3.3.1 Quantitative Sales Forecasting

Question 1

Quantitative forecasting

Answer 1

Why forecast sales
A virtual planning activity
The sales forecast forms basis for most other common parts of business planning :
- human resource plan - how many people we need linked with expected output
- production / capacity plans
- cash flow forecasts
- profit forecasts and budgets
A very useful part of regular competition analysed and helps ti focus market research

Question 2

Extrapolation

Answer 2

Uses trends established from historical data to forecast the future
Moving averages
Takes a data series and smoothers fluctuations in data to show an average
Aim = take out extremes of data from period to period

Advantages
+simple method of forecasting
+ not much data required
+ quick and cheap

Disadvantages

• unreliable if there are significant fluctuations in historical data
• assumes past trend will continue into the future
• ignores qualitative factors

Question 3

Moving averages

Answer 3

Process that removes spikes from data should enable trends in a set of data to be identified easier and be more reliable

3 years = 1+2+3/3 = x then 2+3+4/3=x then 3+4+5/3=x

Moving averages helps point out the growth trend

Question 4

Correlation

Answer 4

Another method of sales forecasting
Correlation looks at the strength of a relationship between 2 variables

Independent variable- factor that causes dependent variable to change
Dependent variable - influenced by independent variable

Positive correlation - independent variable;e increase in value - so does dependent
Negative - independent increases in value and the dependent falls in value
No correlation - no relationship

Strong or weak. -
Line of best fit indicates the strength
Stong - little room between data points
Weak - spread far away from line
If data is strong relationship might be used to make marketing predictions

E.g link between weather and icecream vans sales

Question 5

Limitations of quantitative sales forecasting

Answer 5

Consumer trends - demand in many markets change as consumer tastes, fashions change
- affects both overall market demand and market shares of competitor

Economic variable - demand sensible to changes in exchange, interest rates and taxation
- overall strength of economy (GDP) is also important

Competitor actions - hard to predict but often significant reason why sales forecasts prove over optimistic

Question 6

Main reasons why sales forecasts often turn out to be pretty inaccurate when compared with actual sales achieved:

Answer 6

Business is new - start up (difficult to forecast sakes)
Market subject to significant disruption from technological change
Demand is highly sensitive to changes in price and income (elasticity)
Product is a fashion item
Significant changes in market share
Management have demonstrated poor sales forecasting ability in past