New Product Forecasting

An Applied Approach

Kenneth B. Kahn

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781317463870
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

Concise and jargon free, this is a one-step primer on the tools and techniques of forecasting new product development. Equally useful for students and professionals, the book is generously illustrated, and features numerous current real-world industry cases and examples. Part I covers the basic foundations and processes of new product forecasting, and links forecasting to the broader processes of new product development and sales and operations planning. Part II includes detailed, step-by-step techniques of new product forecasting, from judgmental techniques to regression analysis. Each chapter in this section begins with the most basic techniques, then progresses to more advanced levels. Part III addresses managerial considerations of new product forecasting, including postlaunch issues such as cannibalization and supercession. The final chapter presents an important set of industry best practices and benchmarks.

Part I

Foundations of Applied New Product Forecasting

The beginning of knowledge is the discovery of something we do not understand.

Frank Herbert, Novelist (1920–1986)

It is important to first recognize and understand the distinguishing characteristics and challenges of new product forecasting before movingahead and applying forecasting techniques. To meet these ends, chapter1 introduces the topic of new product forecasting, describes the issuesthat make new product forecasting unique versus regular sales forecasting (especially the forecasting of existing products with a long, stablehistory), and defines key terminology associated with the new productforecasting topic. Chapter 1 also introduces the various techniques thatone may consider to employ in the course of forecasting new productsand links each technique to a particular new product forecasting strategy. Chapter 2 discusses and lays out the new product development process and the new product forecasting process. Chapter 2 further showshow these two processes are interrelated, and also how new productforecasting has an important, emerging role in the process known asSales and Operations Planning (S&OP).

1

Introduction to Applied New Product Forecasting

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New product forecasting is an important topic. Yet, compared to the forecasting of ongoing product demand and sales, new product forecasting receives considerably less attention, especially when counting the number of publications on each respective topic. Those publications that do discuss the topic of new product forecasting predominantly focus on statistically sophisticated techniques. This portrays new product forecasting as a potentially mysterious endeavor.

New product forecasting should not be viewed as mysterious. However, it certainly can be viewed as a complicated endeavor due to its many challenges. One principal challenge is overcoming the characteristically low credibility and low accuracy associated with new product forecasts. Benchmarking research finds that new product forecast accuracy on average one year after launch is slightly above 50 percent (Kahn 2002). Another major challenge is time management. When forecasting existing products, one can usually run a forecasting engine embedded within a company’s production planning computer system, but, in contrast, forecasting a new product requires more manual attention, and thus, considerable time resources. The ability to afford additional time to develop a new product forecast may be prohibitive, particularly if a forecaster is responsible for a product mix of over ten thousand items. Less available time means less thinking on inherent new product forecasting issues like draw (the percent of a new product’s volume coming from products within a product category), cannibalization (the percent of a new product’s volume coming from other company products), category growth (the percent of a new product’s volume coming from new category buyers who enter the category to purchase the new product), and category expansion (the percent of a new product’s volume coming from increased category consumption among current category buyers where the purchase of the new product is incremental volume for the buyer). While high accuracy is never assured and time is a limited resource, employing a systematic approach can “demystify” the new product forecasting endeavor and force attention to those new products and issues deserving of attention. Subsequently, attending to the right issues initially can manifest more accurate new product forecasts and optimize one’s time in generating this forecast. This therefore highlights taking a practical, applied approach to new product forecasting and acknowledging a process approach for proper new product forecasting.

To date, there is little guidance regarding applied new product forecasting and so it is the intent of this book to serve as a primer on new product forecasting with an applied approach perspective. Accordingly, this book outlines inherent issues in new product forecasting and discusses the application of different techniques for generating a new product forecast. A practical, “toolbox” approach is adopted to illustrate how various new product forecasts can be generated. In a toolbox approach, each new product forecasting technique is portrayed as a tool that has parameters regarding data input requirements, necessary statistical knowledge, and implicit assumptions; these characteristics then would indicate which forecasting technique to apply to the task at hand. Like someone attempting to use a screwdriver to pound a nail, some forecasting techniques are not well suited for certain forecasting situations because they can be overly time-consuming and result in erroneous (“broken”) forecasts, especially if the forecaster fails to recognize the implicit assumptions on which the technique is based. To reiterate, one must have an understanding of the applied new product forecasting endeavor and which techniques are most appropriate in which situations before attempting to forecast new products. There is not one “save-all” or “silver bullet” technique for new product forecasting.

Clarifying the Terminology of Product, Service, or Offering

Before further discussions on the topic of new product forecasting, it is important to clarify what “product” means when conducting new product forecasting. This book adopts a broad definition for product, such that the term can describe any company offering, be it a product, service, or even an idea. The basis for this is that while historically and traditionally seen as distinct, products, services, and ideas are now innately intertwined. One does not just buy a new car: aside from receiving the car the buyer receives warranties, financing, and service opportunities. It therefore is very difficult, if not inappropriate, to distinguish products and services. There are slight nuances and inherent characteristics associated with products versus services versus ideas, yet the issues and processes related to the development and management of these are remarkably common and should be considered equivalent. Hence, the term “product” is used in conjunction with new product forecasting and employed throughout this book. The term “service” could be easily substituted, or simply the general terminology of “offering.”

A New Product Forecasting Directive

A forecasting director during a recent executive training session commented, “I know the new product forecast is going to be wrong, but as long as the forecast can get us into the ballpark, we can plan accordingly.” While this comment exemplifies the challenge that all new product forecasts are wrong, it further exemplifies a new product forecasting directive: to accept that error will exist and then work to develop the best, most meaningful forecast possible coupled with an understanding of what underlies the forecast and its associated contingencies. Doing so, the company can then plan financial, production, and other functional area decisions that pertain to the forthcoming new product. In short, the task of new product forecasting is laudable, and with understanding and persistence it can be accomplished.

Beginning the New Product Forecasting Endeavor

The first step toward successful new product forecasting is to establish the forecasting objective. This will clarify the purpose and intent of the forecast so that a meaningful forecast can be made—meaningful in the sense that the forecast is presented in a usable and understandable form. Otherwise, an innumerable set of forecasts can be developed, leading to confusion over which forecast should be employed. The forecasting objective helps to clarify what is needed at particular points during the new product development (NPD) process.

Once the forecasting objective is established, consideration is needed regarding the forecasting level, time horizon, interval, and form. Forecasting level refers the focal point in the corporate hierarchy where the new product forecast applies. Common levels include the stock keeping unit (SKU) level, stock keeping unit per location (SKUL) level, product line, strategic business unit (SBU) level, company level, and industry level. Forecasting time horizon refers to the time frame for how far out one should forecast. New product forecasts may correspond to a single point in the future or a series of forecasts extending out for a length of time (the latter is more common). Examples include a one- to two-year time horizon, which is typical for most fashion products, two to five years for most consumer product goods, and ten-plus years for pharmaceutical products. One reason for the longer time horizon for pharmaceuticals is the consideration paid to the length of term for a new drug patent. Forecasting time interval refers to the granularity of the new product forecast with respect to the time bucket as well as to how often the forecast might be updated. For example, a series of forecasts can be provided on a weekly, monthly, quarterly, or annual basis. Forecasting form refers to the unit of measure for the forecast. Typically, early new product forecasts are provided in monetary form (e.g., U.S. dollars) and later provided in terms of unit volume for production purposes. Some new product forecasts even come in the form of narrative scenarios that describe a future event.

Types of New Product Estimates

New product forecasts can represent different types of estimates. These include market potential, sales potential, market forecast, and sales forecast. Potential estimates represent the maximum attainable under a given set of conditions, with market pertaining to all companies within a given industry marketplace and sales pertaining to only the respective focal company. A market potential estimate is therefore a prediction of maximum total market volume under a given set of conditions. A sales potential estimate is a prediction of maximum company sales within the given market under a given set of conditions.

Forecasts represent likely or reasonable attainable estimates. A market forecast is therefore a reasonable estimate of total market volume to be attained by all firms in that market under a given set of conditions. A sales forecast is a reasonable estimate of attainable sales volume for a focal company within a given market under a given set of conditions.

These definitions characterize a market potential estimate as the largest, most general of the four types of estimates possible. A market forecast would be the next largest estimate. Sales potential would be the third largest estimate. The sales forecast would be the smallest and likely most granular of estimates. Note that in the case of a monopoly, market and sales estimates would be same; that is, in the case of a monopoly, market potential would equal sales potential, and the market forecast would equal the sales forecast.

New Product Planning Versus New Product Forecasting

New product planning and new product forecasting should be keenly distinguished, although in many companies this distinction is muddled. New product planning is a process that determines company management expectation of what sales volume or revenue should be to meet company financial objectives and financial targets. In other words, new product planning is keenly focused on what management wants to happen at new product launch and postlaunch. New product forecasting is a process that determines a reasonable estimate of sales attainable under a given set of conditions. That is, new product forecasting serves as a reality check by providing visibility to what is likely to happen.

Many times during the new product forecasting endeavor company management expectations are driven by financial objectives and financial targets, which influences the new product forecast, often in the direction of an inflated one. All efforts should be made to resist these temptations to tweak forecasts unless a set of reasonable assumptions and conditi...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Foreword
• Preface
• Part I. Foundations of Applied New Product Forecasting
• Part II. New Product Forecasting Techniques
• Part III. Managerial Considerations for Applied New Product Forecasting
• References
• Index