Demand forecasting is the activity of estimating the quantity of a product or service that consumers will purchase. Demand forecasting involves techniques including both informal methods, such as educated guesses, and quantitative methods, such as the use of historical sales data or current data from test markets. Demand forecasting may be used in making pricing

Pricing

Pricing is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product. Pricing is also a key variable in microeconomic price allocation theory. Pricing is a...

 decisions, in assessing future capacity requirements, or in making decisions on whether to enter a new market.

Necessity for forecasting demand

Often forecasting demand is confused with forecasting sales. But, failing to forecast demand ignores two important phenomena. There is a lot of debate in demand-planning literature about how to measure and represent historical demand, since the historical demand forms the basis of forecasting. The main question is whether we should use the history of outbound shipments or customer orders or a combination of the two as proxy for the demand.

Stock effects

The effects that inventory

Inventory

Inventory means a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished. This remains the prime meaning in British English...

 levels have on sales. In the extreme case of stock-outs, demand coming into your store is not converted to sales due to a lack of availability. Demand is also untapped when sales for an item are decreased due to a poor display location, or because the desired sizes are no longer available. For example, when a consumer electronics retail

Retail

Retail consists of the sale of physical goods or merchandise from a fixed location, such as a department store, boutique or kiosk, or by mail, in small or individual lots for direct consumption by the purchaser. Retailing may include subordinated services, such as delivery. Purchasers may be...

er does not display a particular flat-screen TV, sales for that model are typically lower than the sales for models on display. And in fashion retailing, once the stock level of a particular sweater falls to the point where standard sizes are no longer available, sales of that item are diminished.

Market response effect

The effect of market events that are within and beyond a retailer’s control. Demand for an item will likely rise if a competitor increases the price or if you promote the item in your weekly circular. The resulting sales a change in demand as a result of consumers responding to stimuli that potentially drive additional sales. Regardless of the stimuli, these forces need to be factored into planning and managed within the demand forecast.

In this case demand forecasting uses techniques in causal modeling. Demand forecast modeling considers the size of the market and the dynamics of market share versus competitors and its effect on firm demand over a period of time. In the manufacturer to retailer model, promotional events are an important causal factor in influencing demand. These promotions can be modeled with intervention models or use a consensus to aggregate intelligence using internal collaboration with the Sales and Marketing functions.

Methods

No demand forecasting method is 100% accurate. Combined forecasts

Consensus forecasts

In a number of sciences, ranging from econometrics to meteorology, consensus forecasts are predictions of the future that are created by combining together several separate forecasts which have often been created using different methodologies...

 improve accuracy and reduce the likelihood of large errors. Reference class forecasting

Reference class forecasting

Reference class forecasting is the method of predicting the future, through looking at similar past situations and their outcomes.Reference class forcasting predicts the outcome of a planned action based on actual outcomes in a reference class of similar actions to that being forecast. The theories...

 was developed to reduce error and increase accuracy in forecasting, including in demand forecasting.

Methods that rely on qualitative assessment

Forecasting demand based on expert opinion. Some of the types in this method are,

• Unaided judgment
• Prediction market
  Prediction market
  Prediction markets are speculative markets created for the purpose of making predictions...
  
  
• Delphi technique
  Delphi method
  The Delphi method is a structured communication technique, originally developed as a systematic, interactive forecasting method which relies on a panel of experts.In the standard version, the experts answer questionnaires in two or more rounds...
  
  
• Game theory
  Game theory
  Game theory is a mathematical method for analyzing calculated circumstances, such as in games, where a person’s success is based upon the choices of others...
  
  
• Judgmental bootstrapping
• Simulated interaction
• Intentions and expectations surveys
• Conjoint analysis
  Conjoint analysis (in marketing)
  Conjoint analysis is a statistical technique used in market research to determine how people value different features that make up an individual product or service....
  
  

Methods that rely on quantitative data

• Discrete Event Simulation
• Extrapolation
  Extrapolation
  In mathematics, extrapolation is the process of constructing new data points. It is similar to the process of interpolation, which constructs new points between known points, but the results of extrapolations are often less meaningful, and are subject to greater uncertainty. It may also mean...
  
  
• Reference class forecasting
  Reference class forecasting
  Reference class forecasting is the method of predicting the future, through looking at similar past situations and their outcomes.Reference class forcasting predicts the outcome of a planned action based on actual outcomes in a reference class of similar actions to that being forecast. The theories...
  
  
• Quantitative analogies
• Rule-based forecasting
• Neural network
  Neural network
  The term neural network was traditionally used to refer to a network or circuit of biological neurons. The modern usage of the term often refers to artificial neural networks, which are composed of artificial neurons or nodes...
  
  s
• Data mining
  Data mining
  Data mining , a relatively young and interdisciplinary field of computer science is the process of discovering new patterns from large data sets involving methods at the intersection of artificial intelligence, machine learning, statistics and database systems...
  
  
• Causal model
  Causal model
  A causal model is an abstract model that describes the causal mechanisms of a system. The model must express more than correlation because correlation does not imply causation....
  
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• Segmentation

Ex post studies of demand forecasts

Ex post studies compare actual with predicted outcomes of forecasts. Such studies generally find demand forecasts to be highly inaccurate. For instance, a statistically valid study of demand forecasts in 210 large public works projects, led by Oxford University professor Bent Flyvbjerg, found that for rail projects the average demand (passenger) forecast was overestimated by a full 106 percent. For roads, half of all demand (vehicle) forecasts were wrong by more than 20 percent; a fourth of forecasts were wrong by more than 40 percent.

See also

• Supply and demand
  Supply and demand
  Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
  
  
• Demand chain
  Demand chain
  -Concept:Analysing the firm's activities as a linked chain is a tried and tested way of revealing value creation opportunities. The business economist Michael Porter of Harvard Business School pioneered this value chain approach: "the value chain disaggregates the firm into its strategically...
  
  
• Calculating demand forecast accuracy
  Calculating Demand Forecast Accuracy
  Calculating demand forecast accuracy is the process of determining the accuracy of forecasts made regarding customer demand for a product.-Importance of forecasts:...
  
  
• inventory proportionality
• Reference class forecasting
  Reference class forecasting
  Reference class forecasting is the method of predicting the future, through looking at similar past situations and their outcomes.Reference class forcasting predicts the outcome of a planned action based on actual outcomes in a reference class of similar actions to that being forecast. The theories...