SCDigest Says: |
Judgment is frequently biased with over optimism, or allowing recent events to have unwarranted impact. Judgment is also clouded by personal or political agendas, where the forecast is used to represent what a person wants to happen, rather than what he or she honestly believes will happen.
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The following article is made by special arrangement between Supply Chain Digest and the Institute of Business Forecasting & Planning; a full pdf of the original article from the Journal of Business Forecasting can be downloaded here: Forecasting New Products by Structured Analogy, by Michael Gilliland and Sam Guseman of SaS.
Please consider attending the upcoming Demand Planning & Forecasting: Best Practices Conference April 28-30, 2010. Early bird special still available at time of this article’s publication.
Forecasting demand for new products is extremely challenging, as most any demand planner will tell you, given the lack of history and the variety of pressures that can arise to make the forecast turn out to be something very close to the business plans created before the new product has been introduced to market.
Actually, there are several variants to the basic new product introduction (NPI) process and related forecasting efforts: (1) New to the world products (entirely new types of products), (2) new markets for existing products (such as expanding a regional brand nationwide or globally), and (3) refinements of existing products (such as “new and improved” versions, or package changes).
Number 1 is of course the most challenging scenario.
Whatever the specific type of NPI, there are a variety of approaches to forecasting the new product’s sales, some far from scientific in nature. These include:
Executive Opinion: Executive management provides a top line revenue number, and the forecasting staff comes up with a product mix to meet the top line target, including some guess as to sales for NPIs.
Sales Force Rollup: The sales force is surveyed to create a bottoms-up forecast by customer and item – but do they really know?
Delphi Method: A structured, formal process for gathering forecasts and building a consensus. Participants are surveyed, the results are shared (anonymously), and participants are allowed to make adjustments based on the forecasts of their peers. Effective – but impossible to scale.
Prediction Market: Anonymous wagering is used to gather group opinion. An asset (such as a new product’s first year total sales) is traded in a virtual marketplace (like the stock market), and the market price is interpreted as a forecast. Little used to date, also can’t scale well, it is believed.
Analogy: This based on the assumption that demand for a new product will be similar to demand for “like items” of the past. Like items are identified (based on common attributes or other criteria) and the forecast for the new item is based on a composite of the sales history of the like items. It is commonly used for NPI forecasting.
However, the traditional analogy approach is of necessity often heavily based on various judgments by the forecaster or others in the company that amend the composite analogy, since by definition there really is no true actual history on the product, only history analogies. This can lead to problems.
(Supply Chain Trends and Issues Article - Continued Below)
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