Question

Describe the methods of forecasting future demand on the basis of past sales?

Answer 1

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 inventions 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 judgement or executive judgement 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.
Calculation of trend.
the trend can be calculated by the least square method as follows:
(i) Find time deviations (X) of each period from a certain period and then find the sum of time deviation (?X).
(ii) square the time deviation of each period (X2) and then find the sum of squares of each period (?X2).
(iii) multiply time deviations with the sales of each period individually (XY) and add the product of the column to find (?XY).
(iv) To find the trend (Y) this is equal to a + bX. The value of a and b may be determined by either of the following two ways:
(a) Direct method. This method is applicable only when ?X = 0. To make ?X = 0, it is necessary that the time deviations should be calculated exactly from the mid point of the series. then, the values of a and b will be calculated as follows:
a (average) ? and b (rate of growth) = ? XY /X2
this method is simple and direct.
(b) indirect method. This method is somewhat difficult. This method can be applied in both the cases where ?X has any positive or negative values or ?X is not equal to zero. The values of a and b are calculated by solving the following two equations:
?Y = na + b?X ?XY = a?X + b?X2
By calculating the values of a and b in the above manner, the sales can be forecasted for any future period by applying the formula Y = a + bX.
7. Moving average method: this is another statistical method to calculate the trend through moving averages. it can be calculated as follows:
an appropriate period is to be determined for which the moving average is calculated. While determining the period for moving averages, the normal cycle time of changes in the values of series should be considered so that short-term fluctuations are eliminated. As far as possible, the period for moving averages should be in odd numbers such as period of 3, 5 or 7 years. the period in even numbers will create a problem in centralising the values of averages. the calculated values of moving averages present the basis for determining the expected amount of sale.