CONCEPT, SIGNIFICANCE, OBJECTIVES AND FACTORS
An organization faces several internal and external risks, such as high competition, failure of technology, labor unrest, inflation, recession, and change in government laws. (PESTEL)
Therefore, most of the business decisions of an organization are made under the conditions of risk and uncertainty.
An organization can lessen the adverse effects of risks by determining the demand or sales prospects for its products and services in future. Demand forecasting is a systematic process that involves anticipating the demand for the product and services of an organization in future under a set of uncontrollable and competitive forces.
DEMAND FORECASTING DEFINITION
Popular definitions of demand forecasting are as follows:
According to Evan J. Douglas, "Demand estimation (forecasting) may be defined as a process of finding values for demand in future time periods."
In the words of Cundiff and Still, "Demand forecasting is an estimate of sales during a specified future period based on proposed marketing plan and a set of particular uncontrollable and competitive forces."
It enables an organization to take various business decisions, such as planning the production process, purchasing raw materials, managing funds, and deciding the price of the product. An organization can forecast demand by making own estimates called guess estimate or taking the help of specialized consultants or market research agencies. Let us discuss the significance of demand forecasting in the next section.
SIGNIFICANCE OF DEMAND FORECASTING
Demand plays a vital role in the management of every business. It helps an organization to reduce risks involved in business activities and make important business decisions. Apart from this, demand forecasting provides an insight into the organization's capital investment and expansion decisions.
The significance of demand forecasting is best represented in the following ways:
- Fulfilling objectives:
Implies that every business unit starts with certain pre-decided objectives. Demand forecasting helps in fulfilling these objectives. An organization estimates the current demand for its products and services in the market and move forward to achieve the set goals.
For instance, an organization has set a target of selling 25, 000 units of its output. In such a case, the organization would perform demand forecasting for its products. If the demand for the organization's products is low, the organization would take corrective actions, so that the set objective can be achieved.
- Preparing the budget:
Plays a vital role in making budget by estimating costs and expected revenues. For instance, an organization has forecasted that the demand for its product, which is priced at USD 10, would be 20, 00, 00 units. In such a case, the total expected revenue would be 10* 200000 = USD 20, 00, 000. In this way, demand forecasting enables organizations to prepare their budget.
- Stabilizing employment and production:
Helps an organization to control its production and recruitment activities. Producing according to the forecasted demand of products helps in avoiding the wastage of the resources of an organization. This further helps an organization to hire human resource according to requirement. For example, if an organization expects a rise in the demand for its products, it may opt for extra labor to fulfill the increased demand.
- Expanding organizations:
Implies that demand forecasting helps in deciding about the expansion of the business of the organization. If the expected demand for products is higher, then the organization may plan to expand further. On the other hand, if the demand for products is expected to fall, the organization may cut down the investment in the business.
- Taking Management Decisions:
Helps in making critical decisions, such as deciding the plant capacity, determining the requirement of raw material, and ensuring the availability of labor and capital.
- Evaluating Performance:
Helps in making corrections. For example, if the demand for an organization's products is less, it may take corrective actions and improve the level of demand by enhancing the quality of its products or spending more on advertisements.