Operations Planning – Demand Forecasting | Capacity Management

Table of Contents

1. Demand Forecasting
2. Capacity Planning and Utilization

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1. Demand Forecasting

1.1 Forecasting

Forecasting means peeping into the future. As future is unknown and is anybody’s guess but the business leaders in the past have evolved certain systematic and scientific methods to know the future by scientific analysis based on facts and possible consequences. Thus, this systematic method of probing the future is called forecasting. In this way forecasting of sales refers to an act of making prediction about future sales followed by a detailed analysis of facts related to future situations and forces which may affect the business as a whole.

Forecast must see that they are very nearer to the accuracy.

In long range forecast, the normal period used is generally 5 years. In some cases it may extends to 10 to 15 years also. The purpose of long range forecast is:

1. To work out expected capital expenditure for future developments or to acquire new facilities,
2. To determine expected cash flow from sales,
3. To plan for future manpower requirements,
4. To plan for material requirement,
5. To plan for Research and Development. Here much importance is given to long range growth factor.

In case of medium range forecasting the period may extend over to one or two years. The purpose of this type of forecasting is:

1. To determine budgetary control over expenses,
2. To determine dividend policy,
3. To find and control maintenance expenses,
4. To determine schedule of operations,
5. To plan for capacity adjustments.

In case of short-term forecast, which extends from few weeks to three or six months and the following purposes are generally served:

1. To estimate the inventory requirement,
2. To provide transport facilities for despatch of finished goods,
3. To decide work loads for men and machines,
4. To find the working capital needed,
5. To set-up of production run for the products,
6. To fix sales quota,

To find the required overtime to meet the delivery promises.

1.2 Steps in Forecasting

Whatever may be the method used for forecasting, the following steps are followed in forecasting:

(a) Determine the objective of forecast: What for you are making forecast? Is it for predicting the demand? Is it to know the consumer’s preferences? Is it to study the trend? You have to spell out clearly the use of forecast.

(b) Select the period over which the forecast will be made? Is it long-term forecast or medium-term forecast or short-term forecast? What are your information needs over that period?

(c) Select the method you want to use for making the forecast: This method depends on the period selected for the forecast and the information or data available on hand. It also depends on what you expect from the information you get from the forecast. Select appropriate method for making forecast.

(d) Gather information to be used in the forecast: The data you use for making forecasting to produce the result, which is of great use to you. The data may be collected by:

(i) Primary source: This data we will get from the records of the firm itself.

(ii) Secondary source: This is available from outside means, such as published data, magazines, educational institutions etc.

(e) Make the forecast: Using the data collected in the selected method of forecasting, the forecast is made.

1.3 Forecasting Methods

Methods or techniques of sales forecasting: Different authorities on marketing and production have devised several methods or techniques of sales or demand forecasting. The sales forecasts may be result of what market people or buyers say about the product or they may be the result of statistical and quantitative techniques. The most common methods of sales forecasting are:

1. Survey of buyer’s intentions or the user’s expectation method: Under this system of sales forecasting actual users of the product of the concern are contacted directly and they are asked about their intention to buy the company’s products in an expected given future usually a year. Total sales forecasts of the product then estimated on the basis of advice and willingness of various customers. This is most direct method of sales forecasting. The chief advantages of this method are:

(i) Sales forecast under this method is based on information received or collected from the actual users whose buying actions will really decide the future demand. So, the estimates are correct.

(ii) It provides a subjective feel of the market and of the thinking behind the buying intention of the actual uses. It may help the development of a new product in the market.

(iii) This method is more appropriate where users of the product are numbered and a new product is to be introduced for which no previous records can be made available.

(iv) It is most suitable for short-run forecasting.

2. Collective opinion or sales force composite method: Under this method, views of salesmen, branch manager, area manager and sales manager are secured for the different segments of the market. Salesmen, being close to actual users are required to estimate expected sales in their respective territories and sections. The estimates of individual salesmen are then consolidated to find out the total estimated sales for the coming session. These estimates are then further examined by the successive executive levels in the light of various factors like proposed changes in product design, advertising and selling prices, competition etc. before they are finally emerged for forecasting.

3. Group executive judgment or executive judgment method: This is a process of combining, averaging or evaluating, in some other way, the opinions and views of top executives. Opinions are sought from the executives of different fields i.e., marketing; finance; production etc. and forecasts are made.

4. Experts’ opinions: Under this method, the organisation collects opinions from specialists in the field outside the organisation. Opinions of experts given in the newspapers and journals for the trade, wholesalers and distributors for company’s products, agencies or professional experts are taken. By analysing these opinions and views of experts, deductions are made for the company’s sales, and sales forecasts are done.

5. Market test method: Under this method seller sells his product in a part of the market for sometimes and makes the assessment of sales for the full market on the bases of results of test sales. This method is quite appropriate when the product is quite new in the market or good estimators are not available or where buyers do not prepare their purchase plan.

6. Trend projection method: Under this method, a trend of company’s or industry’s sales is fixed with the help of historical data relating to sales which are collected, observed or recorded at successive intervals of time. Such data is generally referred to as time series. The change in values of sales is found out. The study may show that the sales sometimes are increasing and sometimes decreasing, but a general trend in the long run will be either upward or downward. It cannot be both ways. This trend is called secular trend. The sales forecasts with the help of this method are made on the assumption that the same trend will continue in the future. The method which is generally used in fitting the trend is the method of least squares or straight line trend method. With this method a straight line trend is obtained. This line is called ‘line of best fit’. By using the formula of regression equation of Y on X, the future sales are projected.

1.4 Frequently Asked Questions (FAQs)