Demand forecasting is used to determine the number of products or services that will be purchased by consumers in the future. Numerous methods can be used when integrating demand forecasting into any business. Most demand forecasting methods fall under four basic categories or methods. These categories include, but are not limited to: quantitative, qualitative, time series methods, and casual methods.
Quantitative Assessment Method
Quantitative forecasting methods take numbers or quantities sold in the past to forecast how much will be sold in the near future. This is usually a forecast that will provide numbers for the next sales year. Some examples of quantitative forecasting methods include last period demand, multiplicative seasonal indexes, and simple and weighted moving averages. Each of these use quantities sold in different types of mathematical formulas to determine how many products or services will be sold at the same times in the future year’s sales that is being predicted.
Qualitative Assessment Method
Qualitative assessment is a subjective method used and is based upon how customers and experts think or feel a product will sell. This method incorporates strategies such as the Delphi method, historical life cycles of similar products, and market research. This method is not as reliable on its own and should be combined with other types of methods. However, it is typically used when there is no historical data to perform a quantitative method approach when forecasting sales. Many new businesses use this method when writing business plans and projecting first year sales.
Methods Using Time Series
Demand forecasting typically does use strategies in the time series method to forecast the demand of products and services. The time series method can be split up into two different types of methods. These include frequency domain methods and time domain methods. Even though the frequency domain method is classified as a time series method, it is not based on time, but on frequency of the occurrence happening or a product being bought. Time domain will show quantities purchases with respect to time.
Other methods included in demand forecasting include casual methods. These methods work under the assumption that underlying incidents can affect sales numbers of products and services. Examples of casual methods include holidays and seasons that boost sales of certain items. For instance, a candy store may sell more candy canes during the holiday season than other parts of the year. These casual methods also may use linear relationships between sales and another component that remain consistent over time. If the linear relationship remains consistent, then it is a safe prediction.
Demand forecasting encompasses many types of methods and is not limited to those listed here. This forecasting helps those in businesses to determine projected quantities of products or labor needed to provide services for future sales. In addition, demand forecasting can be an effective tool for those new to certain business industries. These methods can assist in writing business plans and obtaining the funds needed to fund a new business venture.