EFFICACY OF SALES FORECASTING MODELS FOR FMCG SECTOR. Chapter 1 Introduction

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1 Chapter 1 Introduction 1.1 Background: The future success of any business depends heavily on how savvy its management is in spotting trends and developing appropriate strategies. The leaders of the best companies often seem to have a sixth sense for when to change direction to stay a step ahead of the competition. These companies seldom get into trouble by badly misestimating what the demand will be for their products. Many other companies do. The ability to forecast well makes the difference. Due to the strong competition and economic hardship, sales forecasting is a challenging problem as the demand fluctuation is influenced by many factors. A good forecasting model leads to improve the customers satisfaction, increase sales revenue and make production plan efficiently. An effective and timely forecasting model is an urgent and indispensable tool for handling the inventory level. On the other hand, poor forecasting methods would result in redundant or insufficient stock that will affect the income and competitive advantage directly. Forecasting is used to predict or describe what will happen, and the use of such of forecasts in planning would help make a good decision about the most attractive alternatives for the company (Makridakis and Wheelwright, 1989). For instance, sales forecast would enhance the decision quality of a sales strategy performed by the sales or marketing department. The same sales forecast would also be used by operational departments for supporting a decision on planning and scheduling of production process. Many forecasting techniques have been developed either quantitative or qualitative methods. In fact, the most common practice in business is the judgmental forecasting method (Makridakis 1989, DeLurgio, 1998, Wright & Goodwin 1998) in which the decision-makers perform a forecasting task through a judgmental decision mainly based on their intuitions and experiences. Almost all enterprises have experienced in Page 1

2 accomplishing forecasting task through judgmental method, some perform with the combination of statistical method and only few rely solely on the statistical method (Makridakis, 1989). 1.2 Sales Forecasting: Definition: Sales forecasting is the program of action that entails an objective study of the past, present and future, so as to best estimate what that future holds in the way of sales for any given product or firm. Any company in selling goods needs to forecast the demand for those goods. Manufactures need to know how much to produce. Wholesalers and retailers need to know how much to stock. Substantially understanding demand is likely to lead to many lost sales, unhappy customers, and perhaps allowing the competition to gain the upper hand in the marketplace. 1.3 Need for Sales Forecasting: 1. To aid Problem-solving techniques: I. To control finished product inventory. II. To schedule work to achieve optimum use of plant and equipment. III. To maintain adequate stocks of raw materials and supplies to ensure uninterrupted production. IV. To minimize overstocking and keeps warehousing and carrying costs at a minimum. V. To make manpower planning. VI. To estimate cash requirement. 2. To aid Management: I. To guide top management policy and overall planning and control of operations. II. To reconcile views of various functional areas as to the types and quantities of products produced. III. To make sound plant expansion decisions. IV. To make plan for long-term and short-term financing. V. To prepare operating and capital budget. Page 2

3 3. To aid Sales & Marketing decisions: I. To establish sales quotas for the sales force. II. To formulate sales force compensation plan. III. To direct sales effort and establish sales and promotional expenses. IV. To determine the size and character of the advertising budget. V. To develop prices that will give a reasonable level of profit. VI. To determine which product should be further developed. VII. To schedule new product introductions. 1.4 Overview of FMCG sector: FMCG (also known as consumable packaged goods) are product that have a quick turnover and relatively low price consumers generally put less thought into the purchase of FMCG than they do for other products. Though the absolute profit made on FMCG products is relatively small on the unit basis, they generally sell in large numbers and so the cumulative profit on such products can be large. Every time the economy starts to dip. A person may put off buying a car but he will not put off having his dishes. The fast-moving consumer goods (FMCG) sector is an important contributor to India s GDP and it is the fourth largest sector of the Indian economy. Items in this category are meant for frequent consumption and they usually yield a high return. The most common in the list are toilet soaps, detergents, shampoos, toothpaste, shaving products, shoe polish, packaged foodstuff, and household accessories and extends to certain electronic goods. The Indian FMCG sector, with an estimated market size of Rs2 trillion, accounts for the fourth largest sector in India. In the last decade, the FMCG sector has grown at an average of 11% a year; in the last five years, annual growth accelerated at compounded rate of 17.3%. The Indian FMCG sector is highly fragmented, volume driven and characterized by low margins. The sector has a strong MNC presence, well established distribution network and high competition between organized and unorganized players. India is becoming one of the Page 3

4 most attractive markets for foreign FMCG players due to easy availability of imported raw materials and cheaper labour costs. 1 The top 10 companies in FMCG sector: S.No. Companies 1 Hindustan Unilever Ltd. 2 ITC (Indian Tobacco Company) 3 Nestle India 4 AMUL 5 Dabur India 6 Asian Paints (India) 7 Cadbury India 8 Britannia Industries 9 Proctor & Gamble Hygiene and Health care 10 Marico Industries Table1: Source: Confederation of Indian Industry (CII) The companies mentioned in are the leaders in their respective sectors. The personal care category has the largest number of brands, i.e., 21, inclusive of Lux, Lifebuoy, Fair and Lovely, Vicks, and Ponds. There are 11 HLL brands in the 21, aggregating Rs. 3,799 crore or 54% of the personal care category. Cigarettes account for 17% of the top 100 FMCG sales, and just below the personal care category. ITC alone accounts for 60% volume market share and 70% by value of all filter cigarettes in India. The foods category in FMCG is gaining popularity with a swing of launches by HLL, ITC, Godrej, and others. This category has 18 major brands, aggregating Rs. 4,637 crore. Nestle and Amul slug it out in the powders segment. 2 The food category has also seen innovations like softies in ice creams, chapattis by HLL, ready to eat rice by HLL and pizzas by both GCMMF and Godrej Pillsbury. This category seems to have faster development than the stagnating personal care category. Amul, India's largest foods company has a good presence in the food category with its ice-creams, curd, content.icicidirect.com/idirect_fmcg_sectorupdate_dec2013.pdf Page 4

5 milk, butter, cheese, and so on. Britannia also ranks in the top 100 FMCG brands, dominates the biscuits category and has launched a series of products at various prices. In the household care category (like mosquito repellents), Godrej and Reckitt are two players. Goodknight from Godrej is worth above Rs 217 crore, followed by Reckitt's Mortein at Rs 149 crore. In the shampoo category, HLL's Clinic and Sunsilk make it to the top 100, although P&G's Head and Shoulders and Pantene are also trying hard to be positioned on top. Clinic is nearly double the size of Sunsilk. Dabur is among the top five FMCG companies in India and is an herbal specialist. Dabur has brands like DaburAmla, DaburChyawanprash, Vatika, Hajmola and Real. Asian Paints is enjoying a formidable presence in the Indian sub-continent, Southeast Asia, Far East, Middle East, South Pacific, Caribbean, Africa and Europe. Asian Paints is India's largest paint company, with a turnover of Rs.22.6 billion (around USD 513 million). Forbes Global magazine, USA, ranked Asian Paints among the 200 Best Small Companies in the World Cadbury India is the market leader in the chocolate confectionery market with a 70% market share and is ranked number two in the total food drinks market. Its popular brands include Cadbury's Dairy Milk, 5 Star, Eclairs, and Gems. The Rs.15.6 billion (USD 380 Million) Marico is a leading Indian group in consumer products and services in the Global Beauty and Wellness space. 3 FMCG categories Household Care Personal Wash:-The market size of personal wash is estimated to be around Rs. 8,300 Cr. The personal wash can be segregated into three segments: Premium, Economy and Popular. HLL is the leader with market share of 53 per cent; Godrej occupies second position with market share of 10 per cent. 3 Detergents:-The size of the detergent market is estimated to be Rs. 12,000 Cr. With rapid urbanization, emergence of small pack size and sachets, the demand for the household care products is flourishing. In washing powder HLL is the leader with 38 per cent of market share. Other major players are Nirma, Henkel and Proctor & Gamble content.icicidirect.com/idirect_fmcg_sectorupdate_dec2013.pdf Page 5

6 Personal Care Skin Care:-The total skin care market is estimated to be around Rs. 3,400 Cr. The major players in this segment are Hindustan Unilever with a market share of 54 per cent, followed by CavinKare with a market share of 12 per cent and Godrej with a market share of 3 per cent. 4 Hair Care:-The hair care market in India is estimated at around Rs. 3,800 Cr. The hair care market can be segmented into hair oils, shampoos, hair colorants & conditioners, and hair gels. Marico is the leader in Hair Oil segment with market share of 33 per cent; Dabur occupies second position at 17 per cent. 4 Oral Care:-The oral care market can be segmented into toothpaste 60 per cent; toothpowder 23 per cent; toothbrushes 17 per cent. The total toothpaste market is estimated to be around Rs. 3,500 Cr. This segment is dominated by Colgate-Palmolive with market share of 49 per cent, while HLL occupies second position with market share of 30 per cent. In toothpowders market, Colgate and Dabur are the major players. 4 Food & Beverages Food Segment:-The foods category in FMCG is gaining popularity with a swing of launches by HLL, ITC, Godrej, and others. This category has 18 major brands aggregating Rs. 4,600 Cr. Nestle and Amul slug it out in the powders segment. The food category has also seen innovations like softies in ice creams, ready to eat rice by HLL and pizzas by both GCMMF and Godrej Pillsbury. 4 Tea:-The major share of tea market is dominated by unorganized players. More than 50 per cent of the market share is capture by unorganized players. Leading branded tea players are HLL and Tata Tea content.icicidirect.com/idirect_fmcg_sectorupdate_dec2013.pdf Page 6

7 Coffee:-The Indian beverage industry faces over supply in segments like coffee and tea. However, more than 50 per cent of the market share is in unpacked or loose form. The major players in this segment are Nestlé, HLL and Tata Tea Major Concerns in the FMCG Sector in India In present situation not only in one industry but also all sectors are facing tough competition. It has become very difficult to grow, stabilize and excel in business performance. The FMCG market is extremely volatile. New products, shorter product life-cycles and the influence of promotions means that sales forecasts and sales planning is extremely difficult for FMCG sector. Moreover, FMCG sector encounter fragmented retail structures in some countries, which makes planning difficult. Therefore, sales planning at a global level for FMCG sector is a highly-complex process. 1.6 Objectives of the Study: The following are the objectives of doing this research: 1. To assess the suitability of various models for sales forecasting in FMCG Sector. 2. To study and analyze attributes and factors affecting the selection of sales forecasting models for select FMCG goods. 3. To compare various forecasting techniques as per the attributes of select FMCG goods. 4. To suggest justifiable modifications in forecasting models as per the attributes of select FMCG goods. 1.7 Expected Contribution from the Study It is expected the study would contribute in clarifying all the concepts relating to sales forecasting. The beneficiary from the study would be first of all self-researcher, academician, practicing managers and the persons who involved in sales forecasting process. The 5 content.icicidirect.com/idirect_fmcg_sectorupdate_dec2013.pdf Page 7

8 suggested sales forecasting model for different categories of goods would help the forecaster to improve their accuracy of forecast. The study also helps in identifying all the factors affecting the selection of sales forecasting models for select fast moving consumer goods. The following are the expectations of forecasters from improved forecast: Lower Inventory Cash Flow, which will allow for increased expenditures in areas such as advertising and in-store displays to further promote sales. Minimum store-level stock outs (lost sales). Maximum resource utility under constrained production environment by producing the right product at the right time. The FMCG companies may implement the suggestions for improving the sales forecasting of different categories of goods in order to deliver the goods to the customer in time and also reduces the cost of handling inventory. It can be said the benefits would be multidimensional for all industries and sectors. 1.8 Limitations of the Study To carry out the research study the following limitations were expected and faced during the research study: (a) Availability of secondary data from sales records of the companies was difficult. (b) Salesmen, customers, dealers and retailers were reluctant or hesitant to share data. (c) Forecasters may not like to share their views on the topic. (d) Time, cost and location factors become major difficulties in completion of research. (e) Sample size may not be exact representative of the universe. There is possibility of some error to a limited extent. However, to overcome the limitations and maintain the effectiveness of research work sincere efforts were put. Page 8

9 1.9 Thesis organization: The content is organized as below: Chapter 1 discuss the need of sales forecasting in FMCG sector and also describes the objective of the research study. Chapter 2 review the available literature on Sales forecasting models. Chapter 3 discuss the different forecasting techniques and their attributes. Chapter 4 present the overview of FMCG sector and its major player. Chapter 5 discusses the research methodology used in this study. Chapter 6 present the assessment of the efficacy of forecasting techniques in different FMCG Categories, hypothesis testing and interpretation of the result. Chapter 7 present the findings & conclusion. Page 9