What is Demand Forecasting?

As you no doubt know, there are plenty of problems that companies try to avoid when they introduce a new product or service for their customers. One of these problems is wasting both time and materials. Companies can avoid waste in a number of different ways. One method of avoiding waste and predicting future demand is known as demand forecasting. This method is quite helpful for companies since they can use it to more effectively predict demand and make arrangements to meet this future demand. This is especially crucial for smaller organizations that have fewer resources, but it remains a crucial goal for larger organizations, as well.

Defining Demand Forecasting

You can define this concept in a number of different ways. One of the more common definitions of this is that it is a method that companies can use to predict the future demand that will exist for their services or products.

You can also refer to demand forecasting as sales forecasting because of the fact that predicting future sales statistics for the company is part of this process. This process is also part of limiting the amount of risk that a company takes when rolling out a new product or service.

Long-Term vs. Short-Term Forecasting

The two main kinds of sales forecasting are long-term and short-term forecasting. There are some critical differences between the two concepts.

  1. Short-term forecasting focuses on making sure that you can coordinate routine activities, like coming up with an effective sales strategy, creating your pricing policy, and scheduling necessary activities for the production of the new product or service.
  2. Long-term forecasting is much different. Long-term forecasting is designed for activities that will take much longer and are less immediate, such as planning out the new project, expanding the production plant, and even upgrading the production plant if necessary.

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What is Demand Forecasting 1

Different Parts of Demand Forecasting

You will find that there are several components that go into the concept of sales forecasting.

First Part of Sales Forecasting

The first part of sales forecasting is what level the forecasting happens at, which can vary considerably from company to company and even from project to project for the same company.

  1. The first level of sales forecasting is the firm level, and this involves forecasting future demand for the products and services of a single company.
  2. The second level is the industry level, and this means that you are forecasting future demand for the services and products that every organization in a certain industry creates.
  3. The third and final level is the economy level, where you predict the aggregate demand that a particular economy will have for all products and services.

Second Part of Sales Forecasting

The other part of sales forecasting is the amount of time for which you are predicting the future demand of a service or product. As previously mentioned, the two main types of sales forecasting based on time period are short-term and long-term forecasting.

  1. Short-term sales forecasting means that you are predicting the future demand for a service or product for only the first year of this expected demand, at most.
  2. Long-term forecasting means that you predict demand for a period of between five and seven years, but this amount of time may last 10-20 years.

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Third Part of Sales Forecasting

The third part of sales forecasting is the type of product involved in the forecasting. You can separate products into either consumer goods or capital goods.

Consumer goods are the end products that are meant for use by consumers, and sales forecasting for consumer goods usually happens when you are rolling out a new product or replacing a current product with a better product.

Capital goods are necessary in order to create consumer goods, and one example of capital goods is raw material.

Conclusion

Demand forecasting for capital goods varies based on the amount of demand for the company’s consumer goods. If there is high demand for these consumer goods, you would likely predict high demand for capital goods.

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Images by Mediamodifier and Colin Behrens from Pixabay

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