Why It is Important to Conduct Demand Estimation - Research Paper Example

Why it is important to conduct demand estimation and demand forecasting? Introduction The complex behavior of market related variables like demand, market share and factors affecting them causes uncertain business environments. The present day economists and managers find it difficult to deal with increasingly uncertain business contexts. One of the most significant aspects of Economics is Demand Estimation and Forecasting that can help both managers and economists understand the behavior of the market, trends and potential changes of demand in the future and interrelationship of such variable. Demand Forecasting and Estimation have long been considered to be powerful economics tools that analyze current demand structure and find trends and potential changes in the demand and related variables. This piece of research work is an attempt to address the principles and practices of Demand Forecasting and Estimation. This paper presents the needs of demand forecasting and it details various tools that are used in demand estimation and forecasting. Demand Estimation and Demand Forecasting It is highly important for any firm to know current demand for its porducts and services for a particular period of time in the market. The fundamental reason for the estimation of demand is to avoid overporduction and underporudtion. The firm should be able to porduce the goods or services to meet the existing market demand as well as suppply more than what is demanded in the market. Both will result in loss. A firm is said to have used demand estimation when it is able to know the existing demand for a particular goods or services and it is thus able to secure optimal sales, or optimal revenue or optimal porfit. Demand estimation not only helps a firm to avoid over or under porduction, but also to detremine its pirce policy and promotional policy etc (Wilkinson, 2005, p. 124- 125). Demand forecasting is the process of finding values for demand for a particular goods or services in the future time period. Even though demand estimation is generally used to refer to a process of finding out the current values of output of the porduct being demanded in a short period and the term demand forecasting is generally used to refer to the porcess of finding out the values of output of the product in the long period, the demand forecasting is often used for both short term estimation and long term forecasting of the demand. According to Tranter, Stuart-Hill and Parker (2009), Demand forecasting is the process of estimating, calculating or predicting consumers’ demand for products and services in the future (p. 92). In order to forecast the future demand for a particular goods or service, the first and foremost step is to determine the overall demand for the market and this can be started by examining the existing demand generators within the market. The demand generators can be different from market to market and industry to industry (Tranter, Stuart-Hill and Parker, 2009, p. 92). Arnold and Chapman (2001) argued that the demand forecasting is depending on what is to be done. An effective demand forecasting must be able to analyse various types of demands like seasonal demand, cyclical demand or trend in the markets (p. 185- 187). Keat and Young (2009) emphasized that demand estimation technique is used by managers in order to probe the effect on the demand or quantity demanded of a change in one or more independent variables. Where as, demand forecasting puts less emphasis on identifying and explaining causes demand changes and on obtaining information about future trends of sales activities (p. 142). It shows that forecasting can be achieved even without the introduction of causal factors. Future sales or future trends can be predicted by projecting the past in to the future. From the above literatures, it can be understood that demand forecasting is the art of predicting, estimating and calculating the market demand for a particular porduct or service at some future date based on certain present and past market and demand structures and patterns of some related events. Demand estimation can help suuceesful demand forecasting, because, current demand structures can be analyzed and well understood through demand estimation. Demand forecasting is thus a reasonable judgement of future probabilities regarding market events. Levels of Demand Forecasting Geetika, Ghosh and Choudhury (2008) discussed micro level, industry level and macro level demand estimations as the major three levels of demand forecasting (p. 104). Micro Level Demand Forecasting Demand forecasting by a firm about the future demand for its particular goods or services is of greater importance to a firm. Micro level demand forecasting is most important from the managers’ view point because it helps them complete various functions within the organization through better decision making and planning. Industry Level Demand Forecasting Industry level demand forecasting is the forecasting of the quantity demanded for a product within an industry as a whole. It provides insight to the market shares, growth patterns of the industry and life cycle stage of the product as well. The total quantity of cars that is expected to demand in the future against motor cycles and other vehicles is an example for indsutry level forecasting. Macro Level Demand Forecasting The aggregate demand and aggregate supply are the very important two dimensions in Macroeconomics. Macro level demand forecasting involves predicting the aggregate measures of economic activity at the international, national, state or regional levels (Hirschey, 2009, p. 201). Estimating and forecasting the total quantity of the demand for all goods and services within a particular economy will be held by governmnts and other bodies to help them formulate policies and tax decisions. Methods of Demand Forecasting Demand forecasting can be done through a number of ways. The main categories of the demand forectaing tools are 1) qualitative and 2) quantitative methods. Qualitative methods are based on opinions and intuitions whereas quantitative methods of demand forecasting use mathematical models and histroical data in order to generate forecasting (Wisner, Leong and Tan, 2005, p. 123). According to Wisner, Leong and Tan (2005), a recent research study has found that time series models are the most freuently used demand froecasting method in the Unted Sates with around 60 % respondents using this method. The research showed that only 24 % of the companies used assocative forecasting method slike regression analysis (p. 123). Qualitative Methods Consumers’ opinion survey, sales force composite, experts’ opinion method and group discussions are the main forms of qualitative methods of demand forecasting. Even though survey methods are expensive, the results are found more accurate if it is well conducted. Sales force composite model may be condictioned by bias and sales persons may even be unaware of the economic conditions. Delphi method also has been considered by many firms. In Delphi method, internal and external experts are surveyed. Quantitative methods Time series forecasting and associative forecasting are the major quantitative methods of demand forecasting. Time series forecasting is based on the assumption that the future is an extension of the past. The historical data is used to predict the future demand. The associative forecasing method assumes that one or more factors are interrelated with demand and therefore thay are significant factors to be considered in demand forecasting. As quantitative methods of demand forecasting rely on past demand data, the demand forecasting becomes less accuarate because time horizon increases (Wisner, Leong and Tan, 2005, p. 124). Why demand estimation and forecasting are necessary Demand estimation and demand forecasting play significant roles in managerial decision making and planning at micro as well as macro levels. The manangers may not be able to take appropriate decisions about production, pricing, new porduct development and other strategic activities and thence it will lead to over or under productions. An effective demand forecasting will enhance competitive advanatges and maximum porductivity (Holden, Peel and Thompson, 1990, p. 3). Keat and Young (2009) stated that forecasting of demand becomes more important in today’s worlds of business, governmnet and even nonprofit institutions. As organizations and their environmnets are continually changing and becoming more complex, decision makers need helps in understanding the relationship of variables to arrive at proper decisions (p. 143). According to Keat and Young (2009), almost all organizations conduct their business activities in most uncertain environmnets and the levels of uncertainity can be probably be reduced by demand estimation and forecasting. Demand forecasting is not a substitute for decision making or for the removal of uncerrtainities, but it is an aid that helps managers in decision making as well as risk avoidances (p. 142) The major reasons behind demand estimation and demand forecasting are detailed below:- To produce the required quantity Meeting the requirements of the market and customers is of greater significance to any business. Demand forecasting is imperative for a firm to enable it to produce the required quantity of products and take necessary arrangements well in advance. If demand was estimated, various factors of production like raw materials, labors, equipments, machine accessories, building and plants can be arranged in advance. In order to meet the demand of the future, As a component of Planning According to Shim, Siegel and other writers, market demand forecast is a component of decision making about a company’s functional activities (Pilinkiene, 2008, p. 26). According to Pilinkiene, an important matter in the demand estimation and forecasting is that it is a method of planning that depends on critical condictions and results (p. 26). Many authors have concluded that forecasting is an integral part and an important component of business planning. Many researchers like Hirshey and Pappas, Sloman and Suteliffe, have supported the idea of the integration of planning and forecasting processes (Pilinkiene, 2008, p. 26). The concept of planning and forecasting integration can be depicted as in the figure. To assess probable demand Demand forecasting also helps a firm to assess the porbable demand for its products or services so that the firm can plan its production accordingly (Gupta, 2001, p. 57). Sales forecasting Demand forecasting helps a firm identify and assess the future sales of the goods or serices that it markets and thus to measure the porfitability of a particular manufacturing operation. The profit and loss analysis for the future is alos highly important and it can be more accurate it can be done based on the demand and sames forecastings (Holden, Peel and Thompson, 1990, p. 4) Business Control A business gets better control over its revenue management and staretgic activities only when it has better control over profit and losses. Foreasting annual demand and annual sales will help the firm to maintain better control over all the business activities. Inventory Control If future requirements can be well measured and identified, there can be better control over raw materiasl, inventories, semi finished goods, finished goods and spare parts etc. Demand estimation will help the organization identify the requirements of customers and that in turn helps the firm know about the necessary requirements of the inventroy. To plan investment and employment For any organization, long term invetsment decision will be a crucial one. A long term investment decision needs carefull planning and broad decisions about the casue and effects. Various tools and staretgies are to be used in order to assess whether the long term investment will be porfitable for the business or not (Gupta, 2001, p. 57). For this purpose, Demand estimation and forecasting will help the management decide on whether the investment project will be successful or not. Many organizations take decisions of critical invetsment without careful forecasting of the porbable market changes and demand variations and thus the invstmnet becomes complete failure. To call for teamwork There are various departments and activities within the firm like market research, sales, production, planning, accounting and finance. The demand forecasting process may enhance better relations and team work among these various teams within an organization. Stability A firm’s managemenmt can ensure stability in production and employment for a period of time with the help of reliable and accurate demand forecasting. The demand forecasting helps management formulate and brings policies in order to adjust to the cyclical orotherwise fluctuations in demand (Holden, Peel and Thompson, 1990, p. 4-5) As a part of research and development program According to Pilinkiene (2008), the demand freocasting models like consmuer survey or statistical models provide exploration to analyze and evluate both internal and external environmnetal factors. The impacts of both internal and external factors can be well understood with the helps of demand forecasting (p. 27). Demand forecasting not only helps management identify the probable demand of the future, but also to do intensive researches on market variables and factors based on the information collected through demand forcasting methods. Conclusion In today’s highly competitive and complex marketing contexts, managers are increasingly concerned about understanding the trends and fluctuations in consumer demandespecially in the future. Demand estimation and forecasting are most significant tools for present day managers to arrange production, new product development, manufacturing schedules, pricing, policy formulation etc to meet the market and consumers’ requirements. This research paper has outlined the basic differences of estimation and forecasting and discussed the relevnaces of demand forecasting and estimation. This paper has also examined various types of forecasting methods and analyzedhow these methods can helps managers in decision making and policy frmulation. References Arnold and Chapman S.N (2001), Introduction to Materials Management, Fourth Edition, Pearson Education India Geetika, Ghosh P and Choudhury P.R (2008), Managerial economics, Tata McGraw-Hill Gupta (2001), Managerial Economics, Tata McGraw-Hill Hirschey M (2009), Fundamentals of Managerial Economics, nineth Illustrated Edition, Cengage Learning Holden K, Peel D and Thompson J.L (1990), Economic forecasting: an introduction, illustrated edition, Cambridge University Press, Keat P.G and Young P.K.Y (2009), Managerial Economics, Economic Tools for Today’s Decision Makers, Sixth Edition, Pearson Education India Pilinkien V (2008), Market Demand Forecasting Models and their Elements in the Context of Competitive Market, Engineering Economics, Economics of Engineering Tranter K, Stuart-Hill T and Parker J (2009), An Introduction to Revenue Management for the Hospitality Industry. Principles and Practices for the Real World, Prentice Hall, Pearson Education Wilkinson N (2005), Managerial economics: a problem-solving approach, illustrated edition, Cambridge University Press WisnerJ.D, Leong G, K and Tan K-C (2005), Principles of Supply Chain Management: A Balanced Approach, Chapter 5: Demand Forecasting and Collaborative Planning, Forecasting, and Replenishment, South-Western, Thomson Corporation Read More