Financial appraisal methods for improving reliability in product management estimates

Sales Forecasting

Forecasts, budgets and evaluations are critical for business for a few different reasons. The first is that it allows for better allocation of firm resources. By using forecasts, managers are able to ensure that the firm is able to meet demand where it exists, and not have resources being wasted where it isn't. New product managers may prefer to operate without forecasts, but the process of building a forecast can provide a lot of insight into the product's potential. Where that potential lies and how best to tap into it are two key components of the new product launch strategy. This is especially true in organizations with finite resources. The company may not be able to pursue all projects at all times, so as a result must make decisions about resource allocation. It is only possible to do this effectively with proper forecasts. Even outside of new projects, where the sales environment is relatively easy to understand based on past experience, firms are able to use forecasts to derive supply chain efficiencies (Aviv, 1999).

Given the situation of scarce resources, it is essential that forecasts are used to help with new product launches. The marketing department in particular plays a key role in this task. Marketing is able to gather information through test marketing and surveys that can help the product launch team with all phases of the product marketing process. Insights can be provided as to distribution channels, target markets, the marketing message, most desired attributes, pricing and all other decisions. Some of these decisions will help to determine which products should be brought to market. Demand forecasts may be far less once the research has been analyzed, or the price point consumers want may be too low to earn a profit. The process of building the forecast helps the company to gather all of this information and therefore can add significant value to the new product launch process.

The problems that the new product managers have with forecasts are valid. They do make use of estimates. However, if those estimates are unreliable that implies that they were not derived properly. The process by which those estimates are created should be research intensive -- this is the part of the process that adds value. Donnelly (2011) suggests that forecasts be constructed carefully, and that enough time to put into them to ensure they are reasonably accurate. It is argued that a consistent model or methodology is used, so that the forecasts for different products are comparable -- without that management cannot make good resource allocation decisions.

Forecasts are also used to improve processes downstream. This cuts both ways -- when results are positive the forecasts will identify that as well. Thus, if sales are below expectations, the new product launch team has a mechanism by which to realize that the product is underperforming, and work right away to correct the issue. Should results be well above forecast, the company can learn what went right during the launch, and replicate that for other launches.