How to Forecast a New Product
Today, most companies involve themselves with a wide range of products. Competitive compulsions force companies to keep the product range fresh and relevant in the marketplace and hence introduce new products at high frequency than ever before. However, from the planning perspective, forecasting demand for the new products is one of the biggest challenges for the planning team. Accurate forecasting is absolutely critical to optimizes the resources invested in new products.
A lack of historical data is the biggest obstacle when it comes to forecasting demand for a new product. The good news is that most new products are truly a variation of an existing product. This gives the planner a big clue on the expected behaviour of the new version and which is likely to be the same as the product it is replacing or a similar another product. This is true for almost all consumer products. When we see ‘new’ models of cars being launched or a ‘new’ soap or a ‘new’ laptop model. None of these are truly a new product but a new version of an existing product.
The method used to manage such new product introductions is called ‘Forecasting By Analogy’. As the name suggests in this method we pick an existing analog product (or an ‘alike’ product) to use its history for forecasting demand for the new product. Streamline Forecasting System has an Analogy Model feature that enables new product forecasting. Let’s discuss in more detail how to work with this approach.
Step 1: Picking an analog product
The first and the most important thing is to pick the right existing product whose sales behaviour we expect the new product to emulate. For a company that has a large number of SKUs, this is a tough choice to make because if this goes wrong, everything else will too. We will discuss how to make use of other statistical techniques to help us with this choice.
Step 2: Selecting the Date Range
We need to select the historical period range of the analog product that we would like the new product to emulate in its behaviour. This is important as too long a history or too short a history may provide different consumer behaviour. For technology products it is better to use a shorter history.
Step 3:Aligning Seasonality
Forecasting for seasonal products is more complex as the launch month is more significant than the actual launch. The launch month, in this case, needs to align with the season. As opposed to the month in which the existing product was launched. The Align Seasonality option helps align the launch month to that of a similar product, thus overcoming this complexity.
Step 4:Specified Launch Total
The Marketing team usually conducts a survey before a product launch to predict product acceptance. The alternative is to use their judgement to arrive at the initial launch quantity. Streamline helps demand planners incorporate the launch amount using the “specified launch total” option. Once the demand planner keys in the launch amount, it is distributed over the launch horizon. This is based on the historical trend of similar items. In the absence of a specified launch total, the system will derive the launch total basis the historical data of the analog product within the selected date range.
Selecting the right analog product
As discussed earlier, for a large product base organization it is oftentimes tough to pick the right analog product from its wide range with minimal differentiation. We can make use of other statistical techniques to help ourselves solve this dilemma. At Streamline we have a proprietary Clustering Algorithm that we use to find answers to such problems.
n Clustering, we basically cluster similar products to pick the best fit or the closest relative. Let’s take an example of a new handbag (Red Sling Bag) being launched by a company to understand this approach.
The first step is to identify the attributes of the new product that we want to use in choosing the analog product. These parameters can be qualitative or quantitative in nature. For this example, in the case of a handbag, the attributes could be price, material, colour, size etc as parameters to find a similar product.
It is important to assign weightage to these parameters based on the business need and product. For example, price is an important factor for consumers so it may be given more weightage than other parameters.
Identify the optimum number of clusters to be used. Too many clusters may fragment the options and too little may not make the cluster truly homogeneous. The good number is usually a relative judgement call. In this example we identified 12 clusters as a good number from the total underlying data set of about 150 possible choices.
Identify the cluster for each product and then identify the closest existing product within the same cluster. In this example, the Red Sling bag is a new product worth INR 25,000. The proxy identified for this product is Pink Slingbag, made of the same material, which costs around 20,000. The other two options are Black Handbag and Brown Handbag.
We know the ideal analogous product, what next?
The new product is assumed to behave like an analogous product, thus it is important to monitor product behaviour. Check forecast vs actual reports on a periodic basis. If the deviation is very high opted for a different analogous item from the list. The benefit of this approach is that you will get multiple best options to choose from.
By following the above steps the demand planner ends up with an accurate and reliable forecast for his new product.
The source: Anamind.com
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