- Specifying the objective: The objective or the purpose of demand forecasting must be clearly specified. The objective may be specified in terms of (a) short-term or long-term demand, (b) the overall demand for a product or for a firm’s own product, (c) the whole or only a segment of the market for its product, or (d) firm’s market share. The objective of demand forecasting must be determined before the process of forecast is started. This has to be the first step.
- Determining the time perspective: Depending on the firm’s objective, demand may be forecast for a short period, that is, for the next 2 to 3 years, or for a long period. In demand forecasting for a short period, 2 to 3 years, many of the demand determinants can be taken to remain constant or not to change significantly. In the long-run, however, demand determinants may change significantly. Therefore, the time perspective of demand forecasting must be specified.
- Making choice of method for demand forecasting: There are a number of methods available for demand forecasting which we shall introduce in another section of the analysis. However, all methods are not suitable for all kinds of demand forecasting because the purpose of forecasting, data requirement and availability of data for the use of a method, and time frame of forecasting differ from method to method. Therefore, the demand forecaster has to choose a fitting method keeping in view his purpose and requirements. The choice of a forecasting method is generally based on the purpose, experience and skill/ knowledge of the forecaster. It depends also to a great extent on the availability of required data. The choice of a suitable method saves not only time and cost but also ensures the reliability of forecast to a great extent.
- Collection of data and data adjustment: Once method of demand forecasting is decided on, the next step is to collect the required data, primary or secondary or both. The required data is often not available in the required type/form. In that case, data needs to be adjusted – even massaged, if necessary – with the purpose of building data series consistent with data requirement. Sometimes the required data has to be generated from the secondary sources.
- Estimation and interpretation of results: As mentioned earlier, the availability of data often determines the method, and also the potential/feasible equation to be used for demand forecasting. Once required data is collected and forecasting method is finalized, the final step in demand forecasting is to make the estimate of demand for the predetermined years or the period. Where estimates appear in the form of an equation, the result must be interpreted and presented in a usable form.
Steps of Demand Forecasting
The objective of demand forecasting is achieved only when forecast is made systematically and scientifically and when it is fairly reliable. The following steps are generally taken to make systematic demand forecasting: