Definition: Demand Forecasting refers to the process of predicting the future demand for the firm’s product. In other words, demand forecasting is comprised of a series of steps that involves the anticipation of demand for a product in future under both controllable and non-controllable factors.
The business world is characterized by risk and uncertainty, and most of the business decisions are taken under this scenario. An organization come across several risks, both internal or external to the business operations such as technology, attrition, unrest, employee grievances, recession, inflation, modifications in the government laws, etc.
Predicting the future demand for a product helps the organization in making decisions in one of the following areas:
- Planning and scheduling the production and acquiring the inputs accordingly.
- Making the provisions for finances.
- Formulating a pricing strategy.
- Planning advertisement and implementing it.
Demand forecasting holds significance in the businesses where large-scale production is involved. Since the large-scale production requires a long gestation period, a good deal of forward planning should be done. Also, the potential future demand should be estimated to avoid the conditions of overproduction and underproduction. Most often, the firms face a question of what would be the future demand for their product as they have to acquire the input (labor and raw material) accordingly.
The objective of demand forecasting is attained only when the forecasting is done systematically and scientifically. Thus, the following steps in demand forecasting are followed to facilitate a systematic estimation of future demand for product:
- Specifying the Objective
- Determining the Time Perspective
- Choice of method for Demand Forecasting
- Collection of Data and Data Adjustment
- Estimation and Interpretation of Results
Thus, demand forecasting is a systematic process that assumes greater significance in large-scale producing firms. Demand forecasting may not be a serious issue for the small scale firms which supply a small portion of total demand or produces the product that caters to the short demand or seasonal demand. Such firms can plan their production on the basis of the business skills and their past experiences.