Demand Forecasting

Demand forecasting is the systematic method of obtaining an estimate of the future value of a commodity, usually based on the analysis of observations of its past behavior. Demand forecasting means predicting demand for a product. The information regarding future demand is essential for planning and scheduling production, purchase of raw materials, acquiring of finance and advertising. Following are the criteria of good forecasting methods. To reduce the uncertainty in the planning for future production levels demand forecasting is essential.

Forecasting demand means prediction of future demand. Forecasting of future demand is one of most important function of managers of firms. Good forecasting of demand reduces uncertainty of environment in which business decisions are made. Good forecasting of future demand is also important for calculating rate of return on capital investment. Capital investment yields returns over a number of years in future.

1. Accuracy: It is necessary to check the accuracy of past forecasts against present performance and of present forecasts against future performance. Some comparisons of the method with what actually happens and of the assumptions with what is borne out in practice are more desirable. The accuracy of the forecast is measured by (a) the degree of deviations between forecasts and actual, and (b) the extent of success in forecasting directional changes.
2. Simplicity and ease of comprehension: Management must be able to understand and have confidence in the techniques used. Understanding is also needed for a proper interpretation of the results. Elaborate mathematical and econometric procedures may be judged less desirable if management does not really understand what the forecaster is doing and falls to understand the procedure. 
3. Economy: Costs must be weighed against the importance of the forecast to the operations of the business. The criterion here is the economic consideration of balancing the benefits from increased accuracy against the extra cost of providing the improved forecasting.
4. Availability: The techniques employed should be able to produce meaningful results quickly; techniques, which take a long time to workout, may produce useful information too late for effective management decisions.
5. Maintenance of timeliness: The forecast should be capable of being maintained on an up-to-date basis. It has three aspects: (a) The relationships underlying the procedure should be stable so that they will carry into the future for a significant amount of time. (b) Current data required to use these underlying relationships should be available on timely basis. (c) The forecasting procedure should permit changes to be made in the relationships as they occur.