• The regression equation may look like this:

• Y = β0 + β1 * Price + β2 * Advertising + β3 * Economic Index + ε

• Y: The number of smartphones sold.

• β0: The intercept (constant term).
• β1, β2, β3: The coefficients of the independent variables (Price, Advertising,
and Economic Index), indicating their impact on demand.
• ε: The error term (the difference between the predicted and actual demand).
• The coefficients (β1, β2, β3) will be estimated by the regression analysis,
showing the strength and direction of the relationships between the
independent variables and demand.
Model Evaluation:

• Evaluate the goodness of fit of the regression model using metrics like R-
squared (R²) to assess how well the independent variables explain the
variation in demand.

Forecasting:

• After obtaining the regression equation and coefficients, you can use it to
forecast future demand. For instance, if you want to forecast demand for the
next quarter, you will need to input the expected values of the independent
variables (Price, Advertising, and Economic Index) for that quarter into the
equation.
• Calculate the forecasted demand using the regression equation:

• Forecasted Demand = β0 + β1 * Price + β2 * Advertising + β3 * Economic

Index

Monitoring and Refinement:

• Continuously collect new data to refine the model and improve its accuracy.
• Monitor the actual demand and compare it to your forecasts, adjusting the
model as needed.

CONCLUSION:
In conclusion, demand forecasting remains a cornerstone of today's business. Its
importance lies in its ability to enable organizations to make informed decisions
about production, inventory, and customer satisfaction. By using historical data,
market data and Advanced Research, companies can adapt to market demands and
gain competitive advantage. Accurate demand forecasts are of utmost importance
to prevent inventories and excess inventories reducing operating costs and
streamlining supply in a constantly evolving market and cannot be unpredictable.
Demand forecasting continues to be an indispensable tool for businesses that aim
not only to survive but to expand their markets. It all extends beyond mere
propensity. That creates the foundation of versus enable growth and success in
dynamic business environment.