According to Savage and Small, there are six factors involved in demand forecasting. First how long is the future period for which forecasting is being made ?
Forecasting may be for a short period of time which is known as short run forecasting or it may be for a long period of time which is then known as long run forecasting short run forecasting is usually defined for any period up to one year. Such forecasting is necessary to cope with seasonal variations in demand. Which period is chosen for short run forecasting depends upon the nature of business.
Long run forecasting covers a period of more than one year. How far ahead can the long run forecast go also depends on the nature of the business. But for a very long period future becomes so uncertain that the forecasting becomes subject to considerable errors due to change in so many factors that are assumed to remain unchanged during the period under consideration. Long term forecasts are necessary for taking decisions about the expansion of the scale of the firm.
Secondly, demand forecasting may be undertakes at different levels. (a) Macro-economic forecasting is concerned with business conditions over the whole economy measured by an appropriate index such as volume of industrial production or national income expenditure etc. Different business units may base their forecasts on this index. For example, a company producing tractors may estimate the demand for tractors on the basis of the estimates of the index of farm income.
(i) Forecasts at the industry level can be carried on by different trade associations. The association then supplies the results to their members. The firm may use such forecasts to compare trends of industry sales with its own current and expected sales and so determine its market share, (ii) Forecast can also be made on the firm level we shall be concerned with this firm Level Demand Forecasting
in this analysis which follows.
Thirdly, forecasting may be general or specific. The firm may be interested in having a general forecasts about its sales. Again sales forecasts can be made for specific products or for specific areas of sales. For example, separate forecasts may be necessary for home markets and export markets.
Fourthly, forecasting problems and methods of forecasting are different for established products and for new products. For established products sales trends are known and past results can be the guide to future performance. But for new products no such past trends are available.
Fifthly, in conducting forecasting the nature of the commodity should be kept in mind. Commodities can be classified as producers goods and consumer goods or consumer good services. The pattern of demand is different for different types of products. For example, the demand for capital goods fluctuates difficulty from the demand for consumer goods.
Finally, in every forecast special factors peculiar to the product and the market must be taken into account.