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FORECASTING MARKET DEMAND

FORECASTING MARKET DEMAND


1. When one is in a producer s market there is less of a need for forecasting as the market takes up all one s production; it is less a matter of selling and more a matter of allowing customers to purchase. 2. However, in a buyer s market, the consequence of over-production is unsold stock which is costly to finance from working capital borrowings. Conversely, under-production can be detrimental as sales opportunities might be missed due to long delivery times and business might pass to a competitor that can offer quicker delivery. 3. Thus the purpose of the sales forecast is to plan ahead and go about achieving forecasted sales.

USES OF SALES FORECASTS


1. A sales forecast is the estimated dollar or unit sales for a specific future time period based on a proposed marketing plan and an assumed market environment. 2. In addition, the sales forecasting procedure must be taken seriously because from it stems business planning. If the forecast is flawed then business plans will also be incorrect.

A sales forecast is important for at least five reasons:


1. A sales forecast becomes a basis for setting and maintaining a production schedule manufacturing. 2. It determines the quantity and timing of needs for labor, equipment, tools, parts, and raw materials purchasing, personnel. 3. It influences the amount of borrowed capital needed to finance the production and the necessary cash flow to operate the business controller. 4. It provides a basis for sales quota assignments to various segments of the sales force sales management. 5. It is the overall base that determines the companys business and marketing plans, which are further broken down into specific goals marketing officer.

PLANNING/FORECASTING/BUDGETING SEQUENCE

Marketing Plan

Sales Forecasts

Sales Force Budget

THE FORECASTING PROCESS


The forecasting process refers to a series of procedures used to forecast. The process starts with the determination of forecast objective. This may be an estimation of rupees sales, unit sales or number of salespeople to hire next year.

A market factor is an item or element that (1) exists in a market, (2) may be measured quantitatively, and (3) is related to the demand for a product or service. A market index is simply a market factor expressed as a percentage relative to some base figure.

THE FORECASTING PROCESS


Forecast Objective Determine Dependent and Independent Variables Develop Forecast Procedure

Select Forecast Analysis Method Evaluate Results versus Forecast Total Forecast Procedure

Make and Finalize Forecast

Present Assumptions about Data

Gather and Analyze Data

Categories of Forecasting
1. Breakdown 2. Build-up

Basic Steps in Breakdown Method of Forecasting Sales

General Environment Forecast Industry Sales Forecast Company Sales Potential Company Sales Forecast Product Lines Individual Products Customers-Territories-Regions-Divisions-U.S.A.-World

for

Industry sales forecast, or market potential, is the estimated sales for all sellers. Company sales potential is the maximum estimated or potential sales the company may reach in a defined time period under given conditions. The companys share of the estimated sales for an entire industry is referred to as market share.

Build-up Method
1. This method is reverse of breakdown method. 2. Individual forecasts are made by groups and units with-in the firm and then combined to make broader forecasts.

SALES FORECASTING METHODS


Two categories of sales forecasting methods exist: Survey methods are qualitative and include executive opinion, sales force composite, and customers intention surveys. Mathematical methods are test markets, market factors, nave models, trend analysis, and correlation analysis.

THE MORE POPULAR OF MANY FORECASTING METHODS

Survey Methods

Mathematical Methods

Executive Opinion

Users Expectation Build-toOrder

Test Market Naive Moving Average

Regression Trend Exponential Smoothing

Sales Force Composite

SURVEY FORECASTING METHODS


Four basic survey methods are Executive Opinion Sales Force Composite Users Expectations Build-to-Order

Executive Opinion
Executive forecasting is done in two ways: Is the original sales forecasting method and is still the most widely used, regardless of the company size. 1. By one seasoned individual (usually in a small company). 2. By a group of individuals, sometimes called a jury of executive opinion.

The group approach uses two methods:


1. Key executives submit the independent estimates without discussion, and these are averaged into one forecast by the chief executive. 2. The group meets, each person presents separate estimates, differences are resolved, and a consensus is reached.

Delphi Method
Administering a series of questionnaires to panels of experts.

Sales Force Composite


Obtaining the opinions of sales personnel concerning future sales.

Users Expectations
Consumer and industrial companies often poll their actual or potential customers.

Build-to-Order
Companies build final products only after firm orders are placed.

MATHEMATICAL FORECASTING METHODS


Test markets are a popular method of measuring consumer acceptance of new products.

Time Series Projections


Time series methods use chronologically ordered raw data. Historical data are used to predict future events.

Classical approach to time series analysis:


The trend component. The seasonal component. The cyclical component. The erratic component.

Nave Method Also known as ratio method


This Years Sales Next Years Sales = This Years Sales X Last Years Sales

Moving Average
Moving averages are used to allow for marketplace factors changing at different rates and at different times. With this method distant past and distant future have little value in forecasting.

TABLE 5.1 EXAMPLE OF MOVING-AVERAGE FORECAST

PERIOD 1 2 3 4 5 6

SALES VOLUME 200 250 300 350 450 ?

SALES FOR THREE-YEAR THREE-YEAR PERIOD MOVING AVERAGE

750 900 1100 ( 3) = 300 366.6

Period 6 Forecast = 366.6

Exponential Smoothing
Exponential smoothing is similar to the movingaverage forecasting method. It allows consideration of all past data, but less weight is placed on data as it ages. It is weighted moving average method.
Next Years Sales = a (This Years Sales) + (1-a) (This Years Forecast)

Trend Projections Least Squares


Eyeball fitting is simply a plot of the data with a line drawn through them that the forecaster feels most accurately fits the linear trend of the data.

FIGURE 5.6 A TREND FORECAST OF SALES

Observed Sales 600 500 400 Sales 300 200 100 0 1984 1985 1986 1987 Time 1988 1989 1990 Trend Line

Forecast Sales

Regression Analysis
Regression analysis is a statistical method used to incorporate independent factors that are thought to influence sales into the forecasting procedure.

FIGURE 5.7 REGRESSION ANALYSIS

Linear Relationship

Curvilinear Relationship

Sales

Population (A)

Sales 0

Population (B)

Questions to Answer to Improve Chances of Hitting the Forecasting Bull s-Eye


H th av I e e an ncr Ba Yo Fo d ea si u re Se sin cs Co ca le g to n s st cti A in ng cc ide re g Y u M o ra d et ur cy ho d?

W M hi Yo eth ch u od Fo U S re se h ca ? ou s t ld (s)

Have You Developed a Good Sales Forecasting Process?

Market Decision Support System

Breakdown Use Multiple Forecasting Methods Buildup

F O R E C A S T

140% 130% 120% 110%

90% 80% 70% 60%

e sid ? ut lp O e d sH ul ce Co our S

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GUIDE TO FORECASTING
FORCASTING METHOD
Executive Opinion Delphi Method Sales Force Composite Users Expectations Test Markets Nave Method Moving Average Exponential Smoothing Least Squares Regression Analysis

TIME SPAN
Short to medium Medium to long Short to medium Short to medium Medium Present to medium Short to long Short to medium Short to long Short to Medium

MATHEMATICAL SOPHISTICATION
Minimal Minimal Minimal Minimal Needed Minimal Minimal Minimal Needed Needed

COMPUTER NEED
Not essential Not essential Not essential Not essential Needed Not essential Helpful Helpful Desirable Essential Limited

ACCURACY

Limited; good in dynamic conditions Accurate under dynamic conditions Limited Accurate Limited Accurate under stable conditions Accurate under stable conditions Varies widely Accurate if variable relationships stable