Jeff’s records (Sales forecasting)
Specificationtopic:Salesforecasting
CaseStudy:Jeff’srecords
AsJeffwatchedoneofhisearlyNirvanasinglessellfor£2500in10minutesonAmazonmarketplacehe
knewhewasaluckyman.Hehadbeensellingsecondhandandnewvinylrecordsfor10yearsfromhis
shopinSwindonbutcouldneverhavepredictedthelatestsurgeinrecordsales,especiallywhenallthe
kidsarestreamingmusicfromthelikesofSpotifyandApplemusic.Thetruthisthatcollectorsare
payingahugeamountofmoneytobuyrare,limitededitionrecords.Atthesametimemoreandmore
peoplearebuyingnewrecords,sharingtheviewthatthequalityofarecordissomuchhigherthanany
otherformat.VinylrecordsalesintheUKrose20%inthelastquarterandlargeretailerslikeAmazon
andHMVareallocatingmoreandmoreattentiontosellingvinyl.
Trendscomeandgoquicklyinmusic.WhenHMVwentintoadministrationin2013buyershadturned
totheonlineretailerstobuytheirCD’sanddownloadsweredestroyingsalesofphysicalmusic.Under
newownershipHMVhasnowdiversifiedintosellingmusicrelatedmerchandiselikeTshirtsand
headphonesalongwithmorevinyl.
Onecurrenttrendisthatlesspeoplearedownloadingmusictotheircomputersbutinsteadlisteningto
streamedmusicforamonthlyfee.ThereisasimilardeclineinCDsales.Butvinylisboomingasaniche
marketsegmentwithenthusiastsowningvastrecordcollections.ThemainproblemforJeffisgetting
holdofstockasthereisaworldshortageofrecordpressesand2ndhandstockisbecomingharderto
getholdof.RivalsecondhandrecordretailerslikeVinylTaparebuyinguplargequantitiesofsecond
handstockandinsteadJeffishavingtoallocatemorespaceinhisshoptonewrecords.Thismakes
profitmarginshardertoachieveduetopricecompetitionfromlargeonlinesellerslikeAmazon.Selling
musiconlineviaEBayandAmazonmarketplacehasreallyhelpedJeff’srecords–especiallywhenit
comestosellingrarer2ndhanditemstocollectors.
Jeffhasseenalargeincreaseinvinylsalesoverthelastyearandiswonderingwhethertoexpandhis
businessbybuyingthevacantshopnextdoor.Thiswouldenablemorestocktobeheldwhichcould
thenbesoldviatherecordshoporonlineviahiswebsite.
Exam-stylequestions
1.AssessthelikelyvaluetoJeffofproducingasalesforecastfornextyear(10marks)
2.AssessthebenefitstoJeffofpurchasingthepropertynextdoortoexpandhisrecordshop
further?(12marks)
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Jeff’s records (Sales forecasting)
Suggestedanswers:
1. Valueofproducingasalesforecastfornextyear:
• Canhelpwiththedecisiontopurchasetheshopnextdoorforexpansionandcould
alsobeusedasevidencetoshowaninvestororlenderwhenfinancingthepurchase
• Canhelpdecidehowmuchstocktopurchase
• CanhelpJeffplanhisstaffinglevels
Potentialcounterbalance:
• Itisverydifficulttoestimatesalesaccurately–forexample,therecentboomin
vinylmaybeapassingphaseandshortlived.Streamingcouldbemorepopular
thananticipatedandtakeawayfuturevinylsales
• Pastdatatrendsarenoguidetothefuture.Thebusinessenvironmentisconstantly
changinge.g.strongrivalslikeVinylTapcouldlowerJeff’ssales
Possiblejudgement
•
SalesforecastingisvaluableasitcanprovideinformationtoJeffthatwillallowhim
toforecasthisstocklevels.Thiscouldensurehehasenoughstocktocopewith
demandaswellashelpinghimtodecidewhetherornottopurchasetheshop
2. ArgumentswhyJeffshouldpurchasetheshop:
• TheUKvinylmarketrecentlygrew20%.MeanwhilerivalslikeHMVareseeingthe
potentialtosellvinylintheirstoreshighlightingitspotential.JeffhasaUSPof
beingabletosupply2ndhandvinylwhichissoughtafterasthemarketgrows
• Jeff’svinylsalesaregrowing
• Peoplewhobuyvinylhavelargecollectionssoarelikelytomakelargerpurchases
i.e.severalitemsatonce
• AmazonmarketplaceandeBayenablemorestocktobesoldinternationallyand
nationallybycollectors.Morestoragespacewillhelpwiththis
Potentialcounterbalance:
•
•
•
•
Customersfinditmoreconvenienttoorderonlinesothereisnoneedtoinvestin
highstreetpropertywhichismoreexpensivee.g.higherrentandratesthanoutof
townsites.Bettertofindawarehouseoutoftowntostorestockandplaceonline
Pasttrendsarenotalwaysaguidetothefutureandthisisafastchangingmarket.
Therecenttrendtobuyvinylmaybeafadandisquiteanichepartofthemarket.
Mostconsumerswillnowstreammusicratherthanpurchasingitinanyformat
LargerivalslikeHMVandAmazonarenowsellingmorevinyl.Thesewillget
economiesofscaleinpurchasingandbeabletochargelowerpricesmakingithard
forJefftocompete
Stockof2ndhandvinylisbecominghardertoacquireasotherrivalslikeVinylTap
arecashinginonthismarket.ThislimitsthepotentialforJefftousesecondhand
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Jeff’s records (Sales forecasting)
•
collectors’itemsashisUSPleavinghimtocompeteatadisadvantagewithonline
rivalsandpayingcostlyhighstreetrent
Themainmassmarketstillrevolvesarounddigitaldownloads,CDsandstreaming.
Itreallydependsonhowmanyconsumersarewillingtotryvinylandkeep
purchasingitinfuture
Possiblejudgement:
•
•
•
•
•
Moreandmorepeoplearebuyingnewrecordsandvinylsalesgrewby20%inthe
lastquarter.Purchasingtheshopnextdoorwouldallowhimtoincreasehisstock
andtakeadvantageofthisgrowth
Jeffcouldbeleftwithanunderutilisedshopasstockisdifficulttocomeby
Purchasingtheshopwillincreasehisoutflowsandifhestrugglestobystockthen
hisoutflowscouldbegreaterthanhisinflowswhichwouldputastrainoncash
flow.
ItwilldependontherelativecostforthesitenextdoorandwhetherJeffhasthe
cashflowtopurchasewithoutanexpensivemortgageorloan
Italsodependsonthepropertymarketforcommercialpremises.Ifrisingprices
thenthiscouldbeareasonablelongterminvestmentforthefuture
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Specification Topic: Sales forecasting
Q1
Fillinthegaps
Salesforecastsareessentialforplanningahead.___levels,stockandproductionlevels
alldependuponaccuratesalesforecasts.Backdatai.e.datafromthe________________canbe
usedtoidentifyatrend.Rawdatawilloftenhavevariations,suchas__________________
variations,whereperhapsonequarteroftheyearseeshighersalesduetotheweather.Datacan
besmoothedouttospottheunderlying______invariousways.Acommonmethodof
findingatrendistoconducta_________average.___________istheterm
usedforextendingatrendlineintothefuturetopredictsales.
Quantitativesalesforecastingdoeshavelimitations,sincethepastisno______ofthe
future.Thisisduetothemany______affectingdemandforaproduct.Howeverin
________________movingmarketsforecastsarelikelytobemorereliable.
Choosefrom:extrapolation;factors;past;seasonal;moving;trend;guarantee;slow;
staffing
Q2
Matchthetermwiththedescription
Lineofbestfit
Timeseriesanalysis
3periodmoving
average
Seasonalvariation
Scattergraph
Correlation
A. Thelinkbetween2variablesofdata
B. Agraphshowingonevariableagainstanothervariableto
helpshowifacorrelationexistsbetweenthetwo
C. Alinedrawnthroughthedataonascattergraphtoshow
therelationshipbetweenthetwovariables
D. Examiningdatafromthepastinordertopredictfuture
figures
E. Wherethreeperiodsworthofdataareaddedtogether
anddividedby3inordertosmoothoutthedata
F. Thetypicalvariationinanygivenquarterbetweenthe
forecasttrendandactualsales
Q3
Circletheoddoneoutineachrowbelow
3.1SeasonalCyclicalRandomRecession
3.2ThreeperiodFourquarterNinemonth
3.3BackdataTimeseriesanalysisCorrelationPrimaryresearch
3.4PositiveInverseNegativeWeakStrong
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Specification Topic: Sales forecasting
Q4
Calculatorsready!ThetablebelowshowsthesalesofGrommitsoverthelast10months
(£000)
Period
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Sales
4700
4500
4800
5300
6000
5700
6340
6400
6900
7300
Moving
Average
4.1Fromthesalesfiguresabove,calculateathreeperiodmovingaveragetogivethe
trenddata.Inputtheanswerintherowhighlighted.
Q5
Brieflyexplainwhy…
5.1 salesforecastsshouldbetreatedwithcaution
5.2 itisimportanttoknowwhopreparedthesalesforecast
5.3 salesforecastsaremoreusefulforthenearfuturee.g.forthenext6months
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Specification Topic: Sales forecasting - Answers
Q1
Fillinthegaps
staffing;past;seasonal;trend;moving;extrapolation;guarantee;factors;slow
Q2
Matchthetermwiththedescription
Lineofbestfit
C
Timeseriesanalysis
D
3periodmovingaverage
E
Seasonalvariation
F
Scattergraph
B
Correlation
A
Q3
Circletheoddoneoutineachrowbelow
3.1recession–othersaretypesofvariation
3.2ninemonth–othersaretypesofmovingaverage
3.3primaryresearch–othersallusedatafromthepast
3.4inverse–othersarecommonnamestodescribefeaturesofacorrelation
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Specification Topic: Sales forecasting - Answers
Q4
Calculatorsready!ThetablebelowshowsthesalesofGrommitsoverthelast10
months
(£000)
Period
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Sales
4700
4500
4800
5300
6000
5700
6340
6400
6900
7300
Moving
4667
4867
5367
5667
6013
6147
6547
6867
Average
4.1Answerintableabove
Q5
Brieflyexplainwhy…
5.1 salesforecastsshouldbetreatedwithcaution
Thepastisnoguidetothefuture,asmanyfactorschangee.g.theeconomy,
actionsofrivals.Alsoprimaryresearch,ifused,canbebiased/unrepresentative,if
basedonsmallsamples.
5.2 itisimportanttoknowwhopreparedthesalesforecast
Sometimesmanagerscanartificiallyinflatepredictions,astheyhaveamotivefor
thenewventuretotakeplace.
5.3 salesforecastsaremoreusefulforthenearfuture
Thelongerwemoveintothefuturethemoreuncertainconditionswillbe.For
example,overthenext6monthsitislesslikelyafirmwouldbehithardbyanew
rivalproduct,butafterthatanythingcouldhappen!Whowouldhavethought
NokiawouldloseitsmarketleadingpositionsoquicklyaftertheiPhonewas
launched!
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