METHODS OF DEMAND

FORECASTING

SUBMITTED
BY
HARI PRASATH S (2066B)
B.E-ME(15);G-1
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.
 SURVEY METHODS

 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:
1.Consumer Survey Method
2.Opinion Poll Methods
 Consumer Survey Method
• Consumer Survey Method is one of the techniques of
demand forecasting that involves direct interview of the
potential consumers.
• Consumer Survey Method includes the further three
methods that can be used to interview the consumer.
 Complete Enumeration Method: Under this method, a forecaster
contact almost all the potential users of the product and ask them
about their future purchase plan. The probable demand for a
product can be obtained by adding all the quantities indicated by
the consumers. Such as the majority of children in city report the
quantity of chocolate (Q) they are willing to purchase, then total
probable demand (Dp) for chocolate can be determined as:
Dp = Q1+Q2+Q3+Q4+……+Qn
Where, Q1, Q2, Q3 denote the demand indicated by children 1, 2,3
and so on.
One of the major limitations of this method is that it can only be
applied where the consumers are concentrated in a certain region
or locality. And if the population is widely dispersed, then it can turn
out to be very costly. Besides this, the other limitation is that the
consumers might not know their actual demand in future. Due to
this, they may give a hypothetical answer that may be biased
according to their own expectations regarding the market
conditions.
 Sample Survey: The sample survey method is often used when
the target population under study is large. Only the sample of
potential consumers is selected for the interview. A sample of
consumers is selected through a sampling method. Here, the method
of survey may be a direct interview or mailed questionnaires to the
selected sample-consumers. The probable demand, indicating the
response of the consumers can be estimated by using the following
formula:
Where Dp = probable demand forecast; H = Census number of
households from the relevant market; Hs = number of households
surveyed or sample households; HR = Number of households
reporting demand for a product; AD = Average Expected
consumption by the reporting households (total quantity consumed
by the reporting households/ Number of households.
 This method is simple, less costly and even less time-consuming as
compared to the comprehensive survey methods. The sample
Survey method is often used to estimate a short-run demand of
business firms, households, government agencies who plan their
future purchases. However, the major limitation of this method is
that a forecaster cannot attribute more reliability to the forecast than
warranted.
 End-use Method: The end-use method is mainly used to forecast
the demand for inputs. This method of demand forecasting has a
considerable theoretical and practical value. Under this method, a
forecaster builds the schedule of probable aggregate future demand
for inputs by consuming industries and several other sectors. In this
method, during the estimation of a demand the changes in
technological, structural and other factors that influence the demand
is taken into the consideration.
 The end-use method helps in determining the future demand for an
industrial product in details by type and size. Also, with the help of
end-use method, a forecaster can pinpoint or trace at any time in the
future as to where, why and how the actual consumption has been
deviated from the estimated demand.

• Thus, these are some of the most commonly used

consumer survey methods, wherein the customers are
directly asked about their intentions about the product and
their future purchase plans.
 Opinion Poll Method
• The Opinion Poll Methods are used to collect opinions
of those who possess the knowledge about the market,
such as sales representatives, professional marketing
experts,sales executives and marketing consultants.
• The Opinion poll methods include the following survey
methods:
 Expert-Opinion Method: Companies with an adequate network
of sales representatives can capitalize on them in assessing the
demand for a target product in a particular region or locality that
they represent. Since sales representatives are in direct touch with
the customer, are supposed to know the future purchase plans of
their customers, their preference for the product, their reaction to the
introduction of a new product, their reactions to the market changes
and the demand for rival products.
Thus, sales representatives are likely to provide an approximate, if
not accurate, estimation of demand for a target product in their
respective regions or areas. In the case of firms, which lack in sales
representatives can collect information regarding the demand for a
product through professional market experts or consultants, who
can predict the future demand on the basis of their expertise and
experience.
Although the expert opinion method is too simple and inexpensive, it
suffers from serious limitations. First, The extent to which the
estimates provided by the sales representatives or professionals are
reliable depends on their skill and expertise to analyze the market
and their experience. Secondly, There are chances of over or under-
estimation of demand due to the subjective judgment of the
assessor. Thirdly, the evaluation of market demand is often based on
inadequate information available to the sales representatives since
they have a narrow view of the market.
 Delphi Method: The Delphi method is the extension of the expert
opinion method wherein the divergent expert opinions are
consolidated to estimate a future demand. The process of the
Delphi technique is very simple. Under this method, the experts are
provided with the information related to estimates of forecasts of
other experts along with the underlying assumptions. The experts
can revise their estimates in the light of demand forecasts made by
the other group of experts. The consensus of experts regarding the
forecast results in a final forecast.
 Market Studies and Experiments: Another alternative method to
collect information regarding the current as well as future demand
for a product is to conduct market studies and experiments on the
consumer behavior under actual, but controlled market conditions.
This method is commonly known as Market Experiment Method.
Under this method, a firm select some areas of representative
markets, such as three or four cities having the similar
characteristics in terms of the population income levels, social and
cultural background, choices and preferences of consumers and
occupational distribution. Then the market experiments are carried
out by changing the prices, advertisement expenditure and all other
controllable factors under demand function, other things remaining
the same. Once these changes are introduced in the market, the
consequent changes in the demand for a product are recorded. On
the basis of these recorded estimates, the elasticity coefficients are
calculated. These computed coefficients along with the demand
function variables are used to assess the future demand for a
product.
 The alternative method to market experiments is the Consumer
Clinics or Controlled Laboratory Method wherein the consumers
are given some money to make purchases in stipulated store goods
with different prices, packages, displays, etc. This experiment
displays the responsiveness towards the changes made in the
prices, packaging and a display of the product.One of the
major limitations of market experiment method is that it is too
expensive and cannot be afforded by small firms. Also, this method
is based on short-term controlled conditions which might not exist in
the uncontrolled market. Therefore, the results may not be
applicable in the long term uncontrolled conditions.
• Thus, these are some of the opinion poll methods that are
used to gather expert opinions of those who are closely
related to the market with an aim to estimate a future
demand for the product.
 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:
1.Trend Projection Methods
2.Barometric Methods
3.Econometric Methods
 Trend Projection Method
• The Trend Projection Method is the most classical
method of business forecasting, which is concerned with
the movement of variables through time. This method
requires a long time-series data.
• The trend projection method is based on the assumption
that the factors liable for the past trends in the variables to
be projected shall continue to play their role in the future in
the same manner and to the same extent as they did in the
past while determining the variable’s magnitude and
direction.
• In predicting demand for a product, the trend projection
method is applied to the long time-series data. A long-
standing firm can obtain such data from its departments
(such as sales) and the books of accounts. While the new
firms can obtain data from the old firms operating in the
same industry. The trend projection method includes three
techniques based on the time-series data. These are
 Graphical Method: It is the most simple statistical method in which
the annual sales data are plotted on a graph, and a line is drawn
through these plotted points. A free hand line is drawn in such a
way that the distance between points and the line is the minimum.
Under this method, it is assumed that future sales will assume the
same trend as followed by the past sales records. Although the
graphical method is simple and inexpensive, it is not considered to be
reliable. This is because the extension of the trend line may involve
subjectivity and personal bias of the researcher.
 Fitting Trend Equation or Least Square Method: The least square
method is a formal technique in which the trend-line is fitted in the
time-series using the statistical data to determine the trend of
demand. The form of trend equation that can be fitted to the time-
series data can be determined either by plotting the sales data or
trying different forms of the equation that best fits the data. Once the
data is plotted, it shows several trends.
 The most common types of trend equations are:
Linear Trend: when the time-series data reveals a rising or a linear
trend in sales, the following straight line equation is fitted:
S = a + bT
Where S = annual sales; T = time (years); a and b are constants.
Exponential Trend: The exponential trend is used when the data
reveal that the total sales have increased over the past years either
at an increasing rate or at a constant rate per unit time
 Box-Jenkins Method: Box-Jenkins method is yet another
forecasting method used for short-term predictions and projections.
This method is often used with stationary time-series sales data. A
stationary time-series data is the one which does not reveal a long
term trend. In other words, Box-Jenkins method is used when the
time-series data reveal monthly or seasonal variations that reappear
with some degree of regularity.
 Barometric Method
• The Barometric Method of Forecasting was
developed to forecast the trend in the overall economic
activities. This method can nevertheless be used in
forecasting the demand prospects, not necessarily the
actual quantity expected to be demanded.
• Often, the barometric method of forecasting is used by
the meteorologists in weather forecasting. The weather
conditions are forecasted on the basis of the movement
of mercury in a barometer. Based on this logic,
economists use economic indicators as a barometer to
forecast the overall trend in the business activities.
• The Barometric Method of forecasting was first developed in
1920’s, but, however, was abandoned due to its failure to
predict the Great Depression in 1930’s. The Barometric
technique was, however, revived, reformed and developed
further by the National Bureau of Economic Research
(NBER), USA in the late 1930’s.
• The barometric method is based on the approach of
developing an index of relevant economic indicators and
forecasting the future trends by analyzing the movements in
these indicators. A time-series of several indicators is
developed to study the future trend.
• These can be classified as:
 Leading Series: The leading series is comprised of indicators
which move up or down ahead of some other series The most
common examples of leading indicators are- net business
investment index, a new order for durable goods, change in the
value of inventories, corporate profits after tax, etc.
 Coincidental Series: The coincidental series include indicators
which move up and down simultaneously with the general level of
economic activities. The examples of coincidental series – the
rate of unemployment, the number of employees in the non-
agricultural sector, sales recorded by manufacturing, retail, and
trading sectors, gross national product at constant prices.
 Lagging Series: A series consisting of those indicators, which
after some time-lag follows the change. Some of the lagging
series are- outstanding loan, labor cost per unit production,
lending rate for short-term loans, etc.
 Econometric Methods
• The Econometric Methods make use of statistical
tools and economic theories in combination to estimate
the economic variables and to forecast the intended
variables.
• The econometric model can either be a single-
equation regression model or may consist a system
of simultaneous equations. In most commodities, the
single-equation regression model serves the purpose.
• The econometric methods are comprised of two basic
methods, these are:
 Regression Method: The regression analysis is the most common
method used to forecast the demand for a product. This method
combines the economic theory with statistical tools of estimation.
The economic theory is applied to specify the demand determinants
and the nature of the relationship between product’s demand and its
determinants. Thus, through an economic theory, a general form of a
demand function is determined. While the statistical techniques are
applied to estimate the values of parameters in the projected
equation.
Under the regression method, the first and the foremost thing is
to determine the demand function. While specifying the demand
functions for several commodities, one may come across many
commodities whose demand depends by or large, on a single
independent variable. For example, suppose in a city, the demand
for items like tea and coffee is found to depend largely on the
population of the city, then the demand functions of these items are
said to be single-variable demand functions.
 On the other hand, if it is found out that the demand for commodities
like sweets, ice-creams, fruits, vegetables, etc., depends on a
number of variables like commodity’s own price, the price of
substitute goods, household incomes, population, etc. Then such
demand functions are called as multi-variable demand functions.
Thus, for a single variable demand function, the simple regression
equation is used while for multiple variable functions, a multi-
variable equation is used for estimating the demand for a product.

 Simultaneous Equations Model: Under simultaneous equation

model, demand forecasting involves the estimation of several
simultaneous equations. These equations are often the behavioral
equations, market-clearing equations, and mathematical identities.
The regression technique is based on the assumption of one-way
causation, which means independent variables cause variations in
the dependent variables, and not vice-versa. In simple terms, the
independent variable is in no way affected by the dependent
variable. For example, D = a – bP, which shows that price affects
demand, but demand does not affect the price, which is an
unrealistic assumption.
On the contrary, the simultaneous equations model enables a
forecaster to study the simultaneous interaction between the
dependent and independent variables. Thus, simultaneous
equation model is a systematic and complete approach to
forecasting. This method employs several mathematical and
statistical tools of estimation.
• The econometric methods are most widely used in
forecasting the demand for a product, for a group of
products and the economy as a whole. The forecast made
through these methods is more reliable than the other
forecasting 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.

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