A prediction or estimation of future demand for the product is known as demand forecasting. Generally every business firm predicts a number of related forecasts. Since the future is uncertain, these forecasts may not be hundred percent correct. But every firm tries to obtain the forecasts as precisely as possible. A demand forecast is said to be good or efficient when the expected market demand is very near or equal to the actual market demand. This may be estimated closely if proper method of demand forecasting is chosen. However, the following are the criteria of a good demand forecasting method.
The criteria of a good demand forecasting method in economics:
Accuracy denotes near to actual demand. A firm should forecast its demand very close to the actual market demand so that required quantities could be made available for the market. Inaccurate forecast may cost huge to the firm. It may create over or under production. Forecast should be explicit. For example, there would be an increase in sales in the next year than the current is not a good forecast but there would be an increase in sales by 20% in the next year is an accurate forecast.
2. Longevity or Durability :
Demand forecast generally takes huge time, money and planning. Since a forecast takes a lot of time and money, it should be usable for longer span of time or multiple years. A forecast for short span of time may not be effective for the organization.
3. Flexibility or Scale-ability
A demand forecast should be flexible and adaptable to any kind of changes. Now a days there is a rapid change in the tastes and preferences of consumers. This affects the demand for different products up to a great extent. Therefore, the demand forecasts made by a firm should be able to reflect those changes accordingly. Apart from this, a business firm, while making forecasts, should consider various business risks that may take place in the future.
4. Acceptability and Simplicity:
Acceptability is one of the most important criterion of a good demand forecasting method. That means a forecast should be acceptable to all. It should also be as simple as possible. A business firm should forecast its market demand by using simple and easy methods so that the organizations do not face any complexities. However, some companies generally prefer advanced statistical methods, which may prove difficult and complex.
A good a good demand forecasting method should have adequate and up-to-date data available. The forecasts should be done in timely manner so that necessary arrangements could be made related to the market demand. Data should be available to the decision makers at all time.
6. Plausibility and Possibility:
It denotes that the demand forecasts should be reasonable, so that they are easily understood by individuals who will use it. Again, it should have the quality of application in the changing business conditions.
A good demand forecasting method should have a relationship with costs and benefits. It should be economically effective. The forecasting should be made in such a way that the costs do not exceed the benefits that will be derived from it. Costs should be less and benefits should be high.
8. Yielding quick results:
A good demand forecasting method should yield quick result rather than taking longer period to respond. It should match with the changing business environment.
9) Maintenance of timeliness:
It should take care of timelines. Data should be available to users as and when requires so that decision making does not hamper.