Uncertainties in Demand Forecasting
Demand forecasting is the activity of estimating the quantity of a product or service that consumers will purchase. It refers to the process of predicting the future demand for the firm’s product. Demand forecasts are subject to error and uncertainty, which arise from three principal sources:
1) Data about past and present market,
2) Methods of forecasting, and,
3) Environmental change.
Coping with uncertainties:
Given the uncertainties in demand forecasting, adequate efforts, along with the following lines, may be made to cope with uncertainties,
- Conduct analysis with data based on uniform and standard definitions,
- In identifying trends, coefficients, and relationship, ignore the abnormal of out-of-the-ordinary observations.
- Critically evaluate the assumptions of the forecasting method, and choose a method which is appropriate to the situation,
- Adjust the projections derived from quantities analysis in the light of unquantifiable, but significant, influences.
- Monitor the environment imaginatively to identify important changes.
- Consider likely alternative scenarios and their impact on market and competition.
- Conduct sensitivity analysis to assess the impact on the site of demand for unfavorable and favorable variations of the determining factors from their most likely level.