Academic journal article The Journal of Business Forecasting Methods & Systems

Sales Forecasting System at Mary Kay Cosmetics

Academic journal article The Journal of Business Forecasting Methods & Systems

Sales Forecasting System at Mary Kay Cosmetics

Article excerpt

Developing and maintaining forecasting functions at a corporation are a challenge. As I discussed forecasting with my colleagues, we discovered a common list of challenges--some have existed at Mary Kay at times during the last 20 year. For example, the common list of challenges includes the following: No one is sure to whom the forecasting function should report. Management sometimes does not understand statistical forecasting methods, much less understand their strengths and limitations. The tendency is to override the forecast with intuition.

Another challenge discussed was overwhelming politics. As a result the forecasting system may encounter management inaction and neglect. For example, a SKU forecast may be developed by one function and overridden by another function, with two different groups measuring forecast accuracy. The net result can be humorous. One department's report may show that actual significantly exceeded forecast while the other, just the opposite (a true story).

BACKGROUND

Mary Kay Cosmetics is in both the cosmetics and direct sales industries. The products include skin care and glamour items. Both these items have perceived need as well as fashion elements. In addition, Mary Kay offers opportunity, especially for women, through our sales force. Therefore, we have to consider both fashion and income opportunity characteristics when modeling firm sales behavior. Similar to other cosmetic companies, we offer various promotions to stimulate sales activity. These promotions typically take the form of a special discount, such as lower prices at various order quantities or additional product at various order levels, or a special new product at an introductory price. New products may be offered only for a limited time or added permanently to our lines of products.

FORECASTING SYSTEM

We forecast sales at the corporate and SKU level. The function reports to the Chief Financial Officer. Sales are forecast using an econometric sales model. SKU sales are forecast using ratios and moving averages. The total SKU sales are forced to total the econometric model forecast. Promotional sales and new products are forecast by a committee using analogous product information and occasionally marketing research studies. Finance, Sales, Marketing, Distribution, and Manufacturing all provide input to the committee responsible for preparing forecasts. The SKU forecasts are modified by Distribution during the month when additional demand data become available.

EVOLUTION IN THE FORECASTING SYSTEM

The current forecasting system evolved from the need to have a formal forecast when the firm's sales reached approximately $35 to $50 million. Sales are currently over 20 times larger. We initially designed a simple system to forecast sales which management could understand. Sales and marketing analysis reporting was designed to track inputs used in the system. The chief marketing executive was included as a partner in the design of the forecasting and reporting systems. His input was needed to understand better the marketing and sales dynamics as well as to gain an ally. Any forecast and sales analysis system must be conceptually understood and successfully used by the top management.

Since Mary Kay Cosmetics was a direct sales company, the forecast and reporting process was designed around the sales force and its productivity and ordering pattern. We initially forecast sales force size and productivity using trend extrapolation and decomposition. The results were measured and reported. This made it possible to make observations about the impact of various sales and marketing programs on sales and sales force. …

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