Chapter 03

Case 3.1 : A. G. Refrigerators Ltd.

Main Issues / Problems :

 How to improve forecasting accuracy?

 Selection of an appropriate sales forecasting method.

Question 1

Satish Kumar cannot get the break-up of the total sales forecast into the product types,
sizes, and market segments by using moving averages methods. This is because the
formula used in this method only indicates the total sales figure. There is no provision
to give the break-up of the total sales budget.

Question 2

The company’s sales budget should be slightly lower than the company’s sales
forecast, in order to avoid excessive risk

Question 3
The moving averages method used by Satish Kumar is theoretically okay, but he
should have anticipated the requirements of the budget break-up figures of
marketing and production functions, for which other sales forecasting methods like
sales force composite and survey of buyers intentions would be suitable.

Question 4

For improving the accuracy of the sales forecast, the company should consider the
following guidelines:

Use multiple forecasting methods. The suitable forecasting methods are survey
of buyers’ intentions, Delphi method, sales force composite, exponential smoothing,
moving averages, regression analysis, and ratio method. The company, can select 2 or
 3 methods depending on time available, cost, available information, and requirements
of other functions like production and marketing.

Use computer hardware and software tools. Increasingly sales managers are using
software packages along with personal computers (PCs) for accurate sales forecasting and to
avoid manual calculations.

Case 3.2: K.R Cash and Carry Pvt. Ltd.

Main Issues/Problems:

 Declining sales for the past three months and no growth in sales for the previous year.
 Attrition of salespersons in the past six months.

Question-1
Pradeep should verify the reasons given by the sales supervisors by visiting a few key
customers and talking to them to know if their requirements have gone down, whether
they are satisfied with the products, services, and prices provided by the company, and
any other issues they would like to mention for increase in the business from the
company. Generally, customers would tell the truth, whereas the company’s salespeople
may hide a few facts. After verification from customers Pradeep can decide which reasons
and suggestions given by the sales supervisors can be accepted.

Question-2
The following strategies and actions are suggested to improve the growth in sales.

(i) Classify the customers. It is not a correct strategy to treat all customers alike, as
done by the company’s salespeople. Instead, customers in each of the three groups-
viz. (a) small businesses, (b) retailers, and (c) institutions – should be classified
depending upon their sales and profit potential into high (A), medium (B), and low
(C) potential customers. Salespeople should visit high (A) potential customers once a
week, medium (B) potential customers once in two weeks, and low (C) potential
customers once in 4-6 weeks.
 (ii) Customer relationship strategy: For ‘A’ class customers collaborative
relationship, for ‘B’ class customers value-added relationship, and for ‘C’ class
customers transactional relationship strategy should be implemented.
(iii) Selling/Presentation methods: The salespeople are using outdated ‘AIDA’
formula for sales presentations. They should be trained to use need-satisfaction
method with FAB (features, advantages, and benefits ) approach for class ‘ B ‘
customers and team selling method for class ‘A’ customers with the sales supervisors
forming a team with respective salespeople. This would help getting more share of
business from ‘A’ and ‘B’ class customers.
(iv) Develop effective compensation plan for salespeople. As the salespeople
are asking for more salaries, the compensation package for salespersons should be
changed from ‘straight salary’ (or 100% salary) to ‘salary plus commission’ basis, with
a break-
up of 70% fixed salary and 30% variable commission depending upon the increase in
sales over the sales budget.
Other two suggestions (a) about developing a mobile application for obtaining information
on prices and product availability, and (b) improvement in delivery service by training
logistics people and providing/hiring more vehicles can be included.

Pradeep should discuss the above strategies and actions with the Managing Director
and after getting his approval implement the same effectively.

Case 3.3: LeafCo Pvt. Ltd.

Question 1

There are several approaches that can be used for the purpose of forecasting quarterly
demand. The following is just one suggested approach, based on the concepts of derived
demand and growth rates.

As the different grades of leaf pulp are all used to produce only three products, viz. leaf-paper
food containers, leaf-paper bags, and leaf-paper packaging materials, the demand for the
different grades of leaf pulp is dependent on the sales of these three products. Thus, the first
step is to express the demand for the different grades of leaf pulp as a function of the sales of
these three products. This is done by multiple linear regression. The regression results (using
Data Analysis add-in in Excel) are as follows:
Grade A:
Coeff. Std Error t Stat p-value
0.36103 0.07885
Intercept 0.663951 3 1.839031 7
0.00001 19.26819 0.00000
leaf-paper food containers 0.000320 7 6 0
0.00000 0.21345
leaf-paper packaging materials -0.000005 4 -1.279562 7
0.00000 0.13422
leaf-paper bags 0.000002 2 1.552373 6
2
R = 98.37%

Grade B:
Coeff. Std Error t Stat p-value
0.00252 0.40342
Intercept -0.002147 2 -0.851223 1
0.00000 0.42791
leaf-paper food containers 0.000000 0 0.807037 2
0.00000 3383.064 0.00000
leaf-paper packaging materials 0.000100 0 5 0
0.00000 4682.498 0.00000
leaf-paper bags 0.000050 0 0 0
2
R = 99.99%

Grade C:
Coeff. Std Error t Stat p-value
0.00227 0.36110
Intercept -0.002121 6 -0.931838 0
0.00000 0.35439
leaf-paper food containers 0.000000 0 0.945178 2
0.00000 5624.596 0.00000
leaf-paper packaging materials 0.000150 0 3 0
0.00000 0.84059
leaf-paper bags 0.000000 0 0.203421 5
R2 = 99.99%

The second step is to generate forecasts for the sales of leaf-paper food containers, leaf-paper
bags, and leaf-paper packaging materials.

As the data is quarterly, the first possibility to be concerned about is that of seasonality.
However, in this case, a simple time series plot shows that seasonality does not play a role.
 200000
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120000 leaf-paper food containers
100000 leaf-paper packaging materials
80000 leaf-paper bags
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The next choice to be made is the functional form for the forecasting. The approach suggested
is to consider growth rates, as suggested by the marketing manager in the case. As the data is
quarterly, the compounded quarterly growth rates are appropriate. The results are shown in
the table below. Note that CQGR was also calculated from 2004 onwards, and was different
from that based on the entire data. This was performed as the time series showed a break in
2004.

LP food LP packaging LP bags

containers materials
based on entire data 0.37% 2.67% 2.13%
from 2004 onwards 0.69% 2.70% 1.85%

The CQGRs above were then used to forecast for the sales of leaf-paper products for the next
two years, assuming constant growth rate (base case) and two and three times the growth rate.
The results are shown in the table below.
base case:
LP food containers LP packaging materials LP bags
quarter/ based on from 2004 based on from 2004 based on from 2004
year entire data onwards entire data onwards entire data onwards
Q3_2007 28337.00 28337.00 54036.00 54036.00 182718.00 182718.00
Q4_2007 28440.55 28531.28 55478.95 55492.86 186609.20 186098.39
Q1_2008 28648.80 28923.84 58481.49 58525.48 194641.97 193047.94
Q2_2008 28964.03 29522.83 63292.70 63387.97 207344.09 203961.87
Q3_2008 29389.74 30340.82 70328.91 70505.43 225578.93 219479.57
Q4_2008 29930.69 31395.26 80234.14 80536.42 250643.90 240547.30
Q1_2009 30592.98 32709.07 93978.74 94474.79 284424.79 268514.74
 Q2_2009 31384.21 34311.50 113017.34 113813.43 329632.10 305279.10
Q3_2009 32313.55 36239.19 139542.22 140807.26 390160.46 353498.26
Q4_2009 33391.99 38537.60 176893.24 178900.07 471637.94 416906.60

optimistic case:
LP food containers LP packaging materials LP bags
quarter/ based on from 2004 based on from 2004 based on from 2004
year entire data onwards entire data onwards entire data onwards
Q3_2007 28337.00 28337.00 54036.00 54036.00 182718.00 182718.00
Q4_2007 28544.10887 28725.56 56921.90708 56949.73 190500.4015 189478.77
Q1_2008 28962.87881 29518.72 63164.33673 63256.99 207073.7366 203760.05
Q2_2008 29602.58139 30749.73 73834.72933 74051.50 234676.0166 227225.33
Q3_2008 30477.55051 32471.29 90917.12276 91362.44 277285.3711 262768.72
Q4_2008 31607.71891 34759.40 117930.7141 118798.22 341585.7701 315115.55
Q1_2009 33019.3765 37718.96 161140.3945 162802.33 438719.7093 391872.91
Q2_2009 34746.19086 41491.74 231941.342 235136.35 587474.5847 505358.85
Q3_2009 36830.54561 46267.73 351680.3944 357921.15 820173.2165 675824.21
Q4_2009 39325.27091 52300.91 561712.9016 574200.28 1193813.939 937231.44

highly optimistic case:

LP food containers LP packaging materials LP bags
quarter/ based on from 2004 based on from 2004 based on from 2004
year entire data onwards entire data onwards entire data onwards
Q3_2007 28337.00 28337.00 54036.00 54036.00 182718.00 182718.00
Q4_2007 28647.6633 28919.83 58364.86062 58406.58961 194391.6023 192859.1614
Q1_2008 29279.24481 30121.71 68090.72717 68236.87962 220023.8869 214861.2787
Q2_2008 30252.82058 32018.82 85801.07941 86169.80791 264946.5888 252659.1201
Q3_2008 31601.46425 34735.45 116779.2792 117616.9047 339424.3529 313596.1655
Q4_2008 33372.12596 38457.63 171675.0131 173525.3874 462619.3901 410833.1212
Q1_2009 35628.36359 43454.43 272594.2229 276716.4353 670812.0127 568092.552
Q2_2009 38454.14954 50110.34 467513.8333 476963.9348 1034841.882 829147.2851
Q3_2009 41959.0725 58974.28 866045.1695 888617.3406 1698413.096 1277330.292
Q4_2009 46285.38515 70833.69 1732825.704 1789462.829 2965574.436 2076986.536
The last step is to substitute the forecasts of the sales of leaf-paper products in the regression
equations for the different grades of leaf pulp to obtain the required demand forecasts. The
results are presented in the tables below.
Grade A:
based on entire data from 2004 onwards
quarter/ base case optimistic highly base case optimistic highly
year case optimistic case case optimistic case
Q4_2007 9.8945 9.9290 9.9635 9.9222 9.9844 10.0466
Q1_2008 9.9639 10.0684 10.1735 10.0477 10.2376 10.4297
Q2_2008 10.0687 10.2805 10.4953 10.2387 10.6282 11.0285
Q3_2008 10.2099 10.5687 10.9353 10.4984 11.1690 11.8710
Q4_2008 10.3886 10.9362 11.4962 10.8310 11.8758 12.9884
Q1_2009 10.6060 11.3838 12.1649 11.2417 12.7654 14.3997
Q2_2009 10.8630 11.9053 12.8764 11.7363 13.8487 16.0619
Q3_2009 11.1600 12.4753 13.4134 12.3206 15.1147 17.7294
Q4_2009 11.4957 13.0220 13.1102 12.9993 16.4920 18.5398
Grade B:
based on entire data from 2004 onwards
quarter/ base case optimistic highly base case optimistic highly
year case optimistic case case optimistic case
Q4_2007 14.8783 15.2171 15.5560 14.8541 15.1688 15.4835
Q1_2008 15.5801 16.6700 17.8101 15.5049 16.5136 17.5667
Q2_2008 16.6964 19.1171 21.8272 16.5368 18.7664 21.2499
Q3_2008 18.3117 22.9557 28.6487 18.0245 22.2746 27.4414
Q4_2008 20.5554 28.8720 40.2977 20.0810 27.6355 37.8940
Q1_2009 23.6188 38.0493 60.7986 22.8732 35.8737 56.0757
Q2_2009 27.7830 52.5667 98.4905 26.6452 48.7811 89.1521
Q3_2009 33.4617 76.1746 171.5191 31.75550 69.58230 152.72420
Q4_2009 41.2704 115.8583 321.5484 38.73509 104.27940 282.78582

Grade C:
based on entire data from 2004 onwards
quarter/ base case optimistic highly base case optimistic highly
year case optimistic case case optimistic case
Q4_2007 8.3217 8.5382 8.7546 8.3238 8.5424 8.7609
Q1_2008 8.7721 9.4745 10.2134 8.7787 9.4884 10.2354
Q2_2008 9.4937 11.0749 12.8698 9.5081 11.1075 12.9252
Q3_2008 10.5491 13.6371 17.5161 10.5756 13.7041 17.6420
Q4_2008 12.0348 17.6888 25.7497 12.0802 17.8192 26.0277
Q1_2009 14.0963 24.1697 40.8861 14.1709 24.4193 41.5050
Q2_2009 16.9519 34.7888 70.1210 17.0715 35.2685 71.5391
Q3_2009 20.9302 52.7478 129.8940 21.1203 53.6845 133.2802
Q4_2009 26.5324 84.2493 259.8959 26.8338 86.1229 268.3909