Objectives of Demand Forecasting
The objectives of demand forecasting can be divided into two categories, namely short-term objectives and long-term objectives.
1. Formulation of Production Policy
Demand forecast helps in formulating suitable production policy so that there may not be any gap between demand and supply of product. This can further ensure:
Regular supply of material: By the determination of desired volume of production on the basis of sales forecasts, one can evaluate the necessary raw material requirements in future so as to ensure regular and continuous supply of the materials as well as controlling the size of inventory at economic level.
Maximum utilisation of machines: The operations can be so planned that the machines are utilised to their maximum capacity.
Regular availability of labour: Skilled and unskilled workers can be properly arranged to meet the production schedule requirement.
2. Price Policy Formulation
Demand forecast enables the management to formulate some appropriate pricing mechanism, so that the level of price does not fluctuate too much during the period of depression or inflation.
3. Proper Control of Sales
Demand forecasts are calculated region-wise and then the sales targets for various territories are fixed accordingly. This later on becomes the basis to evaluate the sales performance.
4. Arrangement of Finance
On the basis of sales forecast, one can determine the financial requirements of the organization for the product of the desired output. This can lead to minimize the cost of obtaining finance.
Long-term Objectives of Demand Forecasting
1. To decide about the Production Capacity
The size of the plant should be such that the output conforms to sales requirements. Too small or too large size of the plant may not be in the economic interest of the firm. By studying the demand pattern for the product and the forecasts for future, the firm can plan for plant/output of desired capacity.
2. Labour Requirements
Expenditure on labour is one of the most important components in cost of production. Reliable and accurate sales forecasts can help the management to assess the appropriate labour requirements.
3. Capital Restructuring/Resourcing
Long term production planning can help the management to arrange for long term finance on reasonable terms and conditions from different sources, internal as well as external sources, and sometimes from global sources.
Long-term Forecast vs Short-term Forecast
The analysis of long term sales forecast is more significant than short-term sales. Long-term sales forecast helps the management to take some policy decisions of great significance and frame appropriate strategies to achieve the target. Thus, the overall success of a firm mainly depends on the quality and reliability of sales forecasting mechanism.