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What are the different demand forecasting techniques?
Demand forecasting is the process of predicting future sales by using historical data to make informed business decisions about everything from inventory planning, and warehousing needs to running promotions and meeting customer expectations. Demand forecasting helps the business estimate the total sales and revenue for a future period of time. The predictions depend upon the past sales pattern and the continuing trend and user behavior in the present. Subsequently, it is not just simply estimating the future demands but combining several techniques for estimating the demand scientifically and objectively.
Before we continue to various techniques to forecast demand, it is necessary to know about the types of forecasts an organization performs.
Types of forecasting
There are several demand forecasting techniques, based on techniques, your forecast may differ. Demand Forecasting can majorly classified based on the level of detailing, the time period considered and the scope of the market considered. Most organizations do multiple demand forecasts to get a better picture out of it.
Here are the major types of forecasting:
Based on the type of forecasting, required by an organization, various forecasting techniques can be used, which we will discuss in the next segment of the blog.
Demand Forecasting Techniques
There are two methods in which demand forecasting can be done i.e (A) Survey Methods and (B) Statistical Methods.
- Market Research
In the market research technique, consumer-specific survey forms are sent out in tabular format to get insights that an organization can’t get from internal sales. It gives better information about the type of customers and demographic data which will help to target future markets. Market Research helps young companies to know their customer base better.
Sale Force Opinion
SalesForce Opinion method use data from sales groups to forecast demand. Salespeople of an organization are closest to their customer base, hence can generate valuable information on customer needs, behavior, and feedback and can even give information about the competition in the markets.
In Delphi Method, an organization hires a group of external experts. Each Expert generates a forecast based on their market knowledge. After this process forecasts are shared among the experts anonymously, hence experts get influenced by each other’s forecasts. Now the experts are asked again to generate a forecast and this process is repeated until all experts reach a near consensus scenario. The process is intended to permit the experts to expand on one another’s information and assessments.
This is the simplest and most common demand forecasting technique which is used by organizations. Trend Projection uses past sales data to project future sales. This technique can be used by organizations with a sufficient amount of past sales data(typically more than 18 to 24 months). The data is arranged in chronological order to form a time series, time series depicts the past trends based on which future market trends can be predicted.
Barometric Forecasting Technique
In Barometric Technique, demand is forecasted based on the basis of past events or the events occurring in the present. It is done by analyzing statistical and economic indicators such as saving, investment, and income. This method can be implemented even in the absence of past data. For example, suppose the government plans for a large housing project, this indicates that there would be high demand for construction materials in the future.
Econometric Forecasting Technique
This technique combines past sales data with the factors that influence the demand to create a mathematical formula to predict future demand. It finds the relation between the dependent variable and the independent variables. If only one factor affects the demand it is known as a single variable demand function or simple regression. Whereas if there are multiple factors affecting the demand, it is known as multiple variable demand function or multiple regression.
Regression Equation : Y = a + bX , Y is the forecasted demand.
Demand forecasting helps organizations to make smart business decisions. Based on the business requirements, sales data, market research, and economic factors different demand forecasting techniques can be used. It is often an iterative, highly detailed, and expertise-driven process.