There are countless issues, problems, and considerations in forecasting for new product. First, we must understand what a sales forecast is and what is designed to do. A sales forecast is an educated guess of future performance based on sales and expected market conditions. The value of the forecast is that we can predict and prepare for the future objectively. The objective is to review the past, be focused in the present and follow the trends of the past and present to predict the future.
Typically due to things that are out of our control, it is very difficult to forecast precisely.Mathematically, however, it is very possible to forecast sales with accuracy. Best case scenario, if the weather and other factors are predicted correctly, the forecast will have a better chance at being accurate. Obviously no one can forecast the damage a snow storm or tornado may cause and for how long.
The following are are few of the major events that will affect the sales forecast: sales: Seasonality, the economy, politics, fashion changes, average household income, demographic changes, the weather, and production requirements. The major challenge, is who is actually prepared to do the forecast.Is it the newly hired college graduate? Or is it the gray-bearded old man that has been with the company for years? Typically, over time, it may be a combination of the two.
Forecasting is not a science and it is usually inaccurate. Knowing that a forecast is very often inaccurate does not mean that nothing can be done to improve the forecast (Principles of Supply Chain Management, J. Wisner, K. Tan, G.
K. Leong, 2005, p. 142). In this paper, I will address several forecast methods that were of particular interest to me, and the issues and problems associated with each one.There are a number of ways to introduce new products. Forecasting relatively only improves the chances of a products success.
Hopefully, whoever is doing the forecast, forecasts lower on the projected sales outcome rather than the other way around. Well before the product forecast can be done there must be surveys conducted to see if there is a demand. Before a product can be marketed, analyst must research the areas where the product intends to be sold to see if there is a demand for the new product. Mainly products are created based on the demand.People often use the terms ‘demand’ and ‘sales’ interchangeably (Demand Forecasting: Evidence-based Methods, J.
S. Armstrong, 2006, p. 140). As a store manager for Walmart, I have to forecast sales, four weeks in advance. I review data from the previous year to include: the weather, items sold, and the revenue that was generated, to make an informed decision. If the weather is going to be worse, this year versus last year, for my store, there will normally be a dramatic drop in sales.
Typically, in that situation, the very next clear day, sales will bounce back.I’m still amazed at how accurate good forecasting is. It’s unbelievable how 365 days later, you can predict, with relative accuracy, the number of people that will come through the door and the amount of sales that are expected to be made. Sales forecasting is making an educated guess, based on last years sales and current economic trends, to determine the right amount of employees to work on any given day, and what products have the best chance of selling. If someone is good at forecasting, they can maximize the profits for any organization and make themselves very invaluable.At Walmart, Market Managers have to determine from their analysis, the appropriate number of wages to spend per week, send that number to the store managers, and the store managers, as I mentioned earlier, have to plan accordingly.
We begin the financial analysis with the sales forecast (New Products Management, M. Crawford, A. Benedetto, 2008, p. 236). This is the most difficult task for market managers, because it determines whether their markets are going to meet, exceed, or be below the plan that was set for them.Managing expenses is the single most important thing that the market manager is rated by. So my market managers send me the hours for the total store, for a particular week, and I have to allocate those hours throughout the store, without going over. If the market manager is way off in his forecasting, on a continual basis, it will usually cost him his job.
Another reason that forecasting is a difficult task is that he would also have to incorporate the weather and any major events that are scheduled. In the end, he must forecast well or lose his job.Forecasting consist of a large number of variables. It is a way of intelligently guessing what will happen in the present, based on what happened in the past. Forecasting allows managers to prepare for the future as well. There are several things we believe about forecasting: 1. We can not be 100% certain of what the future holds. No matter what we think we know and no matter what method of forecasting we use.
2. Things that we can’t see coming, such as a snow storm or tornado, will always be a possibility.3. Forecast can be used by any organization, corporate or governmental to help set policy or budgets for the present or the future. There are several forecasting methods out there, so I will address the ones that are most commonly used by the companies that I have worked for: Consensus methods – This method typically requires more than one person and several different view points.
A group of experts come together and collaborate and reach a final decision together about the final forecast. A common way to reach an answer is to allow these experts to sit in a room together and brainstorm over the different views and opinions.The problem with this approach is only the more vocal experts will lead the entire process and the more reserved experts will just go along for the ride. A different and more appropriate method is the Delphi technique. This approach eliminates the face to face interaction and allows the participants to respond anonymously. The Delphi method should be a stand alone approach.
It should follow a previous attempted method that did not yield the appropriate results. The results for the Delphi method will be less than desirable if any type of group discussion was involved first.Trend extrapolation – These methods focuses on using mathematical techniques and historical information to arrive at a forecast end-state. The idea is that the past will be a clear prediction of the future. When this approach is given over the short term, it is usually accurate, but long term it can be hit or miss. If the weather is about the same as last year, and the events are relatively the same, then the forecast will have a better chance of being accurate. Simulation methods – Involve very complicated systems.
The use of all types of simulation equipment is used to predict the performance or future performance of a product.A good example would be a car elevated in the air, gear shift is set to drive, and the gas pedal is pressed to the floor for 2 hours straight, to determine what type of damage would occur to the engine on cars racing that fast, for that period of time. There are several types of analogs. A mechanical analog would be a pitching machine that is throwing 90 miles per hour indoors, a hitter begins to make contact hitting the ball that is thrown from the machine. When that batter faces a pitcher that throws the baseball 90 miles per hour, you should be able to say with confidence, that the hitter should be able to make contact.
An analog that predicts economic results, are typically mathematical in nature. As with stock brokers, they usually show some sort of trend dealing with numbers of how stocks perform traditionally and how they are predicted to perform, mathematically, in the future. An analogy that deals with hypothetical or metaphorical would be how termites grow inside a wall, would be a means of describing how cancer spreads in the body. A game analogy would be how chess players compete with each other, and how two people applying for the same job would compete.Genius forecasting – intelligent guess and a little bit of luck.
There were quite a few people, known as prophets that were said to be ones that could predict the future. Some science fiction writers have written quite a few book and articles that were very close to the actual events that occur. There have been so many predictions made by women and men all over the world. Some predictions are right on, like betting on a sports game or gambling at a casino, while other predictions are so far off that one would be ashamed of themselves if they were going around telling people that they were psychic.The problem with genius forecasting is it is impossible to determine if the forecasting was a good forecast or an actually good guess. Some genius forecasters can generally produce fairly accurate results.
Scientist generally deny that these types of people exist, because it goes against the science of nature. Cross-impact matrix method – This method believes that one event affect the likelihood of another event. I remember when President Obama was running for President of the United States. He would become the first African American President.As the day of the election became closer, the economy continued to tank, and the President Obama was able to use that unfortunate situation, to start the chain of events that followed.
Then, as fate would have it, the Republic convention was cancelled. Those two events set the stage for a landslide victory. Anyone watching the election would have to admit and consider that the events leading up to the election, would fall under the cross-impact matrix method. Combining Forecasts- Sometimes one forecast does not have all of the characteristics to give an accurate assessment.That is where combining forecast comes in. Combining forecasts typically gives a more accurate forecast. Research does not indicate which combination works best. I truly believe that the person doing the forecast must have a solid knowledge about the various forecast.
Understanding all of their strengths and weaknesses and combining the attributes that best fit a given situation. In many companies, there is considerable pressure to make sales forecasts agree with the business plan (Sales Forecasting Management: A Demand Approach, J. Mentzer, M. Moon, 2005, p. 145).
So if multiple forecast methods are needed to reach the desired outcome, companies will use this method. Managers that are responsible for forecasting must investigate the various forecasting techniques and chose the method that best works for the type of product being promoted. In many instances companies have faith in their products. The major concern is usually market and economic conditions. The forecasts must take these possible conditions into consideration. When a new product is being developed it falls under two areas: Quantitative Techniques and Judgmental Techniques.Judgmental techniques were can revert back to the Delphi technique.
The Delphi Method is where we get the information informally to protect the person giving the information to better understand the needs of the consumers that will possibly buy the product. Key stakeholders opinions may help the forecaster with his/her forecasting by the information that they give. The objective here is to get input from everyone that has a stake in the project and build the forecast around that.
Due to the fact that the input of so many is needed, the Delphi method is very time consuming.Furthermore, stakeholders may be hung-up on a certain approach that mat disagree with the rest of the teams analysis, and this will also add to the time it will take to get a consensus before moving forward to product completion. A second judgmental method would be the Assumptions-Based Modeling. This is where forecasters assume what is going on in the market and set their forecast to their assumptions. Usually, this approach looks more at market share and penetration potential. Most Marketers would be more incline to use this method over what-if scenarios.The most common of the quantitative techniques, is the Looks-Like forecasting model.
Ideally if a new watch came out this year, and for example, sold 5 million in one year, the marketer would produce an even better watch the next year with a lot of the same bells and whistles and the previous watch, and they could use the Looks-Like method to speculate that 5 million of the new watches will sell this year. Another approach would be the Diffusion Modeling. This model uses the S-shaped curve to forecast sales outcomes.It integrates the mass media effect, market saturation, word of mouth my analysis and consumers to determine the potential effect on a products success. There are two distinct groups of emerging issues in the area of sales forecasting and decision support systems: Methodological issues and implementation issues (Journal of the Academy of Marketing Science, Volume 16, Numbers 3-4, 47-61). Before a company is adequately prepared to conduct the forecast of a new product, it should ensure that the operational and sales planning is right.Operational planning is crucial.
Furthermore, new product forecasting should be different from demand forecasting because there are different people involved and different information needed. The choice of forecasting methods should depend on the decisions that are to be based upon (Emerging Issues in Sales forecasting and Decision Support Systems, E. Mahmoud, 1998, p.
47). In conclusion, There will always be issues, concerns, and problems with sales forecasting. Nonetheless, sales forecasting is a necessary tool to assessment the company.Forecasting takes the pulse of the company and determines if the company is on track or off track when it comes to meeting its sales and profit objectives. Analysis have to keep taking the pulse of the company on a daily, weekly, monthly and annual basis.
A sales forecast should give you statistical data that can be transferred to graphs, reports, and spreadsheets to communicate the condition of the business to others so that they can make the appropriate adjustments. Quality forecasting can make the difference between staying in business and going out of business. It is a crucial part of the company’s budget and success. The future of the company and its direction, hinges on the forecasting that is done by its analyst.References:1) Demand Forecasting: Evidence-based Methods. J. Scott Armstrong, 2006, p.
140 2) Emerging Issues in Sales forecasting and Decision Support Systems, Essam Mahmoud 1998, p. 47 3) Journal of the Academy of Marketing Science, Volume 16, Numbers 3-4, 47-61 4) Sales Forecasting Management: A Demand Approach John T. Mentzer, Mark A.
Moon 2005, p. 145 5) Principles of Supply Chain Management, Joel D. Wisner, Keah-Choon Tan, G. Keong Leong, 2005, p. 142