Professional Documents
Culture Documents
Thus, an operating/short-term sales forecast is a prediction of how much of a companys particular product (or Product line) can be sold during a future period under a given marketing program and an assumed set of outside factors.
The main goal of forecasting is to maximize certainty and precision in business decisions.
Forecasting Approaches
THE BREAKDOWN AND BUILDUP APPROACHES (A)Break-down approach (top-down) the basic steps in the Break-down approach are 1 The manager studies the firms internal & external environments to determine which factors may influence sales. External factors, such general economy, industry activity, competitors activities and governmental actions, may be taken into account.
General Environment Forecast Industry Sales Forecast Company Sales Potential Company Sales Forecast Sales/Marketing managers forecasts for regions, branches, territories, and customers
2 3 4 5
The manger makes a sales forecast for the industry. Company sales potential. Company sales forecast. Sales/marketing managers forecasts for regions, branches, territories & customer.
Combined into company sales forecast Combined into Regional/Zonal sales forecast
It requires less time and cost as it uses data on forecast from secondary sources like economic Research, New Delhi.
Very accurate for short term forecast (up to 1 year) as it is based on primary data collection. Thus more of cost and time required.
Executive opinion
Test marketing
Moving averages
Regression
Decomposition
Sales force composite
Nave/ratio
Delphi method
Users expectation
Executive Opinion
--- In this, sales forecasts are made either by taking the average of all the executives individual opinion or through discussions among the executives.
MERITS:
1. Quick & easy way to turn out a forecast. 2. Less expensive when compared with other methods.
DEMERITS:
1. Unscientific 2. Increases the work load of key executives, requiring them to spend time that they would otherwise devote to their areas of main responsibility. 3. Forecast made by this method is difficult to break down into subunits such as regions, branches of the organization.
Delphi Method
A new version of executive opinion method. It consists of an attempt to arrive at a consensus in an uncertain area by questioning a group of experts repeatedly until the responses appear to converge along a single line (consensus). Each participants are supplied the responses to previous questions from others in the group by the coordinator. The coordinator provides each expert with the responses of the others including their reasons. Each expert is given the opportunity to react to the information or considerations advanced by others. Successfully used in the area of technological forecasting i.e. predicting technical changes.
MERITS:
1. Useful for technology, new product & industry sales forecast. 2. Both long and short-term forecasting possible.
DEMERITS: 1. Difficult to arrange panel of experts. 2. Longer time for getting consensus. 3. Break-down of forecast into products or territories is not possible.
then formulates a forecast that is passed up to the regional manager. Corporate management thus uses the sales force composite forecast to determine how many drilling trucks should be produced for the coming year. 3. Sales representatives make the sales estimate in consultation with customers and sales supervisor, and or based on their experience and intuition.
MERITS: 1. Forecasting is done by salespeople who are closest to the market and have better insight into sales trends than any other group in the company. 2. Detailed sales estimate broken down by customer, product, sales representative and territory are possible. 3. High reliability of sales forecast.
DEMERITS: 1. Sales forecast are often pessimistic or optimistic, as salespeople are not trained in forecasting. 2. If sales forecast are used to set sales quotas, which are linked to incentive schemes, salespeople may deliberately underestimate the demand. 3. Many salespersons are not interested in sales forecasting and prefer to spend time in the field meeting customers.
This method is also known by market research or market survey. It includes asking existing & potential customers about their likely purchases of the companys product and services for the forecast period.
Some companies employ consumer panels that are given products and asked to supply information on the products quality, features, price, and whether they would buy it. The information collected from buyers help the company to make effective decisions not only in sales and marketing areas, but also on production, research & development.
MERITS: 1. Useful in forecasting sales for industrial products, consumer durables and new products. 2. It also gives customers reasons for buying or not buying. 3. Relatively inexpensive and fast, when only a few customers are involved (industrial buyers survey).
DEMERITS: 1. Expensive and time-consuming in consumer non-durable markets where consumers are very large in number. 2. Sometime consumer find difficult to predict their future buying habits. Often, they say Yes in a survey but are not willing to pay for the product in the store. Thus, forecasts based solely on this method tend to be overly optimistic.
Test markets
--Test markets are a popular method of measuring consumer acceptance of new products and established product in a new territory. --various methods for consumer-product market testing are:-
1. Full-blown-test markets:
Company select a limited number of medium-sized cities such as (2 to 6 cities) for promotion campaign.
Time duration varies from a few months to 1 years, depending on repurchase period of the new product.
Survey is conducted to know about consumer attitude, usage & satisfaction towards the new product.
Fig:1.4
Trial rate
High
Re-purchase Rate
TEST MARKETS
Re-purchase rate
Low
Trial rate
If the test markets show high trial rate & high repurchase rates, the product should be launched nationally;
If test markets show high trial rate & a low re-purchase rate, the new products should be redesigned or dropped; If they show a low trial rate & a high repurchase rate, the product is acceptable; If they show low trail rate & a low repurchase rates, the new product should be left permanently.
Both full-blown test market and controlled test marketing expose the new product to the competitors.
3. Simulated test marketing In this method, 30-40 consumers or shoppers are selected,
based on their brand familiarity and preferences in a specific product category, such as detergent, cosmetic, drink product. Consumer or shoppers are exposed to commercial or print ads of branded product and new product without any specific mention. Consumers are given money to make purchase any of the items in a store.
Close observation is maintain to know how many consumers buy the product and competing products.
Consumer are interviewed to know about their buying and not-buying intentions. Satisfaction level if buying and repurchases intentions. This method gives accurate results.
When a forecast is developed for the next period, the sale in the oldest period is dropped from the average and is replaced by sales in the newest period, hence the name Moving Average.
If the company operates in a stable environment, a short two or three year average may be most useful.
If a firm in an industry with cyclical variations, the moving average should use data equal to the length of a cycle. Take, for example, the data in Table 1.1. A companys sales forecast was worked out by calculating moving averages for 3 years time periods.
MERITS:
1. Simple and easy to calculate. 2. Useful for short-term and medium-term sales forecasts.
DEMERITS:
Decomposition method
In this method the companys previous periods sales data is broken down into four major components, such as trend, cycle, seasonal and erratic events. Each components are then recombined to produce the sales forecast. For Example: Assume that various analysis have broken down the previous sales data into the following components: (TREND COMPONENT) A growth of 3 percent in sales due to the development in technology, capital formation and population.
(ERRATIC EVENTS) Increased terrorist activities are expected to reduce sales by 5 percent. (CYCLIC COMPONENT) A 10 percent reduction in sales is expected due to a recession in demand. (SEASONAL COMPONENT) The sales in the third quarter of the year are expected to go up by 15 percent due to festive season, as compared to other three quarters.
The forecaster would combine the different components, as under, in order to forecast sales for 2005.
The biggest drawback of decomposition method is that, difficult and complex statistical methods are needed to break down sales data into various components and needed historical data.
Nave/Ration method
It is a time series method of forecasting, which is based on the assumption that what happened in the immediate past will continue to occur in the immediate future. The formula is stated this way:
Next years sales = This years sales X This years sales Last years sales let us assume the same table 1.1, and forecast the sales for the year 2005. this year sales (2004) is Rs. 450 million and that sales of last year (2003) was Rs. 350 million.
The next year (2005) sales forecast would be [450 X 450 = 350
Rs. 578.5 million.
MERITS: 1. Simple to calculate. 2. Require little data and statistical manipulation. 3. Accuracy is good for short-term forecast, especially if trends are stable or are changing in a relatively consistent manner.
DEMERITS:
Regression Analysis
It is a statistical method used to incorporate independent factors that are thought to influence sales into the forecasting procedure.
It deals with two sets of variable: Dependent variable Y--- i.e., past sales. Independent variable X--- i.e., population, income, salesforce size, expenditure, etc.
Then company identifies causal (cause & effect) relationship between the company sales and the independent variables, which affect the sales.
If there is only one independent variable (X), say population, it is plotted on a graph of paired data of past sales and population. It is called by linear or simple regression. In other word, simple regression procedures use only one independent variable, such as population.
The relationship between the dependent and independent variables can be one of two basic types. A linear regression assumes the relationship is a straight line, as shown in Fig.1.5 this simple regression example shows a direct relationship between sales and population. As population increases, so do sales. If population decreased, sales also would decrease.
A curvilinear relationship is a nonlinear regression producing a line that is not straight Fig1.6 (B). This line shows that sales increase as population increases until a point is reached at which sales begin to decrease. However, the line can take numerous shapes.
Sales
Sales
X Population
O
Population
Multiple regression on the other hand uses two or more independent variables, such as population and sales force size or population, income & sales force size. The availability of computer software forecasting packages such as Statistical Analysis System (SAS), and Statistical Package for the Social Sciences (SPSS), has increased the usage of regression analysis in many companies. MERITS: 1. High forecasting accuracy, if relationship between variables are stable. DEMERITS: 1. Technically complex and required use of computer and software packages. 2. Expensive and time consuming.
DISCUSSION