Managerial uses of demand forecasting:
Demand forecasting is very useful for the organization it is useful in short run as well as in long run business of organization. Now we discuss it all in detail as under.
In the short run:
Demand forecasts for short periods are made on the assumption that the company has a given production capacity and the period is too short to change the existing production capacity. Generally it would be one year period.
1. Production planning: It helps in determining the level of output at various periods and avoiding under or over production.
2. Helps to formulate right purchase policy: It helps in better material management, of buying inputs and control its inventory level which cuts down cost of operation.
3. Helps to frame realistic pricing policy:
A rational pricing policy can be formulated to suit short run and seasonal variations in demand.
4. Sales forecasting:
It helps the company to set realistic sales targets for each individual salesman and for the company as a whole.
5. Helps in estimating short run financial requirements:
It helps the company to plan the finances required for achieving the production and sales targets. The company will be able to raise the required finance well in advance at reasonable rates of interest.
6. Reduce the dependence on chances: The firm would be able to plan its production properly and face the challenges of competition efficiently.
7. Helps to evolve a suitable labour policy: A proper sales and production policies help to determine the exact number of labourers to be employed in the short run.
In the long run:
Long run forecasting of probable demand for a product of a company is generally for a period of 3 to 5 or 10 years.
1. Business planning:
It helps to plan expansion of the existing unit or a new production unit. Capital budgeting of a firm is based on long run demand forecasting.
2. Financial planning:
It helps to plan long run financial requirements and investment programs by floating shares and debentures in the open market.
3. Manpower planning:
It helps in preparing long term planning for imparting training to the existing staff and recruit skilled and efficient labour force for its long run growth.
4. Business control:
Effective control over total costs and revenues of a company helps to determine the value and volume of business. This in its turn helps to estimate the total profits of the firm. Thus it is possible to regulate business effectively to meet the challenges of the market.
5. Determination of the growth rate of the firm:
A steady and well conceived demand forecasting determine the speed at which the company can grow.
6. Establishment of stability in the working of the firm:
Fluctuations in production cause ups and downs in business which retards smooth functioning of the firm. Demand forecasting reduces production uncertainties and help in stabilizing the activities of the firm.
7. Indicates interdependence of different industries:
Demand forecasts of particular products become the basis for demand forecasts of other related industries, e.g., demand forecast for cotton textile industry supply information to the most likely demand for textile machinery, colour, dyestuff industry etc.,
8. More useful in case of developed nations:
It is of great use in industrially advanced countries where demand conditions fluctuate much more than supply conditions.