Demand Forecasting: A Guide for Effective Decision-Making

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Demand Forecasting

All organizations operate in an atmosphere of uncertainty, but decisions must be made today that affect the future of the organization.

The Nature of Demand Forecasting

A forecast is a prediction or estimation of a future situation under given conditions. Demand forecasting helps managers make the following decisions effectively:

Major Short-Run Decisions

  • Purchase of inputs
  • Maintaining economic inventory levels
  • Setting sales targets
  • Distribution network management
  • Working capital management
  • Price policy
  • Promotion policy

Major Long-Run Decisions

  • Expansion of existing capacity
  • Diversification of the product mix
  • Growth through acquisition
  • Change of plant location
  • Capital issues
  • Long-run borrowings
  • Manpower planning

Steps in Demand Forecasting

  1. Identification of objectives
  2. Nature of product and market
  3. Determinants of demand
  4. Analysis of factors
  5. Choice of technology
  6. Testing the accuracy

Criteria for Choosing a Forecasting Method

  • Accuracy
  • Plausibility
  • Durability
  • Flexibility
  • Availability

Benefits of Demand Forecasting

  • Appropriate production scheduling
  • Suitable purchase policy
  • Appropriate price policy
  • Setting realistic sales targets for salesmen
  • Forecasting financial requirements
  • Business planning
  • Financial planning
  • Planning manpower requirements

Selecting the Appropriate Forecasting Technique

  1. Define the nature of the forecasting problem.
  2. Explain the nature of the data under investigation.
  3. Describe the capabilities and limitations of potentially useful forecasting techniques.
  4. Develop predetermined criteria for making the selection decision.

Demand Forecasting Methods

  1. Survey of buyers' intentions
  2. Delphi method
  3. Expert opinion
  4. Collective opinion
  5. Naïve model
  6. Smoothing techniques
  7. Time series / trend projection
  8. Controlled experiments
  9. Judgmental approach

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