Meaning and Importance of demand forecasting
A forecast is a guess or anticipation or a prediction about any event which is likely to happen in the future. Forecasts are made either through experience or through statistical methods. As individual may forecast his job prospects, a consumer may forecast an increase in his income and therefore purchases, similarly a firm may forecast the sales of its product. Predictions of future demand for a firm’s product or products are called demand forecasts. Demand Forecasting is the method of predicting the future demand of a firm’s product.
As mentioned above, demand forecasts may be based on judgment of the experienced staff of a business concern or on scientific analysis (with the help of statistics). When a firm is small in size it may not need or afford an organised forecasting system. They can base their forecasts on the judgment or foresight of their experienced staff. However, as a firm increases in size and produces a number of products and uses modern techniques of production, it becomes necessary for the firm to forecast the demand for its various products, in a more scientific manner. Such forecasts are more accurate and thus help the firm to produce efficiently, with the help of the available resources. Forecasts have become a part of business management of most of the firms.
Forecasts are necessary for (1) Fulfilment of objective of the Plans Every business unit, industry or the government starts with certain pre-decided objectives. These objectives can be fulfilled with the help of accurate demand forecasts. For instance, if a firm decides to start a ’24/7 Cafeteria’ for its employees in future and it obviously wants to win the best bet, then from now on it will start working towards the same. The firm can, through its own product marketing, start targeting those firms, from which it can secure the required contenders for the Cafeteria.
(2) Preparation of a Budget Scientific forecasts are useful to the entrepreneur to take business decision. Every business unit has to prepare a budget. A budget includes the cost and expected revenues. Expected revenues can be estimated only on the basis of demand forecasts. For instance, in a developing part of a city, there are huge complexes coming up. There are big construction houses vying for the same. This means there is boom-time for the cement industry. Thus, a firm into the manufacture of cement has to bear in mind the increased required supply for the current year in laying down the budget for the current financial year.
(3) Stabilisation of Employment and Production Demand for a product changes according to seasons or business cycles or tastes etc.; the supply, however, cannot be changed suddenly. If however, it is possible to estimate the demand for a firm’s product, it can be possible to produce according to the expected demand. This can avoid wastage of scarce resources of the firm. So also the employment policy can be decided in advance, with the help of these forecasts. In view of the above example, the demand for bricks is also expected to increase. So the brick-manufacturers will employ more labour to meet the increased demand. Now in the process of manufacture of bricks, when they are semi-set and with a heavy downpour of rains, it is possible that it may damage the quality of the bricks, which can affect its supply in the market. Even after resetting the bricks, it is possible that the bricks may not get the original strength, which they may have otherwise got without the downpour. Thus, with forecasting for the product demand, at times it becomes imperative to forecast the weather as well!
(4) Expansion of firms When a firm has to decide whether it should expand or not and to what extent it should expand, it has to consider the expected demand for its product, at a future date. Demand forecasts become useful in such cases. For instance, opening a new branch is on the agenda of a particular coaching class for Std.X MATHS. It has decided to do so in one area of the city which has so far been untapped. But before stepping into such an expansion, the firm should bear in mind the influx of students expected at the new place. One factor can help the decision amongst others i.e. in past years, the firm should analyse that how many students were denied admission because of lack of space.
(5) Other Uses Demand forecasts are also useful to a firm, for long-term investment decision, Budgeting policies and Warehouse and Inventory Control. Inventory Control depends on the nature of the commodity, the degree of perishability of the commodity. The decision regarding the manufacture of a good and its storage depends on the life span of the product. If very less, then the firm cannot accrue the benefits of large-scale production at one time, in which case the decisions regarding the demand, supply of the product and investment will differ from the ones producing durable goods.