Management Point

Pawan Kumar ME: Unit 2, Chap 5 DEMAND FORECAST AND SALES FORECAST Due to the dynamic and complex nature of marketing phenomenon, demand forecasting has become an important and regular business exercise. It is essential for profit maximisation and the survival and expansion of a business. However, before selecting any vendor a retailer should well understand the requirement and the importance of demand forecasting. In management circles, demand forecasting and sales forecasting are used interchangeably. Sales forecasts are first approximations in production and forward planning. These provide a platform upon which plans could be prepared and amendments may be made. According to American Marketing Association, Sales forecast is an estimate of sales in monetary or physical units for a specified future period under a proposed business plan or programmer or under an assumed set of economic and other environment forces, planning premises, outside business/ antiquate which the forecast orestimate is made. OBJECTIVES OF DEMAND FORECAST Routine Supply of Materials: Demand forecasting assists in figuring out the preferred volume of production. The essential prerequisite of raw materials in future can be calculated on the basis of such forecasts. This guarantees regular and continuous supply of the materials in addition to managing the amount of supply at the economic level. Best Possible Use of Machines: Demand forecasting in addition expedites cutting down inactive capacity because only the necessary amount of machines and equipments are set up to meet future demands. Regular Availability of Labour: As soon as demand forecasts are made, supplies of the necessary amount of skilled and unskilled workers can be organised well beforehand to meet the future production plans. Appropriate Management of Sales: Demand forecasts are made area wise and after that the sales targets for different regions are set in view of that. This abets the calculation of sales performances. To settle on the production capacity: Long term decisions are entwined with capacity variations by adding or discarding capacity in the form of capital assets - manufacturing plants, new technology implementation etc. Size of the organization should such that output matches with the sales requirements. Organisations that are extremely small or large in size might not be in the financial interest of the company. Inadequate capability can hasten declining delivery performance, needless rise in work-in-process and disturb sales personnel and those in the production unit. Nevertheless, surplus capacity can be expensive and pointless. The incompetence to appropriately deal with capacity can be an obstacle to attaining the best possible performance. By examining the demand pattern for the product as well as the forecasts for the future, the company can prepare for a company's output of the desired capacity. Production Planning: Long term production planning can aid the management in organising long term finances on practical terms and conditions. Labour Requirements: Spending on labour is one of the most vital elements of cost of production. Dependable and correct demand forecasts can facilitate the management to evaluate suitable labour requirements. This can ensure finest labour supply and uninterrupted production procedures. IMPORTANCE OF DEMAND FORECAST 1. Management Decisions: An effective demand forecast facilitates the management to take appropriate steps in factors that are pertinent to decision making such as plant capacity, raw-material requisites, space and building requirements and availability of labour and capital. Manufacturing schedules can be drafted in compliance with the demand requisites; in this manner cutting down on the inventory, production and other related costs. 2. Evaluation: Demand forecasting furthermore smoothes the process of evaluating the efficiency of the sales department. 3. Quality and Quantity Controls: Demand forecasting is an essential and valuable instrument in the control of the management of an organisation to provide finished goods of correct quality and quantity at the correct time with the least amount of expenditure. 4. Financial Estimates: As per the sales level as well as production functions, the financial requirements of an organisation can be calculated using various techniques of demand forecasting. In addition, it needs a little time to acquire revenue on practical terms. Sales forecasts will, as a result, make it possible for arranging adequate resources on practical terms and in advance as well. 5. Avoiding Surplus and Inadequate Production: Demand forecasting is necessary for the old and new organisations. It is somewhat essential if an organisation is engaged in large scale production of goods and the development period is extremely time-consuming in the course of production. In such situations, an estimate regarding the future demand is essential to avoid inadequate and surplus production.

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METHODS OF DEMAND FORECAST 1. Prediction markets: These are speculative markets fashioned with the intention of making predictions. Assets that are produced possess an ultimate cash worth bound to a specific event (e.g. who will win the next election) or situation (e.g., total sales next quarter). The present market prices can then be described as forecasts of the likelihood of the event or the estimated value of the situation. Prediction markets are as a result planned as betting exchanges, without any kind of compromise for the bookmaker. People who buy low and sell high are rewarded for improving the market prediction, while those who buy high and sell low are punished for degrading the market prediction. Evidence so far suggests that prediction markets are at least as accurate as other institutions predicting the same events with a similar pool of participants. Many prediction markets are open to the public. Be fair is the world's biggest prediction exchange, with around $28 billion traded in 2007. In trade is a for-profit company with a large variety of contracts not including sports. The Iowa Electronic Markets is an academic market examining elections where positions are limited to $500. Trade Sports are prediction markets for sporting events. 2. Delphi method: Its use can be illustrated by a simple example. Suppose that a panel of six outside experts is asked to forecast a firms sales for the next year. Working independently, two panel members forecast an 8 percent increase, three members predict a 5 percent increase, and one person predicts no increase in sales. Based on the responses of the other individuals, each expert is then asked to make a revised sales forecast. Some of those expecting rapid sales growth may, based on the judgments of their peers, present less optimistic forecasts in the second iteration. Conversely, some of those predicting slow growth may adjust their responses upward. However, there may also be some panel members who decide that no adjustment of their initial forecast is warranted. Assume that a second set of predictions by the panel includes one estimate of a 2 percent sales increase, one of 5 percent, two of 6 percent, and two of 7 percent. The experts again are shown each others responses and asked to consider their forecasts further. This process continues until a consensus is reached or until further iterations generate little or no change in sales estimates. The value of the Delphi technique is that it aids individual panel members in assessing their forecasts. Implicitly, they are forced to consider why their judgment differs from that of other experts. Ideally, this evaluation process should generate more precise forecasts with each iteration. One problem with the Delphi method can be its expense. The usefulness of expert opinion depends on the skill and insight of the experts employed to make predictions. Frequently, the most knowledgeable people in an industry are in a position to command large fees for their work as consultants or they may be employed by the firm, but have other important responsibilities, which means that there can be a significant opportunity cost in involving them in the planning process. Another potential problem is that those who consider themselves experts may be unwilling to be influenced by the predictions of others on the panel. As a result, there may be few changes in subsequent rounds of forecasts. 3. Data mining: Data mining is the process of extracting patterns from data. Data mining is seen as an increasingly important tool by modern business to transform data into an informational advantage. It is currently used in a wide range of profiling practices, such as marketing, surveillance and scientific discovery. 4. Time series analysis: An analysis of the relationship between variables over a period of time. Time-series analysis is useful in assessing how an economic or other variable changes over time. For example, one may conduct a time-series analysis on a stock, sales volumes, interest rates and quality measurements etc. The focus of time-series analysis is to identify the components of change in the data. Traditionally, these components are divided into four categories: 1. Trend 2. Seasonality 3. Cyclical patterns 4. Random fluctuations A trend is a long-term increase or decrease in the variable. For example, the time series of population in India exhibits an upward trend, while the trend for endangered species, such as the tiger, is downward. The seasonal component represents changes that occur at regular intervals. A large increase in sales of umbrellas during the monsoon would be an example of seasonality. Analysis of a time series may suggest that there are cyclical patterns, defined as sustained periods of high values followed by low values. Business cycles fit this category. Finally, the remaining variation in a variable that does not follow any discernable pattern is due to random fluctuations. Various methods can be used to determine trends, seasonality, and any cyclical patterns in time-series data. However, by definition, changes in the variable due to random factors are not predictable. The larger the random component of a time series, the less accurate the forecasts based on those data.

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5. Surveys: Surveys of managerial plans can be an important source of data for forecasting. The rationale for conducting such surveys is that plans generally form the basis for future actions. For example, capital expenditure budgets for large corporations are usually planned well in advance. Thus, a survey of investment plans by such corporations should provide a reasonably accurate forecast of future demand for capital goods. Several private and government organizations conduct periodic surveys. The annual National Council of Applied Economic Research (NCAER) survey of Market Information of Households is well recognized. Many private organizations like ORGMARG and TNS-MODE conduct surveys relating to consumer demand across certain geographical areas. If data from existing sources do not meet its specific needs, a firm may conduct its own survey. Perhaps the most common example involves companies that are considering a new product or making a substantial change in an existing product. But with new or modified products, there are no data on which to base a forecast. One possibility is to survey households regarding their anticipated demand for the product. Typically, such surveys attempt to ascertain the demographic characteristics (e.g., age, education, and income) of those who are most likely to buy the product and find how their decisions would be affected by different pricing policies. Although surveys of consumer demand can provide useful data for forecasting, their value is highly dependent on the skills of their originators. Meaningful surveys require careful attention to each phase of the process. Questions must be precisely worded to avoid ambiguity. The survey sample must be properly selected so that responses will be representative of all customers. Finally, the methods of survey administration should produce a high response rate and avoid biasing the answers of those surveyed. Poorly phrased questions or a nonrandom sample may result in data that are of little value. Even the most carefully designed surveys do not always predict consumer demand with great accuracy. In some cases, respondents do not have enough information to determine if they would purchase a product. In other situations, those surveyed may be pressed for time and be unwilling to devote much thought to their answers. Sometimes the response may reflect a desire (either conscious or unconscious) to put oneself in a favorable light or to gain approval from those conducting the survey. Because of these limitations, forecasts seldom rely entirely on results of consumer surveys. Rather, these data are considered supplemental sources of information for decision making. 6. Market Experiments: A potential problem with survey data is that survey responses may not translate into actual consumer behavior. That is, consumers do not necessarily do what they say they are going to do. This weakness can be partially overcome by the use of market experiments designed to generate data prior to the full-scale introduction of a product or implementation of a policy. To set up a market experiment, the firm first selects a test market. This market may consist of several cities; a region of the country, or a sample of consumers taken from a mailing list. Once the market has been selected, the experiment may incorporate a number of features. It may involve evaluating consumer perceptions of a new product in the test market. In other cases, different prices for an existing product might be set in various cities in order to determine demand elasticity. A third possibility would be a test of consumer reaction to a new advertising campaign. There are several factors that managers should consider in selecting a test market. First, the location should be of manageable size. If the area is too large, it may be expensive and difficult to conduct the experiment and to analyze the data. Second, the residents of the test market should resemble the overall population of India in age, education, and income. If not, the results may not be applicable to other areas. Finally, it should be possible to purchase advertising that is directed only to those who are being tested. Market experiments have an advantage over surveys in that they reflect actual consumer behavior, but they still have limitations. One problem is the risk involved. In test markets where prices are increased, consumers may switch to products of competitors. Once the experiment has ended and the price reduced to its original level, it may be difficult to regain those customers. Another problem is that the firm cannot control all the factors that affect demand. The results of some market experiments can be influenced by bad weather, changing economic conditions, or the tactics of competitors. Finally, because most experiments are of relatively short duration, consumers may not be completely aware of pricing or advertising changes. Thus their responses may understate the probable impact of those changes.

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