7 Steps of the New Product Forecasting Process
Launching a new product comes with several risks as companies attempt to penetrate a market with established lines. In order to gain a competitive edge, businesses need a plan that outlines the supply chain.
With a new product forecasting process, businesses can reference data from similar products to optimize the product launch, minimize risks, and preserve profit margins.
What is Forecasting?
Forecasting in business refers to the use of software, automated tools, and analytics to predict future developments. Modern forecasting software uses machine learning to develop trends from historical and real-time data. Automation tools also create best-and worst-case scenarios, detect anomalies, and help companies anticipate fluctuating market trends.
Business forecasting can be applied to various segments, from customer demand to spend management. This enables organizations to improve their business strategies to promote profitability.
For example, demand forecasting software may predict that sales for a particular product line will decrease within the next year. Companies can then adjust their ordering strategies to keep minimal on-hand stock, reducing inventory and storage expenses to maintain a profit.
7 Steps to New Product Forecasting
Forecasting is essential when introducing a new product line into the market, as businesses must be able to anticipate consumers' reactions. To begin forecasting a new product, management should follow the primary seven steps.
1. Forecast Initial Sales Volumes of New Products
The first step is the most challenging, as new products often have little to no history, making it difficult to collect sales data. Therefore, companies need to reference different data sources to estimate the initial sales volume. Managers should consider collecting-
- Historical sales data from similar product lines from the same category.
- Current sales data from competitors who carry similar products.
- Marketing data from promotions, advertisements, and coupons.
- Forecasts on the possible risk of different selling propositions.
- Forecasts on the product launch date based on seasonality, such as holidays.
With the above resources, businesses can predict the new product demand for the first 12 weeks.
2. Estimate Brand Cannibalization Impact
Brand cannibalization is the process of creating sub-brands so the original parent brand can expand its customer base.
This initiative must be handled carefully as it requires reallocating supply chain resources and adjusting the plans of existing products. When not executed properly, brand cannibalization can actually decrease sales of established products, leading to significant profit loss.
3. Assess Raw Material Suppliers
Companies must assess their suppliers to determine which offers the best raw materials. Sometimes businesses must realign their supply chains to optimize the procurement and product launch. In this case-
- Supply chain design changes must be reported to all raw material suppliers for final review and compliance.
- The new material introduction must be documented in the bill of materials (BOM).
- Changes in the production line must be outlined before the distribution of resources.
- The raw material supply capacity and lead times should be carefully calculated, checked, and finalized.
4. Assess Finished Goods Manufacturing Capacity
Organizations must review their manufacturing capacity in order to determine their overall internal capacity for finished goods. Otherwise, they may find out too late that they do not have adequate space to house the production output.
To evaluate the finished goods manufacturing capacity, management should review the-
- Production plan of existing products for both short- and long-term manufacturing to determine their capacity utilization.
- New product requirements, set-ups, and changeovers to project the capacity utilization percentage for the product launch.
- Product test runs, once the sample raw materials arrive, to identify manufacturing and equipment needs.
- Packaging, storing, and transportation requirements.
5. Determine the Initial Production Quantity
Typically, initial production quantity ranges between 65-70% of the initial sales volume. However, this figure varies depending on the type of inventory. For example, products with a short shelf life have a reduced percentage.
Warehouses must be ready for shipments at least a week before the official launch date to ensure they can meet the maximum customer demand. There should be managers and quality teams on standby to immediately resolve any issues that may arise.
6. Determine the Initial Production Distribution
Businesses often follow the regional distribution pattern of similar product lines to develop their initial production distribution plan. The finalized plan should also include input from both the regional sales team and loyal customers.
Adequate distribution planning can minimize inventory costs and time-consumption throughout the supply chain, preserving the product's profit margin. Many transportation managers keep the majority of inventory at the regional warehouse until demand calls for distribution across retailers. By allocating products as needed, businesses can reduce unnecessary expenses.
7. Monitor Sales and Customer Feedback
The first month after a product launch is critical and must be closely monitored. By collecting feedback from loyal customers, dealers, and retailers, companies can mitigate emerging threats.
Businesses should also integrate point-of-sale (POS) data with other supply chain management systems to analyze product activity as it travels through the sales funnel. By gauging customer demand, companies can manage backorders and procurement to maintain sales.