Innovation, or new product development, is an integral part of any organization that wants to grow and compete for market share. This doesn’t just involve brand new inventions, but also new models and updated versions. Whatever the new product or model is, it has the potential to revitalize a flagging company or, on the other hand, be the worst decision the company has ever made. The difference between the success and failure of a new release is effective New Product Forecasting and demand planning.
You Must Mitigate Risks of New Products and Stack The Odds in Your Favor
The negative implications are not only loss of market share or brand equity, but also the cash flow risks associated with holding dead stock – the main reason companies have high stock days is due to launching a new product that was unsuccessful. Besides having finished goods sitting in a warehouse taking up valuable space, unused raw materials and packaging are an additional drain on resources. A few basic but powerful methods help mitigate these risks. Here are the core methods we use to create new product forecasts at Castrol:
The reason for anticipating soft demand is because you are still trying to figure out how consumers will respond.
1. The Zero-Based Forecast
Since the new product has no historical sales, the forecast must be built from scratch, which means there is no baseline for it. The Sales & Marketing teams need to put forward convincing contextual assumptions to build the new product forecast. For example, there may be a similar product already available in the company’s portfolio that can be a good reference point to project the new product’s demand. Further information about similar products by other companies already available can be obtained from market research companies.
Remember that it is not only about using market data to construct the forecast; you must temper this data with qualitative insight and risk management. You may wish to err on the side of caution because you are still trying to figure out how consumers will respond – you don’t want to overproduce and end up having to develop liquidation plans for unsold stock. These forecasted volumes should be validated by Finance to ensure they are financially feasible. What’s more, the figure should meet the minimum batch/ order quantity to ensure appropriate supply planning ahead of time.
Cannibalization may sound negative but if it happens, it will have a positive net effect.
2. Understanding Cannibalization To Improve Demand Plan
Now that volumes are constructed, the next step is to gauge the new product’s cannibalization effect, which simply means how much volume share it will take from the existing portfolio of similar product/s. This may sound negative but if cannibalization happens, it will have a positive net effect. In some cases, the top line drops but profit margins increase. In many cases, the reason for new product development is to produce higher margin products to replace lower margin products.
If successful, this positively influences the bottom line. For example, a change in the size of the product can cut production costs, increasing bottom line revenue. Sometimes the cannibalization is ignored, resulting in overstated top line numbers which don’t correlate with actual performance. This lack of planning creates a surplus of inventory – you’ll subsequently be sitting on wasted packaging material, an invalidated production plan, and finished goods you can’t sell.
A performance matrix allows you to compare the actual volume versus agreed demand
3. Performance Matrix To Track Actual Demand
I have an activity planning manager in my team at Castrol who delivers excellent execution of new products. He ensures all relevant parties are involved in the new launches, he delivers on time, and he has a weekly projects tracker that shares all useful information to keep management in the loop. In my first few days in the job I noticed that all these remarkable efforts put into execution are limited unless we use a tool to measure the actual performance.
We use a matrix tool that can be customized to the needs of the business. A performance matrix allows you to compare the actual volume versus agreed demand and the volume intensity of the existing/ similar product related to the new product (in other words, cannibalization). In companies that manufacture fresh food products, the returns and wastages need to be closely monitored. Using this tool, I am able to monitor the new product’s actual demand. If orders are placed which deviate heavily from the forecast, they are flagged and amendments to the plan are made. In some severe cases, there is an agreed tolerance percentage which helps in establishing accountability of forecast.
The above are a few valuable techniques to take into consideration when building new product forecasts. But these are not exhaustive. There are more market dynamics to consider that derive demand, sales activities, distribution, routes, new customers and much more.