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Topic VII
Estimate of future demand Basis for planning Basis for decision making
Factors that influence demand Impact of factors Will these factors continue to influence demand For this purpose buyers & sellers should
Share relevant information Generate single consensus forecast
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Reduction in inventories level Reduction in stock out Smoother production plans Improved Customer Services Overall reduction in costs
CASE STUDIES
Sony PS II Launched in 2000. Sony website crashed Hits exceeded 50,000 Advance booking Sony unable to predict tremendous response from PS I customers Defending their market share against Nintendo Microsoft X-Box Procter & Gamble Retailers lose customers 41% if time Groceries stores sales loss estimated up to $6 billion annually due to out of stock items.
Inaccurate forecasts Bull whip effect Stock Outs Lost Sales High inventory costs Material Shortage Poor response to market needs Poor profitability
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Manufacturers / Buyers
Pull environment From suppliers Product quantity and time Quantity, Price, Time Stock out
Retailer
Maximum Sales revenue Higher level of costs Write downs at end of season Price go up during heavy demand period
Flexible Pricing
Lo profitability
Sales Forecast
estimate of sales (dollars/physical units) of specified company for a future period under particular marketing programme under assumed set of economic factors could be for a single product / entire product line could be for entire marketing department or for subsubdivision short term (in nature) quarterly, annually also termed as operating sales forecasts.
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Forecasting Techniques
Improvement in forecast by
Qualitative Techniques
based on
opinions, intuition, when data not available, low cost, skill and expertise of forecasting is important.
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Forecasting Techniques
Quantitative
mathematical models, analysis of historical data such as
Time series Associative Models such as moving averages and simple trend.
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Qualitative Techniques
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Senior Management group makes the sales forecast as they have the knowledge of
Industry outlook Company s position /capability Future marketing programme of company Suitable when
quick and easy method suitable especially if no historical data available pooling of experience
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Delphi Method
Similar to the above method Internal and external experts are surveyed who are not physically present Answers accumulated and then sent to each expert Each participant can modify their response on other member s opinions Especially useful for high risk and large projects and new product introduction
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Limitations
based on opinion one member can dominate the board lack of factual evidence workload on executives increase
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Individual sales person forecast for their respective territory combined and modified as per management perception Responsibility of forecasting assigned to those who are required to produce the result Sales force operate closely to market conditions Have more confidence in meeting sales targets based on this forecast Easy to breakdown this forecast into per product and per territory
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Limitations
Sales force usually is not trained enough to calculate the forecast Sales force estimate could be overly optimistic or pessimistic. There could be individual biases and hidden motives to reach target more easily Sales force are usually unaware of broad economic changes which effect sales business greatly Hence there is a need to adjust this forecast for biases and train the sales force. But high turnover tendencies among sale people makes this difficult. However this method can still be used very beneficially as an alternative tool to benchmark the forecast arrived at through other methods.
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Input taken from customers include future buying plans, new product ideas and opinions /feedback about existing products of the company.
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If the number of customers is large then it is not economical enough to conduct the survey for every customer. Instead a sample needs to be taken which then arises the issue of selection of those respondents who reflect the entire customer base accurately. This issue can create non sampling error. Moreover the forecast derived from this method needs to be adjusted with the
specialised knowledge of market business conditions and changes in the marketing programme of the company and its competitors.
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Quantitative Methods
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Quantitative Methods
projection of next period s sales based on historical data (extrapolating past into future) assumption is that future is an extension of past
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statistical procedure for studying historical sales data involves isolating and measuring 4 chief types of sales variations or components These are Trend Variations
population growth / shifts cultural and lifestyle changes income level shifts
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Cyclical Variations
wave like movements which are usually longer than 1 year. These are influenced by macro economic and political factors. Example : 2004-05 Real estate boom, Sept 2001 terrorist attack, 20041997 Asian economies crises.
Seasonal Variations
these are the highs (peaks) and lows (valleys) which repeat after consistent interval such as hours/days/weeks/months Example restaurant business has peak hours during breakfast, lunch, hi-tea, dinner and local holidays or weekends. hi-
Random Variations
variations due to unexpected and unpredictable events such as natural disasters, hurricanes, tsunami, earthquakes.
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random event or variation in 1 period can effect the average adversely this method is more responsive only when fewer data points are used inability to respond to trend changes quickly
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The sum of all weights assigned to different periods is equal to 1. this method makes its possible to put more emphasis on recent data assigning of weights is however based on experience of forecaster again trend changed not tracked comprehensively forecast still lags demand because of averaging effect
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near 1 means greater emphasis on recent data far 1 more weight on past data Summing up this method is a partial adjustment to most recent forecast error. However it still may lag any trend present in actual data
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competitor s plans to launch new and improved products advertising and selling plans of the company pricing strategies of the company Past and future trends Impending changes in competitive relationships
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Quantitative forecasts rely on past demand data All quantitative methods become less accurate as forecast time horizon increases. Recommendation for long term time horizon a combination of qualitative and quantitative techniques may be used.
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