Cecilia Lai PDF

MSc Operations Management
Promotion demand forecast: A Case Study of Coca Cola Enterprise

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University of Nottingham

Promotion demand forecast:
A Case Study of Coca Cola Enterprise

Hoi-Yin Cecilia Lai
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Promotion Demand Forecast:
A Case Study of Coca Cola Enterprise

by

Hoi-Yin Cecilia Lai

Year of Publication 2007

A Dissertation presented in part consideration for the degree of MSc Operations Management
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Abstract

In this highly competitive business environment, forecasting becomes one of the
hot topics. Every business organization uses forecasts for decision marking.
Forecasting can help companies to determine the market strategy. It also helps in
production planning and resources allocation. A good forecast can help the
management team to make the best decision. Nowadays, it is important to develop
a collaborative partnership within the supply chain. Coca Cola Enterprise (CCE) is
working with its customers to develop the collaborative partnership. The
relationship enhances the companies within the supply chain to obtain the great
benefit. This project aims at helping to improve its current forecast process. This
project aims at reducing the time consumption on the forecast process and
increasing the accuracy of the forecasts. 72 forecasts models have been created by
using Excel Data Analysis. The best model of each individual product is selected.
However, the fitness of each model varied. The reason of the difference will be
studied in this project. A high accuracy forecast enhances the relationship between
CCE and its customers. Intangible benefit, such as better shelf availability, can be
obtained. Hence, both companies can be benefited.

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Acknowledgement

I would like to take this opportunity to express my deepest appreciation to whom
that have helped and supported me during my dissertation period. They are:

Pro. Bart MacCarthy (my supervisor) -- for his helps and suggestions
Dr. Luc Muylermans(my lecturer) -- for his helps and recommendations
Rachel Loder (CCE customer demand manager) for giving me this placement
opportunity
Usha Ramanathan (PhD student) for her helps
My family and friends for their love and support
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Table of Content
Chapter 1 Introduction ................................................10
1.1 Project background........................................................................................................10
1.2 Project objectives...........................................................................................................11
1.3 Structure of dissertation..............................................................................................12
Chapter 2 Consumer Behaviour on Promotions .......................14
2.1 Introduction......................................................................................................................14
2.2 Consumer Buying Decision Process.........................................................................16
2.3 Sales Promotion..............................................................................................................19
2.4 Influencing Factors on Consumers buying behaviour .....................................23
2.4.1 Price.......................................................................................................................23
2.4.2 Internal Reference Price.................................................................................25
2.4.3 Price Level Effect and Stock Up Effect ......................................................28
2.5 Conclusion.........................................................................................................................29
Chapter 3 Forecasting ..................................................31
3.1 Introduction......................................................................................................................31
3.2 Forecasting Vs Prediction ............................................................................................33
3.3 What is Forecasting?.....................................................................................................33
3.3.1 Factors affect forecast process....................................................................35
3.4 Types of Forecast ..................................................................................................37
3.4.1 Short term forecasting....................................................................................39
3.4.2 Medium term forecasting...............................................................................41
3.4.3 Long term forecasting.....................................................................................41
3.5 Characteristics of Forecasting..........................................................................43
3.6 The importance of forecasting.........................................................................44
3.7 How to improve forecasting?............................................................................45
3.8 Conclusion ...............................................................................................................48
Chapter 4 Forecasting promotion demand ............................50
Chapter 5 Background ..................................................55
5.1 Introduction......................................................................................................................55
5.2 Soft drink industry background ................................................................................55
5.3 Coca-Cola Company Background.............................................................................60
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5.3.1 Coca-Cola Company (CCC) ...........................................................................60
5.3.2 Coca Cola Great Britain (CCGB)..................................................................62
Chapter 6 Methodology .................................................64
6.1 Introduction......................................................................................................................64
6.2 Data Collection................................................................................................................64
6.3 Data Reorganisation......................................................................................................64
6.4 Analytical Model ..............................................................................................................65
6.4.1 Scatter Diagram................................................................................................68
6.4.2 Multiple Regression Model .............................................................................68
6.5 Correlation between R and variables....................................................................73
6.5.1 Correlation between R and number of promotion types .................73
6.5.2 Correlation between R and promotion frequency...............................74
6.6 Software Chosen.............................................................................................................74
Chapter 7 Discussion and Data Analysis...............................76
7.1 Introduction......................................................................................................................76
7.2 Data reorganization.......................................................................................................77
7.2.1 The benefit of data reorganization.............................................................78
7.3 Linear trend......................................................................................................................79
7.3.1 Trend analysis (Scatter diagram) ...............................................................80
7.4 Model interpretation......................................................................................................82
7.5 Model analysis .................................................................................................................84
7.5.1 Statistical significance of multiple regression model (F-test)..........85
7.5.2 Independent variables ....................................................................................90
7.6 Model Fitness ...................................................................................................................93
7.7 The relationship between R and number of promotion types.....................97
7.8 The relationship between R and promotion frequency................................100
Chapter 8 Conclusion.................................................103
8.1 Summary.........................................................................................................................103
8.2 Project Limitations .......................................................................................................105
8.3 Project Recommendations ........................................................................................107
Reference ...111
Appendix 1 (Tesco original sales data spreadsheet) ..................118
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Appendix 2 (Tesco new format spreadsheet) ..........................119
Appendix 3 (Trend Analysis Scatter diagram) .......................120
Appendix 4 (ANOVA table of Morrisons 1.5L Oasis) ...................124
Appendix 5 (Factors include in the products by companies)..........125
Appendix 6 (Good forecast).............................................129
Appendix 7 (Average forecast) .........................................131
Appendix 8 (Bad forecast) ..............................................133

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List of Figures
Fig. 2.1 A typical consumer buying process model 19
Fig. 2.2 Process of brand choice 22
Fig. 2.3 The demand model 25
Fig. 3.1 Stages of forecasting 33
Fig. 3.2 Pattern of demand component 35
Fig 4.1 Components of the sales forecast 50
Fig. 5.1 Global soft drink market shared by value 2005 54
Fig 5.2. Global Soft Drinks Market Share by Volume, 2005 60
Fig. 6.1 An illustration of forecast model in Excel format 69
Fig. 7.1.The sales of ASDA 6 pack Fanta 86
Fig. 7.2.The sales of Tesco 6 pack Fanta 86
Fig. 7.3.The sales of Sainsbury 6 pack Fanta 87
Fig. 7.3.The sales of Sainsbury 6 pack Fanta 87

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List of Tables
Table 3.1 Categorisation of forecast type against time 36
Table. 5.1 Market value in 2005 and Forecast Market
Value in 2010 in Europe 55
Table 5.2. Market Volume in 2005 and Forecast Market
Volume in 2010 in Europe 56
Table 5.3. Market Value Global Vs Europe 57
Table 5.4. Market Volume Global Vs Europe 58
Table 7.1.The F-value 85
Table 7.2.Percentage of a particular model used 90
Table 7.3.Percentage of model fitness by company 93
Table 7.4.The percentage of model fitness within four major customers 94
Table 7.6.The accumulated number of promotion types
in each supermarket 97
Table 7.5.Number of promotion types in each supermarket 97
Table.7.7.The correlation between R and percentage of promotion time 98
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Chapter 1 Introduction
1.1 Project background

Forecasting is a hot topic in the business environment. This topic had been widely
researched. Nowadays, forecasting becomes more important because of the
increasing competition in the business environment. It plays the heart role in a
company. (Nahmias, 2005) A good forecast helps to reduce the inventory level. It
also enables the company to have a better production plan. Therefore, it is widely
used in many industries. (Wheelwrigh, 1973)

Since the increasing complexity of the environment, companies are required to
meet consumers changing demands and expectations in order to survive. Managers
make decision without knowing what will happen in the future. It is difficult to know
the products demands in the future. It is difficult to know the amount of inventories
have to be stored. Risk can be reduced when the uncertainty reduces. As a result, a
better decision can be made. The main purpose of forecasting is to accomplish this
objective. (Balakrishnan, 2007) In addition, forecasting helps to evaluate the
consequences of alternatives. (Wisniewski, 2002)
Coca Cola Enterprise (CCE) is now developing a collaborative relationship with its
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four main customers, i.e. Tesco, Sainsburys, Morrisons and ASDA. CCE is helping its
main customers to forecast the products sales under promotion. The forecasts are
generally one month ahead. It gives sufficient time for its customers to build up
inventory. A good forecast can improve their relationship. Also, trust can be built up.
In addition, CCE could gain some intangible benefits from its customers.

Since the forecasting process is complicated, it is difficult to do the forecasting
calculation by hand. Many statistical software packages can be used, e.g. SPSS, SAS,
Minitab. Excel had been used in this project because Excel is user friendly statistical
software.

1.2 Project objectives

Because of the intangible benefits from the collaborative relationship, CCE would
like to improve its forecasting process. This project aims to help CCE to improve the
forecast. Different forecasting models have been created in order to obtain the best
forecast. Also, the reorganisation of data helps to improve the efficiency. The
objectives of this project are addressed as the following:
1) Time on data searching can be reduced.
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2) Time on forecasting process can be reduced
3) Accuracy of forecast can be improved.

1.3 Structure of dissertation

Chapter 1
Outline the project background, project objectives and the structure of dissertation

Chapter 2
Review the existing literatures on customers buying behaviour under promotion.

Chapter 3
Review the existing literatures on forecasting

Chapter 4
Summarize the previous two literature reviews. A conclusion is drawn on forecasting
promotional demand.

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Chapter 5
Present the background information of the soft drink industry and Coca Cola
Enterprise (CCE)

Chapter 6
Clarify the projects methodology. The formulation of forecasting model will be
covered.

Chapter 7
Discuss on the models and data generated. Data of the four main customers will be
analyzed.

Chapter 8
Summarize the finding of this project. The limitations and recommendations of the
project will be discussed.

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Chapter 2 Consumer Behaviour on Promotions
2.1 Introduction

In the increasing competitive market environment, companies are using different
strategies to increase their sales. Promotion is the oldest and most common
strategy to increase sales. (Schnaars, 1998) Companies use promotional to
motivate consumers to purchase a special product. (Fam, 2003) According to
Alvarez and Casielles (2005), there are three main types of promotion methods.
They are price promotion, coupons and rebates. Price promotion is defined as the
temporary price discounts offered to a customer. (Blattberg, 1995) Rebate is
referred to the cash back via mail after purchasing. (Alvarez and Casielles, 2005)
Alvarez and Casielles (2005) claimed that price promotions have a greater impact
on consumer behaviour than other promotions, i.e. coupons and rebates.

In this literature review, we will focus on price promotion rather than coupons and
rebate promotions. Price promotion is a short term marketing strategy. It aims at
enhancing consumers perceptions of value and increasing the likelihood of
purchase. (Grewal, 1998) Many authors (e.g. Schnaars, 1998) agreed that price
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promotions produce volume gain for the promoted product in a short period of time.
Hence, the sales can be increased during the promotional period. However, the
impact is short term. In 1997, Mela claimed that 50% of the marketing budgets of
US consumer goods firms came from on promotions. 70% of CCE volume came from
promotion, i.e. the sales are promotional driven. (CCE, 2007)

In general, consumers undergo a series of decision making process when they
purchase products. This buying behaviour is seen as a problem solving behaviour.
(Markin, 1969) However, the buying behaviour is influenced when the products are
on promotion. This external factor affected the customers buying behaviour.
Customers are motivated to buy more during the promotion period. As a result, it is
important to understand the consumer buying behaviour in order to introduce an
effective marketing strategy to satisfy customers needs. It is necessary to
understand the general consumer buying behaviour via consumer buying decision
process.

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2.2 Consumer Buying Decision Process

Markin (1969) suggested that all consumers behaviour come from learning theory.
Consumers were reinforced from consumption experience. Consumers behaviour
will be modified by the learning when the consumptions repeat in the future. (East,
1990) Consumers will avoid buying the unsatisfactory product or brand. Conversely,
consumers will select the satisfactory products on the next purchase. The learning
theory implied there is a systematic relationship between experience and the later
behaviour. (East, 1990)

The psychologists have subsumed the problem of consumer choice and consumer
behaviour into three categories, which are needs, desires and motives. (Markin,
1969) Consumer behaviour covers the acquisition and use of goods and services by
individuals or households. (East, 1990) Markin (1969) suggested that the
consumers buying behaviour will change when their attitudes or images towards the
products have been influenced by external factors products, prices, promotional
appeals, firms. In addition, the changes on their own personalities or behaviour do
have an influence on their buying behaviour. (Markin, 1969) The customer buying
behaviour is not only viewed as a decision making process, but also viewed as a
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problem solving activity. (Markin, 1969) When consumers have the needs of a
product, the problem solving process begins. Dibb and Simkin (2001) suggested a
five-step consumer buying process model.

1) Problem Recognition. Consumers recognise the needs of a specific
product. For example, a household appliance such as washing machine that
is broken and it must be replaced.

2) I nformation Search. Consumers start to collect the products information.
Information maybe obtained from friends, family, internet, advertising etc.
After gathering the information, consumers are able to develop a few
alternative options.

3) Evaluation of Alternatives. Consumers measure the alternatives and
choose the best option at this stage. If there is insufficient information for
decision making, consumers may go back to the information search phrase
and collect more products information.

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4) Purchase. The complexity of purchasing depends on the type of product
being bought. For example, a simple decision of buying a book and a
complex decision making for car purchasing.

5) Post- Purchase Evaluation. It is the period of time when consumers judge
the success of their purchase. The success of purchase will influence
consumers later buying.
(Dibb and Simkin, 2001)

Many factors influence the consumers buying decision process. The following
diagram illustrated the consumer buying decision process and the influencing
factors (the possible factors that influence consumers buying behaviour).
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Possible Influencing Factors

Person-specific
influences
Demographic
Situational
Psychological
influences
Perception
Motives
Learning
Reference
groups
Problem
recognition
Information
search
Evaluation of
alternatives
Purchase Post-purchase
evaluation
Feedback
Consumer Buying Decision Process
Roles and
family
Social influences
Fig. 2.1 A typical consumer buying process model (Dibb and Simkin, 2001)

2.3 Sales Promotion

Competing on price is one of the oldest new strategies. (Schnaars, 1998) Temporary
retail price reductions virtually increase sales; hence cause a significant short term
sales spike. (Blatterg, 1995) Promotion motivates consumers to purchase more
products. (Campo, 2006) The consumption rate may increase in some situation, e.g.
food consumption. Hence, promotional price reductions results in a higher sales
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spike. (Blattberg, 1995) Besides price reductions, coupons and discounts, which are
two alternative promotional tools, are widely used. (Gilbert, 2002) Regular
promotions enable to increase the in-store traffic. For example, Tesco sends
coupons to its Clubcard holders to maintain customers loyalty. In addition, new
consumers can be attracted. Dawess (2004) research yielded a volume increase of
approximately 450% for the promoted brand, and a short term category volume
increase of approximately 140% for the retailer.

Alvarez (2005) discussed three types of promotions in his literature, i.e. discounts,
coupons and rebates. From his research, he concluded that price promotions have a
greater impact on consumer behaviour than other promotions. According to
Gilberts research (2002), over 90% of the respondents change their buying
behaviour under price promotion while 65.6% of the respondents change their
buying behaviour by using coupons. Hence, the multibuys promotions, i.e. buy one
get one free, are extensively used in UK during the 1990s. (Putsis, 1998)

Sales promotion has direct influence on the customer buying behaviour. Brand sales
patterns are not only related to time, but also the result of various marketing
activities, like advertising, sales promotion. (Caruana, 2001) Also, Alvarez (2005)
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claimed that promotions do have an effect on customers brand choices, i.e. brand
loyalty. When the products are in mature stage, company generally introduce more
price promotion since there are more competitors. (Lackman, 2007) Customers who
have low brand loyalty will switch brand during the promotions. A low price
motivates consumers to purchase on a specific product. (Alvarez, 2005) On the
other hand, a high price reduces the likelihood of product purchasing. (Alvarez,
2005) Nevertheless, customers who have high brand loyalty do not switch brand
under promotions. Therefore, switchers contribute the most during promotion.
(Gupta, 1988) New customers and switchers are attracted when a product is on deal.
Some consumers may become loyal to the brand and continue to buy the products.
However, some consumers may not re-buy the products when the promotions have
been removed. Nevertheless, some consumers partially or completely ignore the
price information when they purchase a product, i.e. their buying behaviour will not
be affected under price promotion. (Campo, 2006) The following diagram illustrated
the process of brand choice.
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B
r
a
n
d

C
h
o
i
c
e

M
o
d
e
l
s

Elementary
variables
Price
Reference Price
Losses & Gaines
Loyalty
Promotions
Consumers
behavior
Fig. 2.2 Process of brand choice (Alvarez, 2005)

Moreover, time limited price promotion is another tool that is used to increase sales
in short term. It is because consumers may be misled by promotions when there is
time limit restriction. (Devlin, 2007) A time limited offer increases the perceived
unavailability or scarcity of the offer. (Inman, 1997) It accelerates consumer buying
process. Customers buying behaviour is affected by the statement of time limited
offer, e.g. one week only. Psychology theories supported that there is a strong
relationship between scarcity and consumers perception of product offers. (Devlin,
2007) Customers are motivated to purchase more under the time limited offer. The
time limited offers have the potential to push consumers into making rash and
impulsive decisions since consumers do not want to miss out the special offers.
(Devlin, 2007) The search intention and purchase intention are influenced by the
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price promotions. (Compeau and Grewal, 1998) Price promotions have impact on
consumers decision making process. (Compeau and Grewal, 1998) Hence, Devlin
(2007) concluded that discount has significant impact on search intention and
purchase intention. However, the purchase intention will be lower if consumers
expect the offer will repeat soon.

2.4 Influencing Factors on Consumers buying behaviour

Price is not the only factor that influences the consumers buying behaviour. In this
section, three different factors, which influence consumers buying process, will be
discussed.

2.4.1 Price

Consumers wanted lower prices. They will not buy the products if they consider the
product is overpriced. (Schnaars, 1998) Hence, consumers are motivated to
purchase promotional products. ASDA, for example, use roll back promotion to
attract customers, hence increase sales and reduce inventory. (Loder, 2007) In
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general, consumers undergo the buying decision process before they make a
decision on product purchasing. However, the process is influenced by external
factors, like price. The purchasing intention has been motivated by price reduction.
In 1992, Simonson found that consumers were more likely to purchase a
promotional product when they were asked to imagine how they would feel if they
decided to purchase later and missed out the offer. In economics, the demand
model suggested the decreases in price will result in increases in demand, and vice
versa. (Figure 2.3)

From the diagram, we could notice that the decrease in price will increase the sales.
The increase in demand is based on the consumers price sensitivity, i.e. the slope of
demand curve affects the increase in sales under price promotion. The diagram, D1
shows a lower price sensitive market, compare to D2. The quantity demand
increases from Q1 to Q2 when the price decreases from P1 to

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P1
P2
Q1 Q3
Price
D2
D1
Q2
Quantity
Demand

Fig. 2.3 The demand model (Mankiw, 2004)

P2. D2 shows a higher price sensitive market. The quantity demand increases from
Q1 to Q3 when the price drops from P1 to P2. Demand is elastic. The product is price
sensitive when the market is at mature stage. (Lackman, 2007) It is because of the
number of competitors. However, this model assumes that all non-price factors
remain the same.

2.4.2 Internal Reference Price

During promotion, consumers are pushed to use external factors, such as price or
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needs, in order to compare products and make a decision on purchase. (Andreassen
and Lindestand, 1998) If consumers are price sensitive on a product, they purchase
more when the product is under promotion and vice versa.

Blattberg (1995) suggested that promotions change consumer behaviour.
Promotions alter behaviour by changing the time that customer buys the product
and how much the customer buys. There is also a belief that consumers will buy
promotional products simply because they want to be smart shoppers. (Blattberg
and Neslin, 1990) Consumers use the past product price and other context variables
to form the internal reference price. (Putler, 1992) They use the internal reference
price to judge the current price level. (Putler, 1992) When consumers discover the
selling prices below their internal reference price, they may lower their internal
reference price. (Campo, 2006) According to Urbany (1998), consumers use their
internal reference price to evaluate the new price information. Prices within the
range of acceptance, i.e. the internal reference price, will be considered acceptable
by consumers and will be incorporated into the price that the consumer expects to
pay in their purchases. Price outside this range will be considered unacceptable and
will be rejected. The promotion influences the consumers internal reference price
and the future purchases. (Campo, 2006)
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Ehrenberg (1994) suggested that there may be a positive after-effect if a promotion
attracted some new users and they will repeatedly buy later. Yet, there is no
evidence suggests that there will be a long term favourable effects for brand image.
The main reason is that price promotions attract mostly existing, infrequent buyers.
The new buyers have a low propensity to re-buy. In addition, frequent promotions
lower consumers reference prices for the brand. Consumers are more willing to buy
during the promotion. The sales under regular price will decline. (Campo, 2006)

Many literatures (e.g. Campo, 2006) agree that consumers will lower their reference
price and their level of response when the products always on promotion. The
consumers will buy less of the product at regular price because their reference price
has decreased accordingly. (Blattberg, 1995) In 1969, Doob carried out an
experiment on the effect of promotion. He pointed out that there is a negative
after-effect on brand loyalty when products are under promotion. The study found
that the sales decreased where the promotions removed. This experiment
supported the argument on the frequent promotions lower the consumers internal
reference price.

In addition, Krishna (1991) declared that price promotions do not significantly
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influence the modification of reference prices. He believed that consumers may not
be able to aware of the regular prices and the promotion frequency. Also, it is
difficult for them to recall all the information when they plan to purchase. If the
products are always on promotion, consumers expect the deal will repeat soon.
Hence, they may be willing to wait for the next promotion rather than buying at the
normal price level. When consumers may will to store up the products, consumers
are willing to purchase more under promotion. In addition, price reductions damage
brand image and lower price expectation. (Dawes, 2004)

2.4.3 Price Level Effect and Stock Up Effect

According to Smith (2000), the price level effect explores when consumers are
more sensitive to price, volume or mixed promotions, i.e. buy two get 50% off,
based on the amount of money the consumer anticipates saving when purchasing
higher versus lower priced products. Consumers prefer a great deal, e.g. buy one
get on free (BOGOF), on high priced products. (Schnaars, 1998) For example, Coca
Cola coke is more preferable than the supermarkets own brand coke when they are
under the same promotion.
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The stock up or inventory effect refers the consumers willingness to buy and stock
up more of the product when the products are under promotions. (Smith, 2000) He
suggested that consumers may be more sensitive to volume promotions if they are
willing and able to stock up on the specific product. In 1998, Ailawadi and Neslin
found that food products consumption could be increased by promotion because of
fewer household stock outs and faster consumption rates. A higher consumption
rate may result in re-buying the product in the promotion period. However,
consumers who live on their own may not be willing to purchase the promotional
products due to additional amount of product. They may prefer price promotion
rather than volume promotion.

2.5 Conclusion

Promotions act as a communication tool between consumers and retailers. From the
studies, consumers buying behaviour will be definitely affected by promotions. The
main purpose of promotion is to influence the consumers buying behaviour and
consumers decision making process. It aims at increasing the consumers
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purchasing intention, needs and desires. Consumers are willing to purchase and
stock up the products. Hence, the retailers can be benefited from the promotion
periods due to the change on consumers buying behaviour. In addition, retailers are
using promotion as a tool to increase the shops traffic.

Many literatures (e.g. Ehrenberg, 1994) demonstrated that the promotions do not
have a long term negative impact on sales. Consumers may re-buy the promotional
product during non-promotional period. Brand loyalty can be created. Authors (e.g.
Ehrenberg, 1994) suggested that the internal reference price will not be influenced
by the frequent of the promotion. They believed that it is difficult for consumers to
recall the regular price, as an internal reference price, to make the decision.

However, many studies (e.g. Campo, 2006) agreed that frequent promotions have a
negative impact on consumers purchasing intention at regular price. Consumers
brand loyalty is not able to be created. Consumers will switch brand under
promotion because of the introduction of price reduction. Consumers become more
price sensitive when the products are heavily promoted. The internal reference price
will be lower. Heavy promotions may result in lose of sales when the products are on
non-promotional period.
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Chapter 3 Forecasting
3.1 Introduction

Forecasting plays an important role in a company and within the supply chain.
(Nahmias, 2005) The author (2005) claimed that forecasting helps in business
planning. Forecasts are useful in making management decision. Hence, it is
important to every business organisation. (Chase, 2006) It helps in organisations
long term planning. (Chase, 2006)

Forecasting is a management tool which has been widely used in many industries.
(Wheelwrigh, 1973) It is one of the oldest management activities. (Lines, 1996)
Forecasting is extensively used in marketing and production team within a company.
(Nahmias, 2005) The production team uses forecasting to determine their future
production plans. They use forecast to determine the amount of components and
raw materials required in the future. Sales forecast helps a company to make the
decision on projects investment, marketing strategy and new products and markets
development. (Bolt, 1994) Marketing team use forecast to determine the new
market strategy. (Chase, 2006) Forecasts can provide information to production
department to determine the individual stock keeping units (SKU). (Chase, 2006) A
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good forecast can reduce the backorders from customers. Hence the companys
reputation can be raised. The lost of losing customers can be reduced because
consumers may buy alternative products when the product they wanted is
unavailable.

In addition, company can be benefited from a good forecasting. In the early 1980s,
Compaq forecasted the demand for a portable version of ICM PC accurately. As a
result, Compaq became the market leader in the industry. (Nahmias, 2005)
However, Ford is an unsuccessful example on forecasting consumers desires. The
company almost came to the end because of the failure of forecasting demand on
the new car model. (Nahmias, 2005)

In this literature review, we are going to discuss forecasting in general, the
application of forecasting, the advantage and importance of forecasting. Finally, the
improvement on forecasting process will be discussed.

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3.2 Forecasting Vs Prediction

Prediction is an estimation on what will happen in the future based on subjective
considerations. Predictions are mainly subjective. On a routine basis, prediction is
more expensive than forecasting. (Lewis, 1997)

According to Lewis (1997), forecasting is considered as a scientific approach on
estimating the future demand based on historical data. Forecasting helps to identify
products trends. (Caruana, 2001) It also aids the company to purchase the correct
amount of raw materials and components. (Caruana, 2001) Company can forecast
what will happen in the future. (Lewis, 1997) It provides a more effective way to
estimate the customers demand in the future.

3.3 What is Forecasting?

Forecasting plays an important role within the supply chain. It helps the company to
plan the project investment, material used, production planning etc. Wheelwright
(1973) viewed forecasting as a decision marking process. It is an objective and
reliable scientific technique.
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According to Bolt (1994), there are various types of forecasting method in
predicting the companies future shape and direction. They are:

Economic forecasting (either international, national or regional)
Technological forecasting
Market and/ or industry forecasting
Product/ service/ process forecasting
Sales forecasting
Profit forecasting
Bolt (1994)

Armstrong (2001) also viewed forecasting as a decision making process.
Forecasting helps to plan for change and avoid reactive management. Decision
makers need forecasting when there is uncertainty in the future. (Armstrong, 2001)
However, Lewis (1997) did not recommend forecasting more than six periods ahead,
expecting a strong seasonal influence exists. It is because the higher degree of
complexity involved when the time increased. Hence, the forecast accuracy will be
lower. The following diagram illustrated the stage of forecasting.
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Formulate Problem
Obtain Information
Select Methods
Implement Methods
Evaluate Methods
Use Forecasts
Satisfactory
Unsatisfactory

Fig. 3.1 Stages of forecasting (Armstrong, 2001)

3.3.1 Factors affect forecast process

In addition, the forecast process will be influenced by the following four major
demand components.

1) Horizontal: horizontal exists when the series is stationary. There is no trend in
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the sales, i.e. do not increase or decrease in a systematic way.

2) Trend: a trend exists when the sales continuously increases or decreases over
time. It is always the prior factor to be considered in developing the forecasting
model. The trend can be used to modify other patterns, e.g. seasonal factor,
which have an influence on the forecasts.

3) Seasonal pattern: a seasonal pattern exists when the product has seasonality,
i.e. the sales pattern has been affected. For example, four seasons in a year or
twelve months within the year.

4) Cyclical pattern: a cyclical pattern is similar to seasonal pattern. It is difficult to
determine the cycle length since it is normally more than a year.
(Wheelwright, 1973 and Chase, 2006)

Fig. 3.2 illustrates the pattern of demand components that mention above.

The above factors have to be considered in developing a forecasting model as they
have an influence on the final forecasts. If there are not considered, it may result in
37
an inappropriate and inaccurate model.
Mean
1) Horizontal pattern 2) Trend pattern
3) Seasonal pattern 4) Cyclical pattern

Fig. 3.2 Pattern of demand component
(Wheelwright, 1973 and Chase, 2006)

3.4 Types of Forecast

Moreover, forecasting methods can be classified into three different types. They are
based on time period. Different types of forecasting methods can help in making
38
strategy at different level, i.e. short term forecasting, medium term forecasting and
long term forecasting. The following table (Table 3.1) gives an example of each type
of forecasting method.

Category of type
of forecast
Time period
associated with
the data being
analysed
Example of
forecasting
application
Forecasting
techniques used
Short term 1 week to 1 month Demand
forecasting in
industry and
commerce
Exponentially
weighted averages
and derivatives
Medium term 1 month to 1 year Sales and financial
forecasting
Regression, curve
fitting, time series
analysis
Long term 1 year to 1 decade Technological
forecasting
DELPHI, think
tanks etc.
Table 3.1 Categorisation of forecast type against time (Lewis, 1997)

39
However, different authors (e.g. Lewis, 1997 and Bolt, 1994) defined time period in
various ways. It is necessary to distinguish the forecast time period. Then the most
appropriate forecasting technique can be used. In different companies in different
industries, the time period varied. (Bolt, 1994) For example, the short term in an
industry such as shipbuilding will definitely longer than the short term in the
manufacture of a grocery such as a chocolate bar. It is because the ship building
takes longer to design and produce. Also the consumer demand, habits and fashions
have a rapider change in the grocery industries than in the capital goods industries.
(Bolt, 1994) Bolt (1994) defined short time as a period which is long enough to
allow the variable factors of production to be used in different combinations and
amounts, to ensure that the maximum profits are obtained. He (1994) also
suggested that the medium period is within two to five years. The author (1994)
also defined the long term forecasting period is over five years.

3.4.1 Short term forecasting

In the short run, a forecast helps a company to determine the amounts of materials,
products, services, or other resources that should be kept. (Chase, 2006)
40
Forecasting aids the production team to make a decision on production planning and
resources allocation. (Bolt, 1994) In this competitive environment, it is necessary to
forecast frequently due to the rapid change on market. Therefore the company
tends to have a short term forecasts. (Holmstrom, 1998) In addition, many
literatures claim (e.g. Nahmias, 2005) that short term forecasting has the highest
accuracy among all the forecasting time periods.

Lines (1996) suggested that almost all short term forecasting assumes what is
happen now is likely to continue to happen in the future, i.e. extrapolation. He (1996)
believed that consumers behaviour change slowly. Hence, extrapolation is believed
to be a reliable approach on short term forecasting. Also, short term forecasting
assumed the industry environment remains the same, i.e. no new entrances enter
the market, and there are no new products introduced by competitors. (Bolt, 1994)
However, seasonal factors may result in a misleading picture in the forecasting.
When seasonality is important in the model, the models result must be adjusted
rather than using the straight line trend. (Bolt, 1994)

41
3.4.2 Medium term forecasting

Similar to short term forecasting, Chase (2006) claimed that simple models can be
used on forecasting, such as exponential smoothing with an adaptive feature or a
seasonal factor. The forecasting model should be simple. It should be able to run on
computer quickly. (Chase, 2006)

Medium term forecasting gives the company a realistic detailed budgeting and the
best possible resources allocation of a company. (Bolt, 1994) However, medium
term forecasting is more difficult to get a higher accuracy, compare to the short
term forecasting. It is mainly because a more complicated calculation will be
involved. (Lewis, 1997)

3.4.3 Long term forecasting

Long term forecasting is used as a basis for companys strategic changes, such as
new markets development, new products or services development, and new
facilities expansion. (Chase, 2006)
42

Long term forecasts lead to heavy financial commitments. (Chase, 2006) However,
a great care should be taken in the long term forecasting. Chase (2006) suggested
that the causal methods such as regression analysis or multiple regression analysis
can be used. In addition, economic factors, product trends, growth factors, and
competition should be considered in the long term forecasting. (Chase, 2006)
Many literatures (e.g. Bolt, 1994) suggested that long term forecasting is the most
difficult type of forecasting to have a high degree of accuracy. It is due to the longer
the period the more uncertainties have to be considered in the model. For example,
changes in standards of living, international competition. Long term forecast is the
most difficult forecast. It is difficult to obtain a high accuracy. However it is an
essential tool of business activity and resources planning, e.g. finances, raw
materials and marketing facilities etc. (Bolt, 1994) The accuracy of long term
forecasting can be lower than the short term forecasting and medium forecasting. It
is because long term forecasting helps the management team to determine the long
term market strategies by giving a picture of the future demand. (Bolt, 1994)
However, Bolt (1994) suggested that the forecasts should be reviewed and updated
frequently due to the change of environment.

43
3.5 Characteristics of Forecasting

Many studies (e.g. Nahmias, 2005) concluded there are five major characteristics of
forecasting.

1) They are usually wrong.

2) A good forecast is more than a single number. It is because the forecasts error
should be within a range rather than a single number.

3) Aggregate forecasts are more accurate. It is because of the lower variance of
population variance, compare to the sample variance.

4) The longer forecast horizon results in the less accuracy of the forecast. It is due
to the higher degree of uncertainty.

5) Forecasts should not be used when there is unknown information. The forecasts
should be updated occasionally due to the change of environment, or factors
44
that will influence the forecasts accuracy.
(Nahmias, 2005)
3.6 The importance of forecasting

In this competitive business environment, it is necessary to have a long term
strategies and an effective supply chain. (Holmstrom, 1998) Hence, a reliable
forecast is required. When the management team believes the future is predictable
or fairly predictable, a statistical forecast can be used. (Caruana, 2001)

The forecast aids for both material requirements planning and financial planning.
(Holmstrom, 1998) Company considers forecasting as a management and decision
making tool. (Bolt, 1994) Bolt (1994) claimed that modern forecasting approach
helps to avoid guesswork. It also allows the predictions to be made. A good
forecasting can help the planning of Master Production Schedule (MRP). The
company does not require keeping a large amount of materials for production and
finished good for the sudden increase in demand. The safety keeping units (SKU)
can be reduced. Hence, it is necessary to forecasts the future demand in order to
control the inventory. (Lewis, 1997) Since it is impossible to forecast the exact
45
demand, it is impracticable to adopt the just in time (JIT) or zero inventory in real
life. (Lewis, 1997) However, it is the best to reduce the inventory to the minimum
level in order to reduce cost.

In the competitive environment, it is crucial to response quickly to the market
change. In addition, it is necessary to reduce the buffer stock. (Holmstrom, 1998)
In the mature market, consumers may buy alternative product when the products
they wanted are unavailable. (Lackman, 2007) Therefore, a good demand forecast
is important to maintain the stock availability and reduce backorders from
consumers. It is because backorders may result in the lost of customers, and they
may never return.

3.7 How to improve forecasting?

It is necessary to monitor the accuracy of the developed forecasting model.
Changing has to be made when the forecasts go out of control. It may due to the
change of demand. (Lewis, 1997) In addition, it is necessary to examine the
seasonal factor of the model since variables may change over time. (Lewis, 1997)
46
Moreover, the product life cycle of a product will change over time because the
relationship between its sales and its marketing variables changes. Therefore, the
new products forecasting model should be reviewed when the product life cycle
reaches a different stage. (Lackman, 2007)

Many industries have put great efforts on improving supply chain efficiency. (Lee,
2000) From the bear game theory, we could notice that sharing information
between manufactures, wholesalers and retailers are vital. It can improve the entire
supply chain performance. This cooperation results an efficient consumer response
(ECR). (Holmstrom, 1998) Sharing sales information can avoid the bullwhip effect
within the supply chain. A demand distortion to suppliers will be created, e.g.
grossly inaccurate demand forecasts, low capacity utilization, excessive inventory
and poor customer service. (Lee, 2000) In the grocery industry, the net profit
margin had been increased by 22% and the asset turnover fell 10% in 1997,
compare to 1992 (before ECR). (Brown T.A., 2001) The grocery industry indicates
the success of information sharing. Lee (2000) suggested that information sharing
can reduce inventory and manufactory cost significantly. Cachon (2000) suggested
that a full information shared supply chain can lower its costs by 2.2% on average,
comparing to the no information shared supply chain. In addition, Raghunathan
47
(2001) claimed that the manufacturer can have a better forecast when there is more
information shared by retailer.

Information technology has had a substantial impact on supply chains. (Cachon,
2000) With the information technology, companies are able to share the demand
information and inventory data quickly and inexpensively. (Cachon, 2000) Avis
(2002) recommended companies to develop an electronic data interchange (EDI)
system for information sharing. For example, Wal-Mart uses EDI to share
information with its suppliers, e.g. Johnson and Johnson. The Wal-Marts Retail Link
program allows the suppliers (more than 4000 suppliers) to view the point-of-sale
(POS) data in order to monitor their products sales. (Aviv, 2002 and Lee, 2000)

Traditionally, manufactories and retailers maintained their own forecasting process.
(Aviv, 2001) However, in this competitive business environment, manufacturers and
retailers should be working cooperatively. A collaborative forecasting partnership
will benefit the whole supply chain. (Aviv, 2007) A collaborative planning,
forecasting, and replenishment (CPFR) partnership may include extensive sharing
of information, and the use of such information to drive operational planning and
product replenishment processes. (Aviv, 2007) By using the EDI, inventory can be
48
reduced. (Aviv, 2001) Also, resources can be used more effectively and efficiently.
(Aviv, 2001)

3.8 Conclusion

Forecasting is a traditional management tool for decision making. Yet, it is widely
used nowadays. Each company, including manufactory, wholesaler and retailer, is
trying to get the best forecast on demand. The forecast helps them to develop
companys long term strategy and resources allocation. There are many factors
which have to be considered in forecasting model development, e.g. seasonal
factors. Nevertheless, the accuracy of the forecasting model will not increase simply
by adding the details for products. (Holmstrom, 1998) Variables within the model
should be carefully selected. In addition, the accuracy of the model decreases when
the time increases. It is because of the increased complexity and uncertainty over
time. Forecasting is more than a single number. The result only gives the
management team an estimated demand, which is helpful in making decision,
resources allocation, e.g. labour and materials. Furthermore, the forecasts assumed
that what happen in the past is going to continue in the future. As a result, when the
49
consumers demand change, the forecasting model has to be reviewed and
corrections have to be made.

In the past, company used their own forecasting process. It tends to increase the
inventory within the whole supply chain since inventories were kept by
manufactories, wholesalers and retailers. It increases the costs of the whole supply
chain. In order to reduce the cost and being competitive in the market,
manufactories, wholesalers and retailers have to work together and share
information to each other. The shared demand information leads to a high degree
accuracy of forecasts. EDI is a common and inexpensive way to share information
between companies due to the rapid information technology development. By
sharing the information, the inventories keep in each level can be minimized. Since
the accuracy of forecasts increases, backorders from consumers can be reduced.
The costs of the supply chain can be reduced, and the performance and profit can be
raised within the whole supply chain. In long term, company will be benefit by
developing the collaborative relationship with its suppliers and remained
competitive in the market.

50
Chapter 4 Forecasting promotion demand

From the previous two chapters, consumer buying behaviour under promotion and
forecasting have been discussed. In this chapter, we are going to summarise the last
two chapters.

Traditionally, retailers introduced price reduction when they had to clear their stock
for new season product launched. (Fam, 2003) Once the price drops, it is impossible
to return to its own price. However, retailers introduce promotions more frequently
in the recent year. Promotions are now seen as a popular tool to increase sales.
(Campo, 2006)

From chapter 2, we can conclude that consumers buying behaviour will change
when products are under promotion. During promotions, consumers may also buy
the products that they are not intended to buy, i.e. not on their shopping list.
Promotions can also attract new users. Consumers buy products during promotion
will consider themselves as smart shopper. (Blattberg and Neslin, 1990) In this
high competitive business world, retailers are using promotion as a tool to increase
their sales. Supermarket, like ASDA, introduces not only promotion, but also roll
51
back. Roll back in ASDA aims at reducing the excess inventory.

In order to increase the sales, retailers use promotion to attract customers. By the
law of demand, the quantity demand increases when price drops. However, it is vital
that retailers have to ensure they have enough stock to satisfy consumers demand.
Backorders are likely to reduce the profit, and even losing consumers. Consumers
may never return because of the unsatisfactory service. Therefore, retailers have to
ensure they can reach the consumers demand. However, it is expensive to keep a
huge amount of stock in order to satisfy the sudden increase in demand. As a result,
a forecast should be used to estimate the products demand under promotion. A
sales forecast is useful. It can reduce the inventory level to a minimum while still
satisfying consumers needs.

In the past, the selling price is retailers driven, i.e. selling price = costs + profits.
Nevertheless, selling price now is market driven, i.e. profit = selling price costs.
(Kim, 2006) Therefore, costs have to be kept as a minimum in order to gain the
largest profit. A good forecast enables the retailers to keep the minimum stock level.
It can reduce the costs, hence profit increases. However, a poor forecast will lead to
backorders from consumers or excess inventory. An appropriate forecasting model
52
is required for estimating the demand. Nevertheless, the model should be reviewed
and corrected occasionally. (Lackman, 2007) The current forecasting model may no
longer helpful because of the change in business environment, e.g. change of
government policy, change of competitors action, new entrants of the market. The
following diagram illustrates the components of the sales forecast.

Environment
Market
Company actions Competitors actions
Costs
Actions by suppliers,
distributors and government
Market share
Sales
Profits

Fig 4.1 Components of the sales forecast (Armstrong, 2001)

53
Different variables need to be considered within the forecasting model. The quality
of the input data is important to the forecasts. Manufactures are able to develop a
high accuracy forecast when their input data comes from its customers, i.e. the
wholesalers and retailers. (Raghunathan, 2001) The order history record may
mislead the forecasts due to the poor forecasts from wholesalers and retailers.
Companies within the whole supply chain should share their information in order to
develop a lean supply chain. A lean supply chain can help to gain the largest benefit
within the whole supply chain. In this highly competitive business environment,
company should share information in order to gain a win-win situation; while unlike
traditionally, a win in a company is based on a lost of another company. Electronic
data interchange (EDI) could be developed for information sharing. By using the
actual sales data, instead of the order history, a higher degree accuracy of
forecasting model can be developed. Manufacturers, wholesalers and retailers are
able to forecast the sales properly.

Since the consumers buying behaviour change under promotion, the EDI system
helps to develop a more precise forecast of promotion sales. With the collaboration
of manufactures and wholesalers/ retailers, the demand of end-customers can be
forecasted. The stock keeping unit (SKU) at each level can be reduced.
54
Manufactures can allocate the resources more effectively and efficiently.
Wholesalers and retailers are able to reduce their inventory level. The bullwhip
effect can be eliminated by the collaboration. The evidence of this can be supported
by the beer game theory. Manufactures, wholesalers and retailers can all be
benefited from the collaborative forecasting. (Pearce, 1996)

55
Chapter 5 Background
5.1 Introduction

In this section, the background information of soft drink industry will be discussed.
The Coca Cola Company history will be presented afterward.

5.2 Soft drink industry background

In the 17
th
century, the first non-carbonated soft drink, made with water and lemon
juice sweetened with honey, appeared. (Wikipedia, 2007) In 1676, the Compagnie
de Limonadiers of Paris sold lemonade soft drink monopoly. (Wikipedia, 2007) In
1835, the first bottled soda water was introduced into the U.S. market. Dr Pepper
was invented by Charles Aderton in 1885. Coca-Cola was established in Atlanta in
1886 while Pepsi-Cola was established in 1898. (Bellis, 2007) Initially, the soft
drinks were sold in bottles. Later, glass bottles were introduced in 1899. And in 1957,
aluminum cans were introduced to the market.

Today, the soft drinks market consists of bottled water, carbonates, concentrates,
functional drinks, juices and ready-to-drink (RTD) tea and coffee. (Datamonitor,
2006) In 2005, the revenue of the global soft drinks market generated USD$ 319.2
56
billion. Between 2001 and 2005, the market had a compound annual growth of
3.2%. Datamonitor (2006) predicted that the global soft drink market will continue
to grow. In addition, the carbonated drink contributed 46.1% to the soft drinks
market, i.e. USD$ 147.1 billion. Within the soft drink market, Americas, which
includes United States, Canada, Mexico and Brazil, contributed 42.3%, while Europe,
Belgium, United Kingdom, France etc, contributed 36.5%. Moreover, the
Asia-Pacific, China, India, Australia etc, takes up 21.2% of the market. The following
diagram shows that market share in the world.
Asia-Pacific
21%
Americas
42%
Europe
37%
Fig. 5.1 Global soft drink market shared by value 2005 (Datamonitor, 2006)
The three market leaders in the market are the Coca Cola Company, the PepsiCo Inc.
and Nestle S.A. They take up only 42.7% in the soft drink market. The following
tables show the market value and market volume in 2005 and the forecast market
value and market volume in 2010.

57
2005 2010
Country Market
Value (%)
Market Value
(USD$ billion)
Forecast
Market
Value (%)
Forecast Market
Value
(USD$ billion)
Belgium 3.1 3.9 19.2 4.7
Czech Republic 3.4 2.5 17.1 3
Denmark 0.5 2.4 2.8 2.3
France 1.4 9.2 7.5 9.8
Germany 2.7 28.7 16.3 33.4
Hungary 4.3 1.1 22.6 1.3
Italy 4.7 14.8 21.7 18
The Netherlands 4.1 2.9 19.7 3.4
Norway 1.3 2.1 6.8 2.3
Poland 5.8 4.9 24.9 6.2
Spain 3.2 8.9 7.6 9.5
Sweden 1.5 2.3 6 2.5
United Kingdom -0.2 18.7 14.3 21.4
Table. 5.1 Market value in 2005 and Forecast Market Value in 2010 in Europe
(Datamonitor, 2006)
58
2005 2010
Country Market
Volume (%)
Market
Volume
(billion L)
Forecast
Market
Volume (%)
Forecast Market
Volume
(billion L)
Belgium 1.7 2.8 14.6 3.2
Czech Republic 2.6 2.9 13.8 3.3
Denmark 0.1 0.6 3.4 0.6
France 0.8 11.6 5.6 12.3
Germany 2.9 22.9 17.5 26.9
Hungary 2.8 1.6 17.1 1.9
Italy 3.7 15.8 17.6 18.6
The Netherlands 2.3 1.7 11.4 1.9
Norway 0.7 0.8 4.5 0.8
Poland 3.7 4.8 18.3 5.7
Spain 1.8 10 7.9 10.8
Sweden 1 1.1 3.6 1.1
United Kingdom 0.7 11 12 12
Table 5.2. Market Volume in 2005 and Forecast Market Volume in 2010 in Europe
(Datamonitor, 2006)
59
The currency conversions of the tables presented in this chapter are based on the
constant 2005 annual average exchange rate.

As we could notice from the above table, the United Kingdom is the only one has
negative growth in market value percentage in 2005. However, its market value still
reaches USD$ 18.7 billion, which ranked the second within the Europe. All the other
European countries have a positive growth in market value.

Table 5.2 shows that all the Europe countries have a positive growth in market
volume in 2005 and 2010.

2005 2010
Country Market
Value (%)
Market Value
(USD$ billion)
Forecast
Market Value
(%)
Forecast Market
Value
(USD$ billion)
Global 2.6 319.2 14.7 366.2
Europe 3.1 116.5 17.9 137.4
Table 5.3. Market Value Global Vs Europe (Datamonitor, 2006)

60
2005 2010
Country Market
Volume (%)
Market Volume
(USD$ billion)
Forecast Market
Volume (%)
Forecast Market
Volume
(USD$ billion)
Global 3.2 333.7 17.1 390.7
Europe 2.4 98.7 14.1 112.7
Table 5.4. Market Volume Global Vs Europe (Datamonitor, 2006)

All the above tables show that there is a positive growth of the soft drink market.
Furthermore, Europe takes up one-third of the global market growth, including
market value and market volume.

5.3 Coca-Cola Company Background

5.3.1 Coca-Cola Company (CCC)

Nowadays Coca-Cola Company (CCC) is a leading company in the soft drink market.
It is the largest manufacturer, distributor, and marketer of non-alcoholic beverage
concentrates and syrups. (Datamonitor, 2006) It was established in May, 1886 by Dr.
61
John Pemberton in Georgia, Atlanta. (Bellis, 2007) In the first year, the sales are
US$ 50 while the expanses are over USD$ 70, i.e. a loss in the first year of the
company established. (Bellis, 2007) By the late 1890s, Coca Cola was one of the
most popular drinks in America. CCC increased syrup sales by over 4000% between
1890 and 1900. (Bellis, 2007) The new secret coke formula was developed in 1985
and the products are consumed more than one billion drinks per day nowadays.

CCC is manufactured more than 400 soft drink brands and focuses on the
non-alcoholic beverage market. These products are sold nearly in 200 countries
around the world. Today, the company sells over six million beverages every day.
(Datamonitor, 2006) In addition, the company owns four of the top five drink brands
in the world. They are Coca-Cola, Diet Coke, Sprite and Fanta. (Datamonitor, 2006)
CCC has a strong brand image developed within these one hundred years. Moreover,
there is a strong growth in North Asia, Eurasia and Middle East market.
(Datamonitor, 2006) However, its market position may be affected due to the
declining popularity of carbonated beverages in US and UK. Therefore, expanding
flavored water market and juice can enhance the market position. (Datamonitor,
2006) Fig. 5.2 shows that market share within the global soft drinks market.
62
Coca Cola Company
19%
Pepsi
17%
Other
52%
Nestle S.A.
6%
Coca Cola FEMSA,
S.A. de C.V.
6%

Fig 5.2. Global Soft Drinks Market Share by Volume, 2005
(Datamonitor, 2006)

5.3.2 Coca Cola Great Britain (CCGB)

The first Coca Cola product launched UK in 1900. In 1999, CCC purchased Cadbury
Schweppes plc in different countries, including Great Britain, hence resulted in the
extension of the existing product range, e.g. Coca Cola, Sprite, Fanta, Dr. Pepper, Lit,
Five Alive etc. (http://www.coca-cola.co.uk/Company_History/) Coca Cola Great
Britain (CCGB) is responsible for marketing Coca Cola products within UK. There are
over 100 products within UK. One of their responsibilities is developing new brands
and extending existing brands. They also response for protecting Coca Cola trade
marks within UK. Coca Cola Enterprises Ltd. (CCE) is the local bottler responsible for
63
the manufacturing, distributing, sales and trade marketing of the brands of CCGB
within UK. (http://www.coca-cola.co.uk/Company_structure/)

64
Chapter 6 Methodology
6.1 Introduction

The purpose of this project is to help CCE to improve the efficiency and accuracy of
the forecast. In order to achieve this objective, different techniques had been used.
They help in forecast model development and data reorganisation.

6.2 Data Collection

In this project, primary data have been used for developing forecast model. The
primary sales data have been collected from the CCE. CCE obtains the sales data
from their customers database system, i.e. EDI. CCEs main customers include
Sainsburys, ASDA, Morrisons and Tesco. Customers weekly sales data of individual
products are provided to CCE.

6.3 Data Reorganisation

Four main customers sales data are presented in various ways. Each products, by
line, sale is presented in the spreadsheet. For example, the sales of two liters Coca
65
Cola coke products are separated by line, i.e. 2L coke, 2L diet coke, 2L vanilla coke,
2L coke zero, 2L coke with lime etc. However, there are over 150 products within
one spreadsheet. It is difficult to find the data required. Hence, it is time
consumption. As a result, a new format spreadsheet is developed.

The new spreadsheet links with the current sales data spreadsheet. Once the data
on the current sales spreadsheet has been updated, the new spreadsheet data will
be updated automatically. In the new spreadsheet, not only the individual sale data
is shown, but also the aggregated data are presented. For instance, all the favour of
six pack cokes sales is aggregated. The aggregated data used in the forecasting
model will give a higher degree of accuracy. Moreover, the products are sorted in
alphabetical order. Therefore, the data can be obtained easily within a spreadsheet.

6.4 Analytical Model

According to Balakrishnan (2007), the forecasting model is categorized into three
different types. They are qualitative model, time series model and causal model.
Time series model and causal model are quantitative models.
Judgment or subjective factors are included in the qualitative forecast model. This
66
approach is appropriate when it is necessary to include subjective factors or the
accurate quantitative data is difficult to obtain. (Balakrishnan, 2007)

Time series model forecast is based on the past data. (Chase, 2006) The time series
model considered trend, seasonality, cycles and randomness. (Nahmias, 2005)
Time series model assume that what happened in the past is going to continue to
happen in the future. (Balakrishnan, 2007)

Causal model considers there are variables or factors that will influence the
forecasts. (Nahmias, 2005) The best statistical relationships between the forecast
(dependent variable) and independent variables can be determined by the causal
model. (Balakrishnan, 2007)

In this project, we are going to examine the relationship between the sales and
different variables. The independent variables included type of promotion, structure
of promotion, holiday weekend and seasonality. Type of promotions represents the
kind of promotions. For example, Buy one get one free (BOGOF), 2 for 2 etc.
Structure of promotions represents the size and feature of the promotions. For
instance, Tesco metro only, the number of stores include in the promotion event.
67
Holiday weekend indicates the presence of holiday in a particular week, e.g. Bank
holiday weekend.

Therefore, causal model are considered as a suitable method. Since there are
various variables, multiple regression is considered as an appropriate model.
(Muyldermans, 2007) In addition, Armstrong (2001) suggested that simplest
methods, e.g. regression analysis, are generally as accurate as sophisticated
methods, e.g. spectral analysis. Also, simple models are easy to monitor and review
in the future. By using simple methods, the risk of severe errors can be minimized.
(Nahmias, 2005)

Since the regression analysis is based on past data, trend effect and seasonal
factors can be examined. (Nahmias, 2005) A scatter diagram will be used to
investigate the linear trend effects on different products. Seasonal factors will be
examined in the multiple regression models. The F-value given by Excel Data
Analysis will show the significant level of the models. Adjusted R value is used to
determine the best model of fitness. R represents the model fitness. Hence, the
percentage of data covers by the forecast model.
68
6.4.1 Scatter Diagram

Linear trend relationship indicates the sales increases/ decreases when time
increases. Scatter Diagram is used to examine the trend effect. In this project, we
are going to examine is there any linear trend effect on products sales. It is because
trend is the prior factor that has to be considered within a forecast. A scatter
diagram is plotted with time (independent variable, X) against sales (dependent
variable, Y).

6.4.2 Multiple Regression Model

A multiple regression model is an extension of a simple regression model.
(Balakrishnan, 2007) In the multiple regression model, the forecast sales, Y, is
expressed in a function of X (independent variables).
Y = f(X1, X2, X3 Xn)
We assume there is a linear relationship between Y and (X1, X2, X3 Xn). (Nahmias,
2005) Hence, Y can be expressed in the form of
Y = a0 + a1X1 + a2X2 + . . . + anXn
69
for some constant (a0, a1, a2, . . . , an).

In the model, the independent variables include types of promotion, holiday,
structures of promotion and seasonality. The relationships between Y and the
combinations of the above factors will be examined.

By using Excel Data Analysis, R, adjusted R, and F-value will be generated. R is
defined as the percentage of data can be explained by the regression equation.
(Balakrishnan, 2007) The adjusted R applies a correction factor to R based on the
independent variables and observations since there are different variables included
in different models. It helps comparing multiple regression models that include
different independent variables. From the ANOVA table, F-value is generated.
F-value, which is less than 0.05, indicates that the regression model is significant at
the 5% level. Model, which has F-value greater than 0.05, is considered not
significant. For the non-significant models, weekly data will be aggregated into
monthly data, i.e. 4 weeks for a month. A new regression equation will be obtained
after the aggregation.

Moreover, dummy variables had been introduced in the forecasting model. Dummy
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variable is non-quantitative or qualitative independent variables. Dummy variables
do not assume as a numerical value. (Winston, 2004) Nevertheless, it is classified as
one of the categories. For instance, dummy variables have used on seasons in our
forecasting models. Dummy variable is defined as follows:

X = 1 when observation include the categorical variable
X = 0 otherwise

For example, in the project, we introduced the dummy variables to seasonality.

Wn = 1 when observation takes under season n, e.g. n = 1 = spring
Wn = 0 otherwise

Dummy variables have been introduced to promotion types and promotion structure.
They are defined as the following:

Xn = 1 when observation takes promotion types n/ promotion structure n
Xn = 0 otherwise

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In our forecasting model, there are four categories of variables. They are types of
promotion, types of promotion structure, seasonality and holiday weekend.The
multiple regression equation is defined as follow:
Y = a + biXi + cjYj + dkWk + elZl
where
a = Y-axis intercept
bi = slope of the Xi
cj = slope of the Yj
dk = slope of the Wk
el = slope of the Zl
Xi = promotion type i
Yj = promotion structure j
Wk = seasonality, i.e. k is spring, summer, autumn or winter
Zl = holiday weekend l
Y = sales forecast

CCE week number Sales X1 Xi Y1Yj W1Wk Z1Zl

Fig. 6.1 An illustration of forecast model in Excel format
72
In this project, there are four categorized variables. The combinations of these
variables formulate seven different forecast models. These models have been used
to determine the best model for individual products. The combinations of variables
are shown below.

1) Type of promotion (T)
2) Holiday (H)
3) Seasons (SE)
4) Type of promotion and structure of promotion (TS)
5) Type of promotion, structure of promotion and seasons (TS, SE)
6) Type of promotion, structure of promotion and holiday (TSH)
7) Type of promotion, structure of promotion, seasons and holiday (ALL)

The above models will be examined for individual products. The best model will be
chosen according to the best value of adjusted of R.

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6.5 Correlation between R and variables

6.5.1 Correlation between R and number of promotion types

The relationship of R and number of promotion types will be studied. An individual
product within the four supermarkets has various types of promotion type. 1.5L
Oasis is used as example. Morrisons only have BOGOF promotions for 1.5L Oasis.
However, 1.5L Oasis has three different types of promotions in ASDA, which are 3
for 3, 3 for 2 and 64p. Sainsbury also have three different types of promotions.
They are 2 for 1.5, 2 for 2 and BOGOF. Tesco also has three various types of
promotions. They are 2 for 2.25, 2 for 2, and 2 for 2.3.

In addition, different supermarkets have various number of CCEs products under
promotion between 2006 and 2007. Sainsbury has 15 products while Tesco has 21
different products. Both ASDA and Morrisons have 18 products. Hence, percentage
has been used in order to obtain a consistent of measurement.

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6.5.2 Correlation between R and promotion frequency

By using Excel Data Analysis (correlation), the correlation between R and the
promotion frequency can be calculated. Percentage is used rather than the number
of promotion weeks. It is because some products have less data, i.e. Tesco 4 pack
Powerade only has 41 weeks data while Tescos products have 77 weeks data in
general. Scatter diagram are plotted. The relationship between R and variables can
be investigated. However, the correlation only shows the strength of the
relationships between R and variables. It does not indicate the cause and effect.
(Wisnieeski, 2002)

6.6 Software Chosen

Multiple regression is complex and complicated to be solved by hand. (Wisniewski,
2002) Hence, a computer package is required. Statistical computer packages, like
MICROSTATS, MINITABS, SPSS, can be used for determining the relationships
between variables within the multiple regression. In this project, Excel Data
Analysis has been chosen for developing the multiple regression model. Excel Data
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Analysis is a user friendly package. It is easy to run. Also, the background
knowledge of statistical software is not required.

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Chapter 7 Discussion and Data Analysis
7.1 Introduction

In this chapter, the benefits of data reorganization will be discussed. In addition, the
trend effect of product will be explained. If a product has a trend, then it has to be
included in the models because trend influences on underlying sales.

The main purpose of this chapter is to analyze the results constructed by the
forecasting model presented in the previous chapter. The objective of a forecasting
model is to determine the best relationships between the forecast sales and the
variables that influenced the sales, i.e. promotion types, promotion structure,
holiday weekend and season. The relationship between R and variables will be
examined. R measure the goodness of fit of the multiple regression equation. It
indicates the percentage of data covers by the multiple regression equation.
(Balakrishnan, 2007)

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7.2 Data reorganization

In this section, the benefit of the data reorganization will be discussed. An Excel
spreadsheet format is used as it is user friendly. Initially, the sales data are
presented in various ways by the four major CCE customers. CCE have found it is
difficult to obtain a specific products data that they wanted since there are more
than 150 sets of products data within one customers spreadsheets. Here, the data
for the four major customers are now presented in a consistent way. All the products
are categorized according to brand. Individual products sales data and aggregated
products sales data are presented on the spreadsheet. Tesco original sales data
spreadsheet is shown on Appendix 1. The new formatted spreadsheet is shown on
Appendix 2. In the bottom of the new spreadsheet, Core 3 and Core 4 sales are
presented. Core 3 includes Dr. Pepper, Lilt and Split. Core 4 includes Dr. Pepper, Lilt,
Split and Fanta. Their sales data have been added together are because
supermarkets normally have either Core 3 or Core 4 products promotions.
Supermarkets seldom have either individual product on sales.

78
7.2.1 The benefit of data reorganization

1) The sales data of each customer are presented in a consistent format.
2) The data are categorized according to product brand.
3) The product brands are sorted in alphabetical order and data can be obtained
more easily.
4) The managed data implies the data are more accessible.
5) The time on searching for a products sales can be reduced. Therefore, the data
can be obtained more effectively and efficiently.
6) It is more convenient for comparing the sales data of different customers for the
same product.

With the new presentation of sales data, each data user in the company, for
example, customers demand management department, marketing department, can
have the access of the managed data. The integrated view gives a clearer view of
the whole picture. Communications between departments will be improved as they
have a clear and consistent picture of the sales data. The improved access helps the
end users to respond quickly to their environment. (Rob, 2007) Better decisions can
79
be made based on the managed data. For example, the production team can
produce the right amount of products at the right time. As a result, the inventory
level can be reduced.

Moreover, the aggregated data helps to improve the accuracy of the sales forecasts.
CCE is working closely with its customers. CCE can help its customers to forecast the
promotion volume. A high accuracy forecast can improve the relationship between
CCE and its customers. The collaborative planning helps CCE to gain some tangible
benefits, e.g. on shelf availability, more informed production planning, reduced raw
materials and finished goods. (CCE, 2007) A good forecast helps to reduce the back
orders from end consumers, i.e. customers of supermarkets. In addition, it helps to
improve the production planning and logistics planning of CCE.

7.3 Linear trend

Trend refers to a stable pattern of growth or decline over time. The growth can be
either positive or negative. (Nahmias, 2005) The linear trend can be expressed by
the following equation.
= a + bX
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where
= the predicted value of Y
X = value of independent variable
a = Y-interception of the line
b = slope of the line

Balakrishnan suggested that the linear trend effect can be determined by using
scatter diagrams. In this section, we will discuss the trend effect on products. The
data for over 70 products have been examined.

7.3.1 Trend analysis (Scatter diagram)

72 sets of sales data, from four customers, have been plotted on the scatter
diagram against time. Excels built-in charting capability has been used to add the
linear trend line in each diagram. Appendix 3 shows scatter diagrams of several
products. Two products scatter diagrams of each supermarket are presented in
Appendix 3.
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From scatter diagrams, the linear trend lines tend to have a small value of b, i.e. the
slope of the line is small. The linear trend line is produced by a statistical method
called the least squares procedure. The aim of this method is to minimize the sum
of the squares of the vertical differences from the lines to the observations.
(Balakrishnan, 2007) Hence the errors between forecasted sales and the actual
sales can be minimized. Since the sharp increase in sales during the promotion
periods, it has an effect on the calculation of linear trend line. Therefore, it seems to
have a small linear trend effect. However, by observing the sales of non-promotion
periods, the sales are stable throughout the whole period of time, i.e. from January
2006 to June 2007. All the products generate the same outcomes. The products do
not appear to have any significant trend effect.

The reason for the sales being stable may be the result of the market nature. As the
soft drinks industry had been established over three hundreds years, the market is
well developed. It is at the mature stage of the product life cycle. In addition, the
Coca Cola Company had been established over one hundred years; they have a
stable market share. According to the product life cycle, soft drink products are in a
mature phase. Consumers loyalty had been increased throughout years.
Companies at this stage use price competition in order to increase market share.
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(Nahmias, 2005) The market is promotion driven. From the customers promotion
calendar, we could notice that CCEs products are always on promotion. In addition,
70% of CCEs profit occurs from promotions. (CCE, 2007) Since the industry is in the
mature stage, the demands of products are stable. There are no trend effects within
the products sales. As a result, the trend effect is not included in the forecasting
model.

7.4 Model interpretation

This section shows the interpretation of the data generated by the Excel Data
Analysis. Appendix 4 shows the ANOVA table of Morrisons 1.5L Oasis. The table
shows that 83% of the data have been covered by the multiple regression model.
The significant F-value is 3.79E-26, which implies the model is highly significant.
The p-value indicates that both spring and summer are not significant in the model.
However, this model gives the best value of adjusted R. Hence, they remain in the
forecasting model. In addition, the multiple regression model can be presented as
the following:

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Future sales = 2248.729 + 11556.29(BOGOF) + 0(Shelf) - 6329.8(Stack)
1120.62 (Spring) 836.194(Summer) + 0(Autumn) 2148.71(Winter)

Since all of the variables are dummy variables, 1 and 0 are substituted into the
equation when the situation occurs.

For example, there is a BOGOF sale on 1.5L Oasis in Morrisons. An on shelf
promotion occurs in winter. The future sale can be calculated as follows:

Future sales = 2248.729 + 11556.29(1) + 0(1) - 6329.8(0) 1120.62 (0)
836.194(0) + 0(0) 2148.71(1)
= 11656.309

The intercept coefficient shows the basic sales of 1.5L Oasis. The coefficients of
other variables represent the change in sales when these events happen. A 1 will
be substituted into the equation when the situation occurs. Otherwise, a 0 will be
substitute into the equation. In this case, the future sale of 1.5L Oasis in Morrisons
is about 11657 units, i.e. about 5 times the baseline sales level.
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7.5 Model analysis

This section presents the results generated from the multiple regression models. In
the model, four main factors have been tested by Excel Data Analysis. F-test and
t-test were used to determine the statistical significant of the multiple regression
models and independent variables. (Balakrishnan, 2007) Adjusted R were used to
determine the best model within our seven choices. (Winston, 2001) 5% significant
level has been used in the multiple regression model. Hence, the model is not
significant when the F-value and p-value are greater than 0.05 respectively. The
better value of adjusted R implies the better fit of the model.

For F-test, the null and alternate hypotheses are as follows:

Null hypothesis: H0: the overall regression model is not significant
Alternate hypothesis: H1: at least one variables in the regression model is
significant

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For t-test, the null and alternate hypotheses are as follows:

Null hypothesis: H0: the independent variable is not significant, given the presence
of other variables
Alternate hypothesis: H1: the independent variable is significant, given the
presence of other variables

In this section, the statistical significance of the overall model will be discussed. The
best model is chosen via the highest adjusted R value. The best model decides
which independent variables should be excluded/ included in the model. The result
of the best model for each product by customer will be represented in this section.

7.5.1 Statistical significance of multiple regression model (F-test)

The significance of the F-value is generated by Excel Data Analysis. The overall
model is significant when the F-value is less than 0.05, i.e. = 0.05. Null hypothesis
will be rejected when F-value is less than 0.05.
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The F-values for two customers, Tesco and Morrisons, are all under 0.05 with the
maximum of 0.002217. Hence, the model is highly significant. The small F-value
strongly suggested that the variables contribute a significant part of the variation of
sales (Makridakis, 1998). The null hypothesis is rejected. There is at least one
independent variable in the model that is significant.

The model is highly significant to all products in Sainsburys, except 10 Capri Sun.
However, the model is significant after the sales data is aggregated in month instead
of the week. Its F-value decreases from 0.11 to 0.037.

Moreover, two forecasting models for products, with 18 forecasting models in total,
of ASDA have F-value greater than 0.05. Hence, the model is not significant for
these two products. But the model works well on the same product of the other
customers. The F-values of these two products are illustrated in the following table.

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Customers
Products
Sainsbury Morrisons Tesco ASDA
6 pack Core 4 4.58E-15 1.99E-27 8.43E-36 0.1
750ml Appetizers 1.78E-13 6.83E-28 1.89E-36 0.1
Table 7.1.The F-value (2.47E-06 equals 0.00000247)

By comparing the F-values among all CCEs main customers, the F-value of ASDAs
data are generally greater than the others customers although most of them still
remain statistically significant. It is mainly because of the roll back promotion
approach used within ASDA stores. ASDAs rolls back promotions aimed at reducing
its excessive inventory. (Loder, 2007) The schedule of roll backs is not available to
CCE. The missing data for the promotion period leads to an inaccurate input data.
Without the accurate input data, it is difficult to develop a good forecasting model.
The average R of ASDAs products is 0.32, with maximum equals to 0.64. It
indicates that most of the data can not be explained by the model. Nevertheless,
those models work impressively well on Tescos, Morrisonss and Sainsburys
products.

In the following diagrams, the blue line indicates the sales of non-promotional
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period. The high lightened line indicates the sales response to different types of
promotion.
6 pack Fanta
2 for 2 1.8 2 for 3.5
0
5000
10000
15000
20000
25000
30000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75
CCE Week
S
a
l
e
s
Fig. 7.1.The sales of ASDA 6 pack Fanta
6X330ml Fanta
BOGOF 2 for 3
0
50000
100000
150000
200000
250000
300000
350000
400000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75
CCE Week
S
a
l
e
s

Fig. 7.2.The sales of Tesco 6 pack Fanta
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6 pack Fanta
BOGOF 2 for 3
0
5,000
10,000
15,000
20,000
25,000
30,000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77
CCE Week
S
a
l
e
s

Fig. 7.3.The sales of Sainsbury 6 pack Fanta

6 pack Fanta
BOGOF Buy 2 save 1.00 2 FOR 3.00
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71
CCE Week
S
a
l
e
s

Fig. 7.3.The sales of Sainsbury 6 pack Fanta

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Many literature sources claim that the sales increase when price decreases. (E.g.
Campo, 2006) From Fig. 7.2 7.4, all the peak sales are caused by promotions.
However, ASDA is difference. In Fig. 7.1, some of their peak sales are not indicated
as promotion sales. It implies that the non-indicated peak should be caused by the
roll back activity. (Loder, 2007) The lack of rolls back activities calendar results in
the inaccuracy input data of ASDA. As a result, it leads to a higher value of F-value,
i.e. the forecasting model is less significant.

7.5.2 Independent variables

In this project, seven different models have been tested in order to obtain the best
value of adjusted R. The model is chosen with the maximum value of adjusted R.
Hence the best fitting line can be found. By the testing the models, the independent
variables that should be included in the regression model will be determined. In
general, there are four popular combinations of the independent variables. They
are:

1) Type of promotion and structure of promotion (TS)
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2) Type of promotion, structure of promotion and holiday weekend (TSH)
3) Type of promotion, structure of promotion and season (TS, SE)
4) Type of promotion, structure of promotion, holiday weekend and season (ALL)

But there are two exceptions. Sainsburys all flavour 500ml drinks and ASDA 6 pack
Core 4 only include the season effect in their forecasting model. The best R value
is given when the model only include seasonality as a factor. Neither models
performs well, the R are 0.23 and 0.13 respectively.

All the models, except Sainsburys all flavour 500ml drinks and ASDA 6 pack Core 4,
include type of promotions and structure of promotions. However, some of their
p-values are not significant. For example, Tesco 2L Core 3s p-value of one the
promotion type is not significant while the other two promotions types are highly
significant. Since the promotion type is the main factor in the model, the
insignificant variables remain in the model. However, it is believed that the accuracy
of forecast will be improved when the insignificant promotions happen at other
times. (Ramanathan, 2007)

Appendix 5 show the factors included in the products by companies. The following
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table shows the percentage of different models used according to companies.

TS TS, SE TSH ALL SE None
ASDA 6% 56% 11% 17% 5% 5%
Morrisons 44% 22% 6% 28% 0% 0%
Tesco 19% 24% 28.5% 28.5% 0% 0%
Sainsbury 33% 40% 13% 7% 7% 0%
Table 7.2.Percentage of a particular model used

Interestingly, different supermarkets customers have different buying behaviour. It
may because different supermarket aims at different market group. Hence, the
consumers buying behaviour varies. Tesco has a similar percentage on four
different models. The others tend to have a relatively high percentage of a particular
model. About half of the Sainsbury and ASDAs products can be forecasted by TS, SE
model. 44% of the Morrisonss products can be forecasted by the TS model. More
then 50% of the products sales in each supermarket have been affected by the
seasons. For example, ASDA has 56% + 17% +5% = 78% of products have
seasonality. Morrisons has 22% + 28% = 50% products sales have been affected
by seasonality. Tesco has 52.5% while Sainsbury has 54%. However, only 28% of
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the ASDAs models include holiday weekend as one of the significant factors. Tesco,
with the highest percentage, has 57% of the products forecast model included the
holiday weekend as one of the factors. Morrisons has 34% while Sainsbury has 20%.
From this result, we could notice that seasonal factors play a relatively important
role in the forecast models, compared to holiday weekends. Summer has a higher
sale because of the hot weather. The demand for soft drinks increases during
summer. In addition, Christmas has a peak sale on carbonated soft drinks, e.g. Coca
Cola, Mixers. Consumers are willing to store the promotional soft drinks as
Christmas approaches. It agrees with Smith (2000) that consumers are willing to
buy more when the products are convenient to store, especially when they know
there are parties or other events likely to happen. Some consumers prepare their
parties in advance rather than a few days before the parties. Therefore, products
seasonality has a greater impact than holiday weekend.

7.6 Model Fitness

The best model is chosen with the highest value of adjusted R. R shows the
percentage of the data had been covered. The model is considered to be a good
94
forecast when R is greater then 0.7, i.e. R > 0.7. The model is viewed as an
average model if R is between 0.5 and 0.7, i.e. 0.7 R 0.5. The model which
has R less than 0.5 is considered as a bad forecast, i.e. R < 0.5. (MacCarthy,
2007)

A good forecast gives a whole picture of the future sales. It gives a good guideline of
the future sales. It helps in production planning and inventory control. Appendix 6
shows some examples of good forecasts. The actual sales curve and forecast sales
curve are close to each other. Therefore, the forecast is given a good picture of the
future sales.

An average forecast gives a healthy picture of the future sales. However, the margin
of errors should be considered. Future sales are presented in a range rather than a
single number. The difference between the past actual sales and past forecast sales
gives an idea of the marginal error. Appendix 7 shows some examples of average
forecasts. The difference between the actual sales curve and forecast sales curve is
in a reasonable range. The maximum and minimum marginal error can be
determined from the plot.

95
A bad forecast is definitely not helpful. It should not be used under any
circumstances. Appendix 8 shows some examples of bad forecast. The difference
between the actual sales and forecast sales is huge. Hence, the models do not
forecast the sales correctly.

The following table shows the percentage of the models fitness in each
supermarket.

Customers Good Average Bad
ASDA 0% 17% 83%
Morrisons 78% 11% 11%
Tesco 67% 19% 14%
Sainsbury 20% 47% 33%
Table 7.3.Percentage of model fitness by company

From the above table, Morrisons gives the best result among all the customers, with
78% of good forecasts. Tesco is another supermarket which is easy to forecast.
ASDA and Sainsbury have a lower percentage of good forecasts, i.e. about 20%.
Nearly half of the Sainsburys products have an average result. However, ASDAs
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products have over 80% poor forecasts.

Within the four major customers, there is 41.25% of the models are good forecasts.
There is 23.5% of the models have R between 0.5 and 0.7, i.e. it is an average
forecast. There is 35.25% of the models are bad forecasts within the four major
customers. The above table shows that ASDA does not have any good forecasts. The
percentage of good forecasts increases significant when ASDAs data has been
removed. The percentage of good forecast increases from 41.25% to 55%. In
addition, the percentage of bad forecasts reduces sharply, i.e. decrease from
35.25% to 19.3%. However, the percentage of average forecasts remains at the
same level. The table below concludes the percentage within the customers.

Good Average Bad
Four major customers 41.25% 23.5% 35.25%
Three major customers (exclude ASDA) 55% 25.7% 19.3%
Table 7.4.The percentage of model fitness within four major customers

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7.7 The relationship between R and number of promotion
types

Unlike other supermarkets, Morrisons has fewer types of promotions according to
each product. A particular Morrisonss product has a maximum of three different
types of promotions. However, the other supermarkets have a minimum of five
different promotion types within one specific product. Table 7.5 shows the number
of promotions types of one single product among the four supermarkets. The same
type of Morrisonss promotions often repeated between January 2006 and June
2007. It means that the forecasts have a higher accuracy. The repeated and
frequent deals give a more accurate measurement on consumers buying behaviour.

From table7.6, 85% of Tescos products have less than three different promotion
types while about 65% of ASDAs and Sainsburys products have less than three
different promotion types. It suggested that the fewer the promotion types, the
higher percentage of good forecasts. With the repeated pattern, Excel Data Analysis
can determine a better relationship between sales and the promotion types. It is
because more data are available to study the relationship. Forecasting is a scientific
98
approach. (Lewis, 1997) If a product has many different types of promotions, the
data for each type of promotions is relatively less. The accuracy of forecast may
decrease since the data amount is relatively less.

ASDA has the greatest amount of bad forecasts. It is mainly due to the inaccuracy
input data. ASDAs roll back promotions calendar is never available to CCE. It leads
to the data inaccuracy. Hence, the forecast accuracy is low. It is difficult to draw any
conclusion for ASDA due to the poor quality of the data. Nevertheless, there are a
relatively large proportion of ASDAs products that have more than three different
types of promotions, i.e. 38%. Therefore, it may be another reason of the low
accuracy in their forecast models.

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Number of promotion type ASDA Sainsbury Tesco Morrisons
1 7 (39%) 2 (13%) 5 (24%) 3 (17%)
2 4 (22%) 5 (33%) 5 (24%) 8 (44%)
3 2 (11%) 3 (20%) 8 (37%) 7 (39%)
4 4 (22%) 4 (27%) 2 (10%) 0 (0%)
5 0 (0%) 1 (7%) 0 (0%) 0 (0%)
6 1 (6%) 0 (0%) 1 (5%) 0 (0%)
Table 7.5.Number of promotion types in each supermarket

Number of promotion type ASDA Sainsbury Tesco Morrisons
1 7 (39%) 2 (13%) 5 (24%) 3 (17%)
2 11 (51%) 7 (46%) 10 (48%) 8 (61%)
3 13 (62%) 10 (66%) 18 (85%) 7 (100%)
4 17 (84%) 14 (93%) 20 (95%) 0
5 0 (84%) 15 (100%) 0 (95%) 0
6 18 (100%) 0 21 (100%) 0
Table 7.6.The accumulated number of promotion types in each supermarket

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7.8 The relationship between R and promotion frequency

In this section, we are going to discuss the relationship between the model accuracy,
R, and the promotion frequency. Excel Data Analysis (correlation) gives the
following results. Three different correlations are presented. The first one presents
the relationship between R and all data. The second one presents the relationship
between R and the percentage which is less than or equal to 50%, i.e. 50%. The
third one presents the relationship between R and the percentage which is greater
than 50%, i.e. > 50%.

Customers R and % R and % (50) R and % (>50)
Tesco -0.22 0.002 -0.06
Morrisons 0.08 0.57 -0.39
Sainsbury -0.54 -0.40 0.26
ASDA -0.09 0.56 0.09
Table.7.7.The correlation between R and percentage of promotion time

From the above table, the correlation between R and promotion frequency is weak.
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Besides, Sainsbury have a relatively strong negative relationship. Tesco shows a
very week correlation in general. The small correlation coefficient shows that there
is no or little relationship between R and promotion frequency.

Morrisons and ASDA have a similar relationship between the first two types of
comparisons. Overall, there is a very weak relationship between R and all data. The
correlation coefficient is less than 0.1. It can be concluded that there is no
relationship between R and promotion frequency in general. However, they both
have a relatively strong relationship between R and promotion frequency less than
50%. The positive relationship shows that an increase in promotion frequency
increases the model accuracy. It agrees with the literature (e.g. Smith, 2000) that
consumers are willing to buy more when the products are on promotions. For a
non-frequent promotion, consumers are willing to store up the products, i.e. the
stock up effect. Interestingly, Sainsburys has an opposite result. It has a relatively
strong negative correlation. Hence, R increases when promotion frequent
decreases. However, it agreed to Campo (2006), who suggested the frequency of
promotion will decrease consumers internal reference price. Consumers are not
intended to buy as much as before.

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For promotion frequency exceeding 50%, it is defined as a heavy promotion. Both
Tesco and ASDA have an extremely low correlation. It shows that there is no
correlation between R and promotion frequency. However, Morrisons and
Sainsbury have a relatively high correlation coefficient. Morrisons shows a negative
correlation while Sainsbury shows a positive correlation. In general, higher
promotion frequency has a relatively lower R value.

From the above data, it is difficult to conclude a relationship between R and
promotion frequency. Four supermarkets do not generate the same pattern of
correlation. Moreover, they sometimes give opposite results. The impact of
promotion frequency on consumers buying behaviour cannot be determined. Under
heavy promotions, consumers may/ may not be willing to stock up the products.
When consumers change their buying attitude, the historical data may not be
accurate. Modifications and updating of data, i.e. more recent data have to be
included in the model. The influence of frequent promotions is still an open question
within literature studies. (Blattberg, 1995) Therefore, it is difficult to conclude that
the high frequent promotion will influence the consumers internal reference price,
i.e. consumers buying behaviour was affected. Hence, it may lead to an inaccurate
forecast model.
103
Chapter 8 Conclusion
8.1 Summary

This section presents the summary of the project. The areas addressed include the
trend, the statistical significance of models and independent variables, model
fitness, the relationship between R and promotion types and the relationship
between R and promotion frequency.

From the finding, we could notice that there is no trend effect on any product group.
It is mainly because of the market nature. The market is in mature phase; hence,
the sales of products are stable. The sharp increase in sales is generally resulted by
the promotions. Under non-promotional period, the sales are stable.

The F-test has been used to determine the significant level of the models. There are
only one product, within four major customers, does not have a significant model
even the data have been aggregated. Also, ASDA has the largest amount of bad
forecasts, i.e. the models that have been developed are not helpful. It is mainly
because of the missing roll back promotion data. Morrisons has the highest
percentage of good forecasts. It is because Morrisons usually repeats the same type
104
of promotions on the same product. Therefore, Morrisons have fewer promotion
types. From our finding, we notice that the models work better when there are fewer
promotion types. As a result, the model has a higher accuracy, i.e. R is larger, when
there are fewer promotion types.

Moreover, the relationship between model accuracy and promotion frequency has
been examined. It is hardly to conclude there are any relationships between the
model accuracy and promotion frequency. However, the correlations are relatively
higher when the promotion frequency is less than 50% in a year.

In addition, different supermarkets consumers have different buying pattern.
Therefore, they have different major model. The different buying pattern may
generate because of the varied target groups.

For all four customers, the seasonal factors play an important role in the models.
More than half of the models include the seasonality while holiday is relatively less
important. The stock up effect influence the consumers buying behaviour. It agreed
with Smith (2000) that consumers are willing to stock up the products for future
use.
105
8.2 Project Limitations

For any forecasting models, there are limitations which need to be addressed and
accounted for. In forecasting, there are predictable and unpredictable variables. In
the model, the predictable factors have been included. Yet, there are some factors
which are unpredictable. This section discusses the limitations of the project.

Lackman (2007) believed that the product life cycle of a particular good changes the
relationship between its sales and its marketing variables over time. A new launched
on promotion products tends to have a higher volume of sales. For example,
Sainsburys weekly sale of 500ml Coke zero is about 5000 units when it launched.
However, the weekly sale dropped to less than 2000 units after the promotion period.
In the product life cycle, the new product tends to have a rapid growth of sales.
Consumers are willing to try the new product especially when it is on promotion.
However, it is difficult to determine when the sale of new product starts to decline.
Also, it is difficult to estimate the amount of products decrease after the promotion.
For example, the normal weekly sales of all favour 500ml Coke in Sainsbury is over
15000 units. The drop of sales, 2000 units in Sainsburys case, may have a
significant influence on the forecasting model since the model does not consider the
106
impact of the new launched product.

The multiple regression model assumes that what happen in the past is going to
continue in the future. (Caruana, 2001) Government nowadays is promoting
healthy eating over the country. The sales of carbonated soft drink are influenced as
consumers prefer to buy juice and water rather than soft drink like Coke. As a result,
the pattern of the demand may have changed. Nevertheless, the impact of this
promotion has not been considered in the models.

Seasonality is one of the factors in the model. In different season, consumers tend
to have different buying habit. Nevertheless, the consumers buying pattern also
influence by the weather. The sales between this summer and last year summer are
a good example. Due to the hot weather last year, a strong sale is resulted. However,
this summer do not have any peak sales. (Loder, 2007) Weather is definitely a
variable which affect the products sales. It is an unpredictable variable. CCE is
normally forecasting the products sales at least one month ahead. However, it is
difficult to have an accurate one month weather forecast. Hence, the weather is not
included in the model although it has a strong effect on sales.

107
On the customers promotion calendar, some of the promotion structures have not
been indicated. However, the structure of the promotion is believed to be one of the
main factors within the multiple regression model. A no indication column had been
introduced. It is one of the dummy variables of the promotion structure. The no
indication promotion structures may vary every time. It may have an influence on
the model accuracy because of the unknown information.

8.3 Project Recommendations

The project limitations have been underlined in the previous section. Hence, a
number of recommendations will be presented in this section.

Data warehouse can be used in order to process individual transactions effectively
and efficiently. Data warehouse is not only used as an information collection, but
also used for decision making. (Elmasri, 2003) High quality information is required
for a companys data warehouse. (Hoffer, 2002) A data warehouse is a
subject-oriented, integrated, time-variant, and nonvolatile collection of data in
support of managements decision making process. (Inmon, 1996) This
transaction-based interaction is known as on-line transactional processing. (OLTP).
108
(Roiger, 2003) A data warehouse can provide a consistent form of data presentation.
However, data warehouse is expensive. It requires time and managerial effort. (Rob,
2007) However, Gowan (2006) claimed that 41% of 142 companies experienced at
least one failure on data warehouse project. Therefore, it is necessary for the
management team to include the important data in the database only.

Management team is suggested to review and update the models. One and a half
year data have been used in the multiple regression models. It may not enough to
determine the seasonality. By keep updating the data, the model will be more
accurate. The forecasting models that have been developed based on the historical
data. Hence, the data have to be updated. The data can be updated either weekly or
periodically, e.g. monthly. Therefore, CCE does not have to search and enter a
relatively large amount of data when a forecast is required. Time can be saved from
searching the past data.

The ASDA models accuracy can be improved when ASDA can provide the roll back
promotion calendar. A collaborative relationship between ASDA and CCE can be
developed. More promotional information can be provided to CCE by ASDA. Hence,
the accuracy of the forecasting models can be improved.
109
Moreover, the data of competitors actions are not available. The sales uplift may be
slightly lower when the same type of products of CCE and CCEs competitors are on
promotion at the same time, e.g. Coca Cola and Pepsi. Consumers who are price
sensitive will buy their preferable brand when there are two different brands on
promotion. Besides, the CCEs non-promotional sales may be reduced because of
the competitors action. Although CCE is the leader brand in the soft drink industry,
less loyalty consumers will switch brand due to the price promotions. (Alvare, 2004)
In this project, the influences of competitors actions have not been examined since
there is no information available.

Some products have all year round promotions. From our discussion, we notice that
R is lower when products are on heavy promotions. Muyldermans (2007)
suggested that a price driven forecasting model can be used. Hence, price uses
considered as a factor instead of promotion types. The models accuracy may be
improved.

Categorical variables probably work better than individual independent variables.
(Muyldermans, 2007) For example, there are two different types of promotions, X
and Y, and four seasons in a year. In the project, they were treated as independent
110
variables. However, Muyldermans suggested that they can be categorized into 2 x
4 1 = 7 different categorised variables. They are as follows:

1) X in spring, represented by 0000000
2) X in summer, represented by 1000000
3) X in autumn, represented by 0100000
4) X in winter, represented by 0010000
5) Y in spring, represented by 0001000
6) Y in summer, represented by 0000100
7) Y in autumn, represented by 0000010
8) Y in winter, represented by 0000001

Excel Data Analysis is only able to handle 16 variables. Categorized variables in this
format will generate a huge number of combinations since there are normally three
or four different types of promotions with one product, i.e. more than ten
independent variables will be generated. Also, the structure of the promotions
needs to be included in the model. Hence, advance statistical software package is
recommended. Software like Minitab and SPSS can be used. They are able to handle
more data while they are user friendly. (Wikipedia, 2007)
111
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118

Appendix 1 (Tesco original sales data spreadsheet)

119
Appendix 2 (Tesco new format spreadsheet)

120
Appendix 3 (Trend Analysis Scatter diagram)
Tesco 1.5L Oasis
0
10000
20000
30000
40000
50000
60000
70000
80000
0 10 20 30 40 50 60 70 8
CCE Week
S
a
l
e
s
0

Tesco 1L Mixers
0
100000
200000
300000
400000
500000
600000
700000
800000
0 10 20 30 40 50 60 70 8
CCE Week
S
a
l
e
s
0

121
ASDA 6 pack Core4
0
10000
20000
30000
40000
50000
60000
0 10 20 30 40 50 60 70 8
CCE Week
S
a
l
e
s
0

ASDA 2L Coke
0
20000
40000
60000
80000
100000
120000
140000
160000
0 10 20 30 40 50 60 70 8
CCE Week
S
a
l
e
s
0

122
Sainsbury's 2L Lemonade
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
100000
0 10 20 30 40 50 60 70 80
CCE Week
S
a
l
e
s
90

Sainsbury's 10 Capri Sun
0
5000
10000
15000
20000
25000
30000
35000
0 10 20 30 40 50 60 70 8
CCE Week
S
a
l
e
s
0

123
Morrisons 4 pack Powerade
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
0 10 20 30 40 50 60 70 8
CCE Week
S
a
l
e
s
0

Morrisons 1L 5 Alive
0
5,000
10,000
15,000
20,000
25,000
30,000
0 10 20 30 40 50 60 70 8
CCE Week
S
a
l
e
s
0

124
Appendix 4 (ANOVA table of Morrisons 1.5L Oasis)

125

Appendix 5 (Factors include in the products by companies)
Sainsbury

Product Promotion
type (T)
Promotion
structure (S)
Holiday (H) Seasonality
(SE)
1.5L Coke X X
1.5L Oasis X X X
1L Mixers X X X
2L Coke X X X
2L Core 4 X X X
2L Lemonade X X X
4 pack Powerade X X
6 pack Coke X X
6 pack 5 Alive X X X
6 pack Core 4 X X X
10 Capri Sun X X
100% Capri Sun X X
All 500ml X
500ml
Relentless
X X X X
750ml Applisters X X X

X indicates the factors that have been included in the model

126

Tesco

Product Promotion
type (T)
Promotion
structure (S)
Holiday (H) Seasonality
(SE)
1.5L Oasis X X X
1L 5 Alive X X X X
1L Mixers X X X
2L Coke X X X X
2L Core 3 X X
2L Fanta X X
2L Lemonade X X X
4 pack Powerade X X X
6 pack 5 Alive X X X X
6 pack Coke X X X
6 pack Core 3 X X
6 pack Fanta X X X
10 pack Capri Sun X X X X
500mk Coke X X X X
500ml Core 4 X X X
500ml Oasis X X X X
500ml Powerade X X X
500ml Relentless X X
750ml Appletisers X X X
100% Capri Sun X X X
Minute Maid X X X

127
Morrisons

Product Promotion
type (T)
Promotion
structure
(S)
Holiday
(H)
Seasonality
(SE)
1.5L Oasis X X X
1.5L 5 Alive X X
1L Mixers X X
2L Coke X X
2L Core 4 X X
2L Lemonade X X
4 pack Powerade X X X X
6 pack Coke X X X
6 pack Core 4 X X X X
10 Capri Sun X X X X
500ml Coke X X X
500ml Core 4 X X X
500ml Powerade X X
500ml Relentless X X X X
750ml Appletisers X X
Kia Ora X X X X
Minute Maid O&R X X X
Minute Maid Standard X X

128
ASDA

Product Promotion
type (T)
Promotion
structure (S)
Holiday
(H)
Seasonality
(SE)
1.5 Oasis X X X
1.5L 5 Alive X X X
1L Mixers X X X
2L Coke X X X
2L Core 4 X X X
2L Lemonade X X X X
4 pack Powerade X X X
100% Capri Sun X X X
6 pack Coke X X X X
6 pack Core 4 X
10 Capri Sun X X X
10 pack Coke X X X
150ml Coke X X
150ml Core 4 X X X X
500ml Coke X X X
500ml Core 4 X X X
500ml Relentless X X X

129
Appendix 6 (Good forecast)
R = 0.98
Morrison 6 pack Coke
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71
CCE Week
S
a
l
e
s
actual
forecast

R = 0.77
Tesco 2L Lemonade
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
1800000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71
CCE Week
S
a
l
e
s
actual
forecast

130
R = 0.87
Sainsbury 6 pack 5 Alive
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75
CCE Week
S
a
l
e
s
actual
forecast

131
Appendix 7 (Average forecast)
R = 0.53
Sainsbury 2L Coke
0
20000
40000
60000
80000
100000
120000
140000
160000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77
CCE Week
S
a
l
e
s
actual
forecast

R = 0.65
Tesco 500ml Core4
0
100000
200000
300000
400000
500000
600000
700000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71
CCE Week
S
a
l
e
s
actual
forecast

132
R = 0.6
Morrison 1L Mixers
0
5,000
10,000
15,000
20,000
25,000
30,000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71
CCE Week
S
a
l
e
s
actual
forecast

R = 0.64
ASDA 500ml Coke
0
5000
10000
15000
20000
25000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75
CCE Week
S
a
l
e
s
actual
forecast

133
Appendix 8 (Bad forecast)
R = 0.23
Sainsbury All 500ml
0
5000
10000
15000
20000
25000
30000
35000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77
CCE Week
S
a
l
e
s
actual
forecast

R = 0.39
Tesco Minute Maid
0
20000
40000
60000
80000
100000
120000
140000
160000
180000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71
CCE Week
S
a
l
e
s
actual
forecast

134
R = 0.43

Morrison 500ml Relentless
0
200
400
600
800
1,000
1,200
1,400
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45
CCE Week
S
a
l
e
s
actual
forecast

R = 0.23
ASDA 2L Coke
0
20000
40000
60000
80000
100000
120000
140000
160000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75
CCE Week
S
a
l
e
s
actual
forecast

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