Demand estimation or demand forecast is the process of forming judgment about the quantities to a product or service that will be demanded by customers in the future. Such forecast of demand are used for planning and control of activities in production, procurement, marketing, personnel, and Finance.
Forecasting methods are classified in the following four types:
- Qualitative
- Time series
- Causal
- Simulation
Qualitative forecasting methods are primarily subjective: they rely on human judgment and opinion to make a forecast. They are most appropriate when there ale little historical data available or when experts have market intelligence that is critical in making forecast. Such methods may be necessary to forecast demand several years into the future in a new industry.
Time series forecasting methods use historical demand to make a forecast. They are based on the assumption that past demand history is a good indicator of future demand. These methods are most appropriate when the environment situation is stable and the basic demand pattern does not vary significantly from one year to the next. These are simplest methods to implement and can serve as a good starting point for a demand forecast. These methods fall into two basic categories
Causal forecasting methods involve assuming that that the demand forecast highly correlated with certain factors in the environment. Causal forecasting methods find this correlation between demand and environmental factors and use estimates of what environmental factors will be to forecast future demand.
Simulation forecasting methods imitate the consumer choices that give rise to demand to arrive at a forecast. Using simulation, a firm can combine time series and causal to answer such questions as these: What will the impact of a price promotion be? What will the impact be of a competitor opening a store nearby?
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