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A Study of The Sales Forecasting Practice of Manufacturing Firms In Enugu

Project Description

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CHAPTER ONE

INTRODUCTION

1.1           BACKGROUND OF THE STUDY

Rising level of competition, growing pressure from stakeholders, environmental complexities and increasing customers’ enlightenment, among others have reawakened the profit maximization goal of business firms. This is understandable because both the survival and growth of any business lies on the level of profit the firm is able to make out of its operations. The role of marketing in this regard has become far more desirable than it used to be some few years ago. Specifically, the entire marketing management roles are today built around how to increase sales revenue. At the corporate level, sales forecasting has become a very important aspect of the marketing management function targeted at increasing sales.

Though as at the late sixties organizations had started applying the principles of forecasting in facilitating and managing their sales levels, the scope of forecasting has kept increasing. According to Bovee and Thill (1992:91), forecasting has become one of the most challenging, intriguing, and frustrating aspects of marketing, especially given that, mistakes in either over- or under- forecasting can be very costly to organizations. Consequently, based on this recognition, efforts to be very careful in the methods or approaches adopted have given more dimensions to forecasting the anticipated volume of sales upon which production can be based.

In the same vein, the definitional concept of forecasting has kept changing to suit the growing organizational dynamics. Whereas the initial definitions took the concept to mean an assessment of the future, and the preparation of a statement concerning uncertain events (Firth, 1972; and Sullivan and Claycombe, 1977), its later definitions consensually see it as an information management process targeted at a minimal error prediction. From these changing dimensions, it is easy to depict the fact that the scope of forecasting in organizations has been broadened beyond what it used to be some few years ago.

Research efforts have also been directed towards diluting the alleged claim that forecasting is the same with strategic planning, since both are usually targeted at predicting the future and taking decisions based on the outcome of such prediction. According to Wotruba and Simpson (1992:151), for instance, sales forecasting is rather an integral part of planning, and can be viewed as what is going to happen to the company. They also argue further that forecasting serves a vital role in planning when management uses it as a simulational strategy in planning.

Forecasting and planning go so much hand in hand that many people confuse the two. Vogt (1977:27) made an earlier distinction between the terms forecasting and planning. According to him, “forecasting is predicting, projecting and estimating some future event, matters mostly outside of management control. Planning on the other hand, is said to be concerned with setting objectives and goals and developing alternative courses of action to reach them, matters generally within management control”. Thus, while forecasting is not planning, forecasting is an indispensable, and even an automatic part of planning; a vital planning input, a management tool for deciding now what a business must do to realize in the future its profits and other goals (Vogt, 1977: 27).

Irrespective of how complex the art of forecasting has become in manufacturing organizations, its importance has made it an unavoidable exercise. Moon and Mentzer (1998: 44) contend that good sales forecasts are important in providing good customer service. “When demand can be predicted accurately, it can be met in a timely manner, keeping both channel partners and final customers satisfied. Accurate forecasts help a company avoid lost sales or stock-out situations, and prevent customers from going to competitors”. Accurate forecasts can also improve a company’s profits by enabling the firm to more accurately plan its purchases. Transportation costs may be reduced if a firm can more precisely predict what products need to be shipped and when they need to be shipped (Moon & Mentzer, 1998). Firth (1972:1) contended that the importance of the strategy of sales forecasting extends across both developing and developed countries. According to him, even in developed countries, the importance of forecasting has become more widely acknowledged in the recent past due to substantial changes in the economic environment.

This growing importance of sales forecasting has been traced to the early 1970s. According to Sullivan and Claycombe (1977), the shortages and the increased inflation of the early 1970s, followed by a major recession, led to firms to focus renewed attention on forecasting and the benefits it can provide. In an unstable economic environment like Nigeria, forecasting can therefore be a desirable and complex approach. Desirable in the sense that organizations need to know the likely outcome of their market participation in order to plan effectively; and complex because the predictability of the business environment and customers’ reaction are usually based on the stability of government economic planning and policy measures.

At present, therefore, the issue is no longer whether forecasting is a desirable business tool or not. Organizational efforts are now being geared towards developing more efficient techniques, methods and processes for a result-oriented forecasting system in organizations.

In Nigeria, for instance, economic instability and lack of confidence in the local economy have resulted in the shortage of essential commodities. This leads to unnecessary price hikes that help in fueling inflation in the economy, and consequently, costly interruptions and sometimes the abandonment of important projects.

These implications have created the need for accurate forecasting for the successful management of business organization. This is because accurate forecasts of future revenues is important in capital budgeting, setting production schedules, determining employment needs, and inventory levels, yet very little appears to be known today of sales forecasting practices in our firms.

1.2           STATEMENT OF THE PROBLEM

The business environments in most developing countries have become very complex, with an increased difficulty in predicting the activities of firms in the market. Notwithstanding, firms need to have a good knowledge of the present and future outlooks of their respective environments to be able to cope with the growing challenges. To do this, the old method of relying on subjective and intuitive managerial and board views is no longer desirable. Instead, there is now stronger need to apply scientific and systematic approaches in major areas of decision making.

The need to have a good knowledge of the future revenue of a firm is the greatest challenge in this respect. This is so because every other aspect of the firm depends almost entirely on the ability of the marketing management to evolve sound strategies capable of increasing the revenue and facilitating efficient utilization of the scarce resources of the firm. In a harsh business environment laced with stiff competition and unstable policies, a lot of scientific approaches are required to make realizable future performance projections.

In the case of Nigeria, empirical research in marketing is unpopular amongst manufacturing firms, thus resulting in the loss of the pulse of our firms in terms of the use into which they put old and recently developed sales forecasting techniques.

 

Hypothesis Three

HO:         Sales forecasting practice has no direct impact on firms’ sales revenues and market powers.

HI:           Sales forecasting practice has a direct impact on firms’ sales revenues and market powers.

Hypothesis Four

HO:         The number of persons involved in sales forecasting has no direct relationship with the frequency of error occurrence in the process.

HI:           The number of persons involved in sales forecasting has direct relationship with the frequency of error occurrence in the process.

 

1.5           SCOPE OF THE STUDY

This study is focused on examining the practice of sales forecasting in manufacturing firms. Its areas of coverage to this effect include the conceptual meaning of sales forecasting, objectives and importance, as well as the methods and processes of sales forecasting. It is necessary to narrow the scope of study so that it would be compatible with the time and other resource constraints. Thus, the study is accordingly limited in scope to manufacturing firms in Enugu. The reason for restricting the study to only manufacturing firms is because it is expected that they could serve the research purpose.

1.6           LIMITATIONS OF STUDY

Although every effort was made to ensure the accuracy of the information collected, a number of problems were acknowledged as hazards in the path of the enquiries, such as the representativeness of the sample size, the control over persons who actually wrote the responses, interviewer perceptions and expectations and so on. Nevertheless these were not considered strong enough as to render the result obtained deficient. Moreover, the researcher relied more on primarily collected data for the analysis, instead of primary or historic data arising from the firms used as case study. The choice of primarily sourced data was because of the difficulties encountered in obtaining sales figures and estimates from the firms.

1.7           SIGNIFICANCE OF THE STUDY

As indicated above, this study was set to examine the practice of sales forecasting among manufacturing firms. Although the study is set in Enugu, the belief is that the result of the study would practically be of help to manufacturing firms in Nigeria. Individuals and groups that would benefit immensely from the study are the manufacturing firms themselves, the government tax agents, the consumers, and the suppliers of industrial inputs in Enugu State and beyond. It is equally expected that the study would aid future researchers in developing better frameworks for sales forecasting.

To the firms, the study would expose the various alternative approaches to sales forecasting. This is expected to assist in reducing the errors involved in the result of forecasting. It would equally help firms in managing their sales process and sales revenue, and as such, create a more reliable procedure for coping with the complexities in the present day marketing environment.

To government tax agents and revenue officers, a good knowledge of the mechanics for sales forecasting would assist them immensely in determining the tax powers and capacities of manufacturing firms. Such expositions would also help them in managing government revenue flow; and in contributing in more realistic terms to government’s budgetary process.

The expectation is also that the result of this study is going to assist consumers and users of manufactured goods in managing their spending habits and plans. For suppliers of industrial inputs, an understanding of how sales forecasting works in firms would form a good basis for determining and managing expected demand for their own respective products

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