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What Is Demand Forecasting?

Manufacturers must forecast product demand before production begins.
Demand forecasting tries to predict consumer spending habits.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 06 December 2014
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Demand forecasting is the strategy of projecting the demand for goods and services over a specific period of time. Doing so makes it much easier to adjust production schedules so that the demand can be met efficiently, while still avoiding the possibility of producing quantities that exceed the demand. By matching production with demand, businesses help to keep inventories low, which helps to cut expenses as well as lower the taxes assessed on finished goods. The concept of demand forecasting can also be applied to the purchase and sale of investment instruments, such as stocks or bonds.

Manufacturers make use of demand forecasting as a means of planning production schedules. The process normally involves looking closely at historical data regarding orders placed by regular customers, general industry trends, and any other relevant factors. As a result of their research, manufacturers will attempt to determine how many units of each product in their line must be produced in the current time period in order to meet consumer demand in the upcoming time period. Once the projection is complete, it is much easier to place orders for raw materials, adjust the workforce as necessary, and even to order packaging for the finished products. If the projection proves to be accurate, the manufacturer also enjoys the benefit of keeping inventories low, but still sufficient to meet the demand.

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Retailers also utilize the concept of demand forecasting when it comes to purchasing products for sale in their stores. By accurately assessing the demand for various products, it is possible to always have enough on hand to satisfy customer needs and wants, while avoiding the commitment of too many resources to a high inventory. Demand forecasting can be especially helpful when it comes to dealing with seasonal items, especially in terms of deciding how many units they can purchase and reasonably expect to sale by the end of the season.

When it comes to investments, demand forecasting is very helpful when deciding on the purchase or sale of stocks. An investor will seek to accurately assess the future movements of the price of a given stock, and determine if that option is likely to generate a desirable return within a given period. If so, the investor may purchase shares while the price is still somewhat low. The investor will then hold those shares all the way through the period under consideration. Assuming the shares perform as anticipated, the investor is likely to make a significant return as a result of his or her projection.

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