Forecasting and Demand Measurement

Sheila Marie A. Dacut

Wrong Sales Forecast

Excessive Inventories or Inadequate Inventory. Sales Forecasts are based on estimates of Demand.

Why Study Demand?

Finance -The cash that is required for operations and investments. Operations To establish capacity and output levels. Purchasing To get the right amount of supplies. HR To get the right number of workers Marketing- To prepare Sales Forecasts

Demand Levels
Time Level Short Run Medium Run Long Run Product Level All Sales Space Level World

Industry Sales India Company Sales Region Product Line Sales Product Form Sales Territory Customer

Measuring Current Market Demand

Marketers will want to estimate three different aspects of current market demand o Total market demand o Area market demand o Actual sales and market shares

Market Demand
Market Demand for a product is the total volume that would be bought by a defined customer group in a defined geographical area in a defined time period in a defined marketing environment under a defined marketing program.

Estimating Total market demand Q=nxqxp Where,

Q = total market demand n = number of buyers in the market q = quantity purchased by an average buyer per year p = price of an average unit

Estimating Area Market Demand

Companies face the problem of selecting the best sales territories and allocating their marketing budget optimally among these territories. Two major methods are available o Market buildup method used primarily by business goods firms o Market-factor index method used primarily by consumer goods firms.

Market-Buildup Method

Calls for identifying all the potential buyers in each market and estimating their potential purchases.

Market-Factor Index Method

Identifies market factors that correlate with market potential and combines them into weighted index.

Common Sales Forecasting Techniques

Based On:
What people say

Methods
Surveys of buyers intentions Composite sales force opinions Expert opinion Test markets Time-series analysis Leading indicators Statistical demand analysis

What people do What people have done

THE MORE POPULAR OF MANY FORECASTING METHODS

Survey Methods

Mathematical Methods

Executive Opinion

Users Expectation

Test Market Naive Moving Average

Regression Trend Exponential Smoothing

Sales Force Composite

Build-toOrder

Survey Methods Executive Opinion: Executive forecasting is done in two

  ways: By one seasoned individual (usually in a small company). By a group of individuals, sometimes called a jury of executive opinion.

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 market is a popular method of measuring consumer acceptance of new products. Time Series Projections: Time series methods use chronologically ordered raw data. Classical approach to time series analysis:
The trend component. The seasonal component. The cyclical component. The erratic component.

Nave Method:
Next Years Sales = This Years Sales XThis Years Sales Last Years Sales

Moving Average Method

TABLE : EXAMPLE OF MOVING-AVERAGE FORECAST

PERIOD 1 2 3 4 5 6

SALES VOLUME 200 250 300 350 450 ?

SALES FOR THREE-YEAR PERIOD

THREE-YEAR MOVING AVERAGE

750 900 1100 / 3 = 300 366.6

Period 6 Forecast = 366.6

Exponential Smoothing Exponential smoothing is similar to the moving-average forecasting method. It allows consideration of all past data, but less weight is placed on data as it ages.

Regression Analysis
FIGURE: REGRESSION ANALYSIS

Linear Relationship

Curvilinear Relationship

Sales

Population (A)

Sales 0

Population (B)

TABLE: GUIDE TO FORECASTING

FORCASTING METHOD
Executive Opinion Delphi Method Sales Force Composite Users Expectations Test Markets Nave Method Moving Average Exponential Smoothing

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

MATHEMATICAL SOPHISTICATION

COMPUTER NEED
Not essential Not essential Not essential Not essential Needed Not essential Helpful Helpful Limited

ACCURACY

Minimal Minimal Minimal Minimal Needed Minimal Minimal Minimal

Limited; good in dynamic conditions Accurate under dynamic conditions Limited Accurate Limited Accurate under stable conditions Accurate under stable conditions

Regression Analysis

Short to Medium

Needed

Essential

Accurate if variable relationships stable

Survey of Buyers Intentions

One way to forecast what buyers will do is to ask them directly. Surveys are especially valuable if the buyers have clearly formed intentions, will carry them out, and can describe them to interviewers.

Leading Indicators
Many companies try to forecast their sales by finding one or more leading indicators other time series that change in the same direction by in advance of company sales. For example, a plumbing supply company might find that its sales lag behind the housing starts index by about four months. The housing starts index would then be a useful leading indicator.

Statistical Demand Analysis

A set of statistical procedures used to discover the most important real factors affecting sales and their relative influence. The most commonly analyzed factors are prices, income, population, and promotion.

Composite of Salesforce Opinions

The company typically asks its salespeople to estimate sales by product for their individual territories. It then adds up the individual estimates to arrive at an overall sales forecast. Salespeople are biased observers. They may understate demand so that the company will set a low sales quota. After participating in the forecasting process, the salespeople may have greater confidence in their quotas and more incentive to achieve them.

Expert Opinion
Experts include dealers, distributors, suppliers, marketing consultants, and trade associations. Dealer estimates are subject to the same strengths and weaknesses as salesforce estimates. Delphi method Experts may be asked to supply their estimates individually, with the company analyst combining them into single estimate. Finally, they may supply individual estimates and assumptions that are reviewed by a company analyst, revised, and followed by further rounds of estimation.

Test Marketing
Where buyers do not plan their purchases carefully or where experts are not available or reliable, the company may want to conduct a direct test market. A direct test market is especially useful in forecasting new-product sales or established product sales in a new distribution channel or territory.

Time-Series Analysis
Breaking down past sales into its trend, cycle, season, and erratic components, then combining these components to produce a sales forecast. Trend is the long-term, underlying pattern of growth or decline in sales resulting from basic changes in population, capital formation, and technology. Cycle captures the medium-term, wavelike movement of sales resulting from changes in general economic and competitive activity. Season refers to a consistent pattern of sales movements within the year. Erratic events include fads, strikes, snow storms, earthquakes, riots, fires, and other disturbances.