Demand Forecasting is the activity of estimating the quantity of a product or service that

consumers will purchase. Demand forecasting involves techniques including both

informal methods, such as educated guesses, and quantitative methods, such as the use of
historical sales data or current data from test markets. Demand forecasting may be used
in making pricing decisions, in assessing future capacity requirements, or in making
decisions on whether to enter a new market.

Contents
[hide]

• 1 Necessity for forecasting demand

o 1.1 Stock effects
o 1.2 Market response effects
• 2 Methods
o 2.1 Methods that rely on qualitative assessment
o 2.2 Methods that rely on quantitative data
• 3 See also

• 4 References

[edit] Necessity for forecasting demand

Often forecasting demand is confused with forecasting sales. But, failing to forecast
demand ignores two important phenomena[1]. There is a lot of debate in the demand
planning literature as how to measure and represent historical demand, since the
historical demand forms the basis of forecasting. Should we use the history of outbound
shipments or customer orders or a combination of the two to proxy for demand.

[edit] Stock effects

The effects that inventory levels have on sales. In the extreme case of stock-outs, demand
coming into your store is not converted to sales due to a lack of availability. Demand is
also untapped when sales for an item are decreased due to a poor display location, or
because the desired sizes are no longer available. For example, when a consumer
electronics retailer does not display a particular flat-screen TV, sales for that model are
typically lower than the sales for models on display. And in fashion retailing, once the
stock level of a particular sweater falls to the point where standard sizes are no longer
available, sales of that item are diminished.

[edit] Market response effects

The effect of market events that are within and beyond a retailer’s control. Demand for an
item will likely rise if a competitor increases the price or if you promote the item in your
weekly circular. The resulting sales increase reflects a change in demand as a result of
consumers responding to stimuli that potentially drive additional sales. Regardless of the
stimuli, these forces need to be factored into planning and managed within the demand
forecast.

In this case demand forecasting uses techniques in causal modeling. Demand forecast
modeling considers the size of the market and the dynamics of market share versus
competitors and its effect on firm demand over a period of time. In the manufacturer to
retailer model, promotional events are an important causal factor in influencing demand.
These promotions can be modeled with intervention models or use a consensus process to
aggregate intelligence using internal collaboration with the Sales and Marketing
functions.

[edit] Methods
No demand forecasting method is 100% accurate. Combined forecasts improve accuracy
and reduce the likelihood of large errors.[2]

[edit] Methods that rely on qualitative assessment

Forecasting demand based on expert opinion. Some of the types in this method are,

• Unaided judgment
• Prediction market
• Delphi technique
• Game theory
• Judgmental bootstrapping
• Simulated interaction
• Intentions and expectations surveys
• Conjoint analysis

[edit] Methods that rely on quantitative data

• Discrete Event Simulation

• Extrapolation
• Quantitative analogies
• Rule-based forecasting
• Neural networks
• Data mining
• Causal models
• Segmentation

[edit] See also

• Supply and demand
• Calculating demand forecast accuracy
[edit] References
1. ^ Forecasting Demand(Aug 05), Oracle Retail
2. ^ Armstrong & Green (2005), Demand Forecasting: Evidence-based Methods

Retrieved from "http://en.wikipedia.org/wiki/Demand_forecasting"

Categories: Financial terminology | Statistical forecasting

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