IB Business Management HL 4.3 Sales forecasting Question Bank

M M uses just-in-time (JIT) production in its Oil Production Division.

The long-term demand for oil is usually predictable, and production is reliable unless major problems occur. In 2020, however, there was an unexpected decrease in demand for oil. Uncertainties in the world economy and responses to climate change now make predictions more difficult.
M M has prepared a sales forecast for its oil production for 2022 and 2023 (Table 2).

§ calculated using a four-quarter moving average based on six years of historic data
† calculated by comparing actual sales with a four-quarter moving average

In 2020, M M had some major problems:
- A catastrophic fire occurred at one of its oilfields.
- The gold mine in Egypt collapsed, trapping 23 miners.
- It experienced a cyber-attack on its computer network.
- An earthquake in Chile damaged the country's transport system.

In response to these problems, M M had to rely on its contingency planning and its crisis management procedures.

JG Mining (JG) wants to buy MM's tar sands mining operation for $50 million, but the board of directors are divided. MM recently invested $15 million in their tar sands operation in addition to the original $ 30 million set-up cost in 1986 . Production is at designed capacity, and, although the long-term average rate of return (ARR) for the tar sands operation is below those of most of MM's other investments, it provides a reliable source of income. However, M M has difficulty selling sulphur, a by-product of tar sands production.

Employees at the tar sands operation are against selling the operation to JG. However, the income from the sale would help M M finance other investments, such as lithium mining, and the sale could help improve MM's corporate image. MM's Finance Director, Ethan, estimates that the net present value (NPV) of the tar sands operation is $46 million.

It is now mid-2019. Production of solar power systems has been going for over a year and sales have exceeded forecasts and reached 5000 systems for the year. Profits have been reinvested into developing new outlets and distribution channels for solar power systems in Afghanistan. Lean production techniques have enabled A S to keep costs low, but A S has had some quality issues: some cells produce lower quality systems than others. AS has found faults in components bought from suppliers. Some solar power systems have been damaged in the supply chain. Salima is thinking of instituting total quality management (TQM). She also needs to forecast sales for 2020 but has decided the situation is not suitable for a four-part moving average.

In a separate development, Doorway Foundation (DF), a multibillion-dollar charity established by the owners of one of the world's largest IT businesses, has approached Su. The foundation has a major IT initiative to bring IT to schools in Afghanistan, Myanmar and Bangladesh. By forming a joint venture, DF could use AS's expertise and local knowledge to help solve some of the electricity supply and IT problems in Afghanistan.

The possibility of a joint venture encouraged managers and investors to think about whether A S should grow. In response, Su decided to analyse the possibility of growth through change using a force field analysis of A S.

4. Music Mania (MM)
Music Mania (MM) is an independent store selling new and used music compact discs (CDs), DVD films and music vinyl records. It is a sole trader business owned by André, who has 25 years of experience in the retail and music business. M M has loyal customers but its total revenue is falling. The store currently has a low market share in DVDs and vinyl records.
André decided to conduct some primary and secondary market research, as the entertainment industry is changing rapidly. He discovered that:
- the market for DVDs is in rapid decline
- CD sales are declining slowly but new releases still sell well
- MM has had to stock computer games, which are selling out very quickly, and the sales of new vinyl records are growing slowly.
André is accustomed to variations in sales but the current sales forecasts are, in his experience, the most worrying. He has decided to create an e-commerce website to increase his sales of new and used vinyl records and CDs. André is also aware that new free online music streaming and gaming sites are being launched.
André has only limited internal sources of finance to set up the website. Two new tactics to ensure future success for M M being considered are:
- to stop selling DVDs
- to increase below-the-line promotional spending on vinyl records.

4. Predicting the future
Traditional secondary research to identify trends, to forecast and to provide data about seasonal and cyclical variation is increasingly outdated, particularly as many products are sold through e-commerce.
Today online forecasting is becoming popular. Google ${ }^{\mathrm{TM}}$ 's chief economist has found a correlation between sales of products (such as cars and holidays) and levels of online Google ${ }^{\mathrm{TM}}$ searches for information about those products.
To make market predictions, market researchers are increasingly using social media* to collect online messages in order to understand consumers' moods. They use web-based data to build a "real time" measure of consumer emotions and preferences and then use the results for predicting consumers' behaviour. Some companies such as Coca Cola ${ }^{\circledR}$, Starbucks ${ }^{\circledR}$ and Disney already use social media for online market research.
Dr Bollen of Indiana University, United States, found that:
- Twitter users' collective mood changes coincide with national events.
- A correlation exists between trends in national mood (expressed in millions of Twitter messages) and changes in share prices. Three days after an increase in anxiety levels, share prices tend to fall (although it is unclear why this happens).
- Investors use social media to guide their decisions.
Users of social media share information online about feelings and purchasing intentions. They are unconcerned by market researchers using software such as "Wise Window" to follow them constantly in order to forecast demand.
Technologically advanced software can recognize sarcasm, double meanings and cultural references. However, interpreting slang expressions remains a challenge.
Mr Watts, an Internet researcher at Yahoo!(R), said that to be useful, a forecasting technique must add something new to what is already known. The use of social media will only add value to forecasting if other sources of information are limited. He warned that sophisticated methods based on the analysis of Twitter messages, blog postings or Facebook ${ }^{(\mathbb{R})}$ pages have limitations.
* social media: refers to various forms of relatively new electronic technologies that allow individuals, groups and organizations to communicate with one another. The communication is "virtual" (across the world wide web and through electronic transmission) and is typically interactive. One frequent feature is the ability of a participant to pass on a communication it has received to other persons, groups, or organizations.

5. Moving back to the US
Reducing costs has been a significant driving force in pushing multinational companies to offshore manufacturing. However, as emerging economies develop, labour costs are rising.
Between 2005 and 2010, wages of factory workers in China rose by 69 %. An analyst for Boston Consulting Group said that "the cost advantages from offshoring are falling to such an extent that some American multinationals with manufacturing offshore are returning home to supply their American customers". By 2015, the cost advantage of offshoring manufacturing for the United States (US) market will disappear. The analyst has forecasted, based on the same time series technique as sales forecasting, that wages will continue to grow at around 17\% a year in China, but remain stable in the US.
Gary Pisano, of Harvard Business School, said that some American companies that had considered offshoring parts of their business are choosing to expand within the US. General Motors, for example, will invest US $ 2 billion to create 4000 jobs at 17 manufacturing plants in the US.
A growing number of multinational companies, especially from high-income countries, are starting to see the benefits of keeping their manufacturing "at home". For many producers, labour costs are a small proportion of the total cost. Also, long and complex supply chains have become unreliable due to changes in external factors such as the increase of oil prices, political instability and natural disasters such as earthquakes.
However, Gary Pisano also argues that:
- in some industries, such as consumer electronics, the US no longer has the necessary supply chain
- some multinational companies will continue to build most of their new factories in emerging economies, where the demand is growing fastest
- some of the new factories in the US have been financed by government subsidies, which will soon stop
- in India, despite rising wages, its innovative software development and call-centre offshoring industries are likely to retain its cost advantages because of increasing productivity.