How to Forecast Demand in Tender Markets
Michael Latta · The Journal of Business Forecasting Methods & Systems · 2002
Describes the structured judgment approach to forecast demand in tender markets ... tender bids are used by the buyers to introduce uncertainty in an effort to drive down the sellers' prices ... scenario manager within Excel can automatically generate expected values.for different scenarios. In my earlier articles in these pages, Excel market models were presented as useful tools for developing demand forecasts as well as monthly manufacturing resource planning forecasts. The basic approach used was for calculating unit demand and financial performance using forecasting assumptions and Excel spreadsheets. Such an approach works well in forecasting domestic demand, but requires a different approach when foreign markets are involved due to the use of tenders by foreign countries in the buying process. In fact, forecasting demand in tender markets is one of the most unnerving tasks faced by a forecasting professional. The difficulty in forecasting tenders arises because they involve a high degree of judgment in the absence of a familiar way to manage uncertainty. Thus, there is a need for a consistent, structured approach to forecasting demand for tenders that incorporates uncertainty and judgments about what might happen under different market conditions. Before I proceed further, let me first define what we mean by Tender. A tender is an agreement to buy (sell) a specified quantity of goods or services at a specified price during a specified time period. Because of restrictions in the tender, it results in product choice elimination for an individual end user or consumer, and sellers are classified into roles such as sole supplier, preferred supplier, non-preferred supplier, or non-supplier. The goals of buyers in soliciting tender bids are to introduce three kinds of uncertainty for sellers in an attempt to drive prices down. Uncertainty comes from the sellers not knowing: 1. How much the tender is worth to the buyer? 2. How much profit they can make by winning the tender? 3. their rivals think the tender is worth? Because of the uncertainty involved, tender success is difficult to forecast. Thus, tender bids do not involve reasoned knowledge or known sales histories, but are a result of judgment, common sense, and/or intuition. Playing it safe is not necessarily playing it smart because the seller may bid too low and leave money on the table. Many different kinds of markets involve tenders. Some examples include: *Federal government purchases. *Infant formula sold through the Women Infants and Children program. * The Federal Communications Commission's method of granting broadcasting licenses to private communications companies. * e-Bay auctions. * Group Purchasing Organizations buying pharmaceuticals in the U.S. * Vaccines sold outside of the U.S. EXPECTED VALUE DEFINED The expected value is one method for dealing with on tender market uncertainties through judgment. It is the dollar amount attached to success and is derived by drawing on available information on marketing tactics and strategy, anticipated reactions of competitors under different scenarios and the probability of success (expectancy). For example, if we have the opportunity to win a tender to sell 1,000 widgets at $2.50 each and we are ninety-- five percent sure that we would win at that price, then our expected value would be $2,375 = (.95 x 1,000 x $2.50). Since it involves mathematical relationships, we can ask ourselves, What if? questions, that is, how changes in our approach will result in different expected values. For example, if we decide to bid the tender at $5.00 instead of $2.50, what would be the probability of getting the tender? It would be The key to using this approach to forecasting demand in tender markets is to be able to specify the events that will occur and the probability associated with each of those events. …