Steps of demand forecasting

Demand forecasting has to be done in a scientific manner. Following steps should be followed to make a sound forecast. 

1.      Identification of Objective: The first step in forecasting is to decide about the period of forecast, whether it is for short-term or long-term purposes. A short­ term forecast is usually for a period of 3 months to a year. It provides data on operational needs for production (raw material, equipment, warehousing, labour); marketing (sales force, promotional campaigns, distributional network); finances (cash flow, profits) and personnel, for the firm. Long-term forecast is for more than a year. It provides information on the expenditure on plant and equipment to meet its strategic decisions.

2.      Nature of the Product: The type of product for which the forecast is to be made influences the selection of forecasting technique. For example, demand for capital goods can be forecasted on the basis of growth prospects of the industries using these products. Obsolescence and demographic changes influence demand forecasting for consumer durables, while the demand for consumer perishables depends mainly on the price, disposable income and population characteristics. Analysis of the factors influencing the demand for a product is essential to make an efficient forecast.

3.      Selection of Forecasting Technique: The choice of technique of forecasting depends on the level of accuracy desired, objective of forecast, availability of data, time period of forecast and the type of product the company produces. Survey methods are useful when high degree of accuracy is desired and to forecast demand for new products. Barometric techniques are more useful for short-term forecasts. Perishable commodities require skilful forecasting to avoid waste of time. 

4.      Accuracy of Forecast: Methods of testing of accuracy of forecasts are applied to avoid the margin of error in a forecast. 

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