The formulation of appropriate and useful production policy is an important aspect for an enterprise. This involves determination of level of production, manpower requirements, equipment and inventory levels. All these decisions are basically related to the size of production which in turn can be determined from potential demand for the product. Thus the starting point of all these decisions is the product demand forecast for a specified period. To know what a business should perform, we must know its future sales. In the absence of this information, both short and long term planning will rest on a foundation much less substantial than sand. A poor job of demand forecasting will lead to an ineffective production planning and too an inventory that is either too large or too small.
Meaning of Demand Forecasting
In literary sense forecasting mean prediction. Forecasting may be defined as a technique of translating past experience into prediction of things to come. It tries to evaluate the magnitude and significance of forces that will affect future operating conditions in an enterprise, Thus, demand forecasting is estimation of future demand. According to Cundiff and Still, “Demand forecasting is an estimate sales during a specified future period based on a proposed marketing plan and a set of particular uncontrollable and competitive forces.” As such, demand forecasting is a projection of firm’s expected level of sales on a chosen marketing plan and assumed marketing environment.
Due to dynamic nature of market phenomenon demand forecasting has become a continuous process and requires regular monitoring of the situation. In management circles, demand forecasting and sales forecasting are used interchangeably. Sales forecasts are first approximations in production planning. These provide foundations upon which plans may rest and adjustments may be made. “Sales forecast is an estimate of sales in monetary or physical units for a specified future period under a proposed business plan or programme or under an assumed set of economic and other environmental forces, planning premises outside the business organization for which the forecast or estimate is made.
Demand Forecasting is much more important where the firm is engaged in large scale production and there is a long gestation period in the production process. In such circumstances, an idea, about future demand is necessary to avoid under production and overproduction. Demand forecasts for a particular product also provides a guideline for demand forecasts of related industries. For example, the demand forecasts for the automobile industry also helps the Tyre industry in estimating the demand for 2 Wheelers, 3 Wheelers and 4 Wheelers.
At macro-level, demand forecasting is useful to the government also for determining the targets of imports and exports for different commodities and planning the international business.