Calculation of first sales forecasts

Master thesis in partial fulfillment of the requirements for obtaining an MSc degree in Business
Administration – specialization Transport & Supply Chain Management

VU Amsterdam

School Business and Economics

Name: Lynn Boot

Student number: 2611243

Date: July 25, 2018

First supervisor: dr. D.D. Tönissen

Second supervisor: prof. dr. W.E.H. Dullaert

Abstract
Nowadays, most of the demand forecasts for a consumer product is based on historical sales
data. The primary challenge for a newly introduced product arise from fact that the historical sales
data is not available. This thesis generates a simple practical model to calculate the first sales for a
newly introduced product, with its foundations set around the Bass Model. The formulation of the
Bass model requires estimation of three parameters: coefficient of innovation (p), coefficient of
imitation (q) and the total market potential (m). The these parameters can be estimated with use of
historical sales data, however the historical sales data for newly introduced products is not available.
Therefore, this thesis make use of estimated parameters of analogy products by historical data to
predict the parameters for the so called baseline Bass model, this estimation method is called looks-
like analysis. The baseline Bass model makes a sales forecast for a newly introduced product
whithout use of the matching sales data. The performance of the baseline Bass model is tested by
analyzing the fit of the model compared to actual sales data of a newly introduced product. In
conclusion, the baseline Bass model overestimates the m parameter however the p and q
parameters of the baseline Bass model give a good representation for the product category. The p
and q parameters are responsible for the shape of the Bass model and so provide more information
about the timing of the product life cycle stages; information about the product life cycle of a newly
introduced product helps companies to find the best matching inventory strategy and so decreases
overestimating or underestimating of their sales. However, in further research the estimation of the
baseline Bass model parameters needs to be improved for more accurate forecasts about the sales
for a newly introduced product. Especially the m parameter.

Keywords: Bass model, First sales forecasting, Looks-like analysis.

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 1. Introduction
Two main questions that arise when introducing a product to the market: When to produce? and
how much to produce (Winters, 1960)? Nowadays there is an increase in market uncertainty when
introducing a new product, this is caused by the difficulty in estimating the number of products that
need to be produced (Lee, Kim, Park, & Kang, 2014). Never the less short product lifecycles are
forcing managers and companies to produce new and improved products more frequently.
Therefore, planners need to forecast the demand of a new product more often and so this makes
forecasting an important factor in the success of a product. Many companies are facing problems in
finding a feasible practical model to forecast the first sales of a product, even companies with
experience in successful launches of new products have faced losses due to inappropriate decisions
on product forecasting (Negahban & Smith, 2018). Misguided decisions relating to first sales
forecasting causes different problems for companies, such as overestimating or underestimating the
sales. Overestimating the sales can result in excess inventories, while underestimation may incur
significant opportunity costs and reduce market share. Both problems have a negative impact on a
products performance (Negahban & Smith, 2018).

Recently developed methods insisting on good performance are too complicated for demand
planners to use on the job (Hong, Koo, & Kim, 2016). This thesis aims to fill a gap, to provide a simple
practical model with good performance to forecast the first sales of newly introduced products
without use of historical data. The data for this thesis is provided by the company Slimstock.
Slimstock is the market leader in inventory optimization of Europe and confirms the difficulty of
estimating the first sales of newly introduced products (Slimstock, 2018).

The challenge of forecasting a new products demand arises from the fact that forecasting the
demand for a mature-stage product is based on historical sales data, but for new products this data is
not available. The model used to calculate the first sales of newly introduced products in this thesis is
the Bass model, introduced in 1969. The Bass model gives a useful framework for viewing the
diffusion of new products, by realistic guesses about the pattern of sales growth (Bass, 2004). Until
now, Bass diffusion models are one of the top competing models to forecast the diffusion of
innovative products or technologies (Massiani & Gohs, 2015). The Bass model is based on the
approach of how current consumers and potential consumers of a new product interact. The basic
Bass model makes use of three parameters: coefficient of innovation (p), coefficient of imitation (q)
and the total market potential (m). The formula of the Bass model and the matching parameters
form the diffusion model for a product. Subsequent researchers tested the model and developed
extensions to improve the basic model. One of these extensions is related to including decision
variables, such as price, advertisement and capacity into the Bass model (Robinson & Lakhani, 1975;
Shen, Duenyas, & Kapuscinski, 2014); another extension is related to the difference in diffusion
between completely new introduced products and new generation products (Norton & Bass,
1987;Negahban & Smith, 2018). Only in a few of these cases did the extensions provide an
improvement on the basic model Bass model (Bass, 2004). So, this thesis uses the basic Bass model
as framework to analyse and predict the sales of newly introduced products.

The Bass model parameters can be estimated with use of historical sales data, however the
historical sales data for newly introduced products is not available therefore, the mean of the
parameters of analogy products are used to estimate the parameters for the so called baseline Bass
model. The purpose of the baseline Bass model is to forecast the sales for a newly introduced
product without use of historical sales data. This thesis estimates the baseline Bass model
parameters by using looks-like analysis. The parameters of analogous products with similar features
and functions is averaged into the baseline Bass model parameters (Ganjeizadeh, Lei, Goraya, &

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Olivar, 2017). In doing so, this thesis provides a practical framework to forecast the first sales of a
product with use of actual sales data from analogy products.

This thesis is designed to answer the main research question:

“How appropriate is a baseline Bass model as a practical framework to calculate first sales forecasts
for an analogous product?”

This thesis is organized as follows: In Section 2, prior literature regarding product life cycle
and Bass Diffusion models is considered. In Section 3 the methodology is explained; how the
parameters of the Bass model will be calculated and how the baseline Bass model will be
constructed. In the fourth section the results of the quantitative analysis are presented. The
discussion in the fifth section deliberates the main results of this thesis. In the last section, Section 6,
the conclusion, limitations of this study and suggestions for further research are brought forward.

2. Literature review
Calculating the first sales of newly introduced products is challenging because of the lack of
historical data. Prior literature on this topic focuses on constructing the best performing model for
forecasting the first demand. In the current economic climate Bass diffusion models are one of the
top competing models in forecasting the diffusion of innovative products or technologies (Massiani &
Gohs, 2015). Bass (1969) paper was selected in 2004 as one of the ten most frequently cited papers
in the 50-year history of Management Science (Massiani & Gohs, 2015). The lasting success of the
Bass model is due to several characteristics: Firstly, Bass diffusion models have a good face value in
comparison with other competing approaches, because of the smooth diffusion curve that it creates
(Massiani, 2013). Secondly, time series of the sales of a product is the only requirement to estimate
the Bass parameters rendering it efficient, more elaborate computations require a large set of
engineering and accounting data (Massiani & Gohs, 2015). Besides that, all subsequent and more
complex forecasting models that are based on the Bass model don’t show significant improvements
on their founding model (Bass, Krishnan, & Jain, 1994). The practical framework of the model
overcomes the problem that recently developed methods insisting on superior performance are too
complicated for demand planners to use on the job (Hong, Koo, & Kim, 2016). The simple Bass model
is a practical framework that even to this day outperform the other approaches in many different
areas of application, because of its parsimony and smooth diffusion curve (Massiani & Gohs, 2015).

This literature review starts with the theory behind the product life cycle to better
understand the background of the Bass model; thereafter, the basic Bass model is explained,
including the mathematical background of the Bass Model. Followed by discussing different relevant
extensions of the model.

2.1 Product life cycle

The basis of the Bass model is related to the adoption and diffusion of new ideas or new
products in a social system. Rogers (1962) proposes that four main elements influence the spread of
a new idea: the innovation itself, communication channels, time and social systems. Two definitions
are important in this approach namely innovation and diffusion. An innovation is an idea, practice, or
object perceived as new by an individual or other unit of adoption. Diffusion is the process by which
an innovation is communicated through certain channels during a certain time among the members
of a social system. Based on the four main elements, Rogers (1962) created different adopter
categories namely: innovators, early adaptors, early majority, late majority and laggards. The adopter
categories are based on the classifications of the members of a social system. This classification is
created by the degree of innovativeness and the degree to which an adopter is relatively more

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perceivable in adopting new ideas than other members of a system. All adopter categories represent
a percentage of the social system, see Figure 1. For example, 2,5% of the social system can be seen as
the innovators of the social system.

Figure 1: Rogers (1962) Adopter Categories.

Early adopters, early majority and late majority are also known as the imitators. Imitators are
influenced in the timing of adoption by other members of the social system (Heeler & Hustad, 1980).
Contrary, innovators decide to adopt an innovation independently of other individuals in a social
system. The importance of innovators will be greater at first but will diminish monotonically with
time. Based on this theory, Bass (1969) developed a product diffusion model.

2.2 The Bass model

In 1969, a new diffusion model is introduced based on the behavior rational of innovative
and imitative behavior. Bass (1969) develops a mathematical model of timing the initial purchase of a
new product based on the different adoption categories by Rogers (1962). The model implies
exponential growth of initial purchased to a peak and then exponential decay. The so called Bass
model is a diffusion model based upon an assumption that the probability of purchase at any time is
related linearly to the number of previous buyers (Bass, 1969).

The formula of the Bass model in words is presented below.

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑢𝑠𝑡𝑜𝑚𝑒𝑟𝑠 𝑤ℎ𝑜 𝑤𝑖𝑙𝑙 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑡ℎ𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝑎𝑡 𝑡𝑖𝑚𝑒 𝑡
= 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 𝑜𝑓 𝑖𝑛𝑛𝑜𝑣𝑎𝑡𝑖𝑜𝑛 ∗ 𝑟𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑝𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑏𝑢𝑦𝑒𝑟𝑠 (𝑖𝑛𝑛𝑜𝑣𝑎𝑡𝑖𝑜𝑛 𝑒𝑓𝑓𝑒𝑐𝑡)
+ 𝑐𝑜𝑒𝑓𝑓𝑖𝑒𝑐𝑖𝑒𝑛𝑡 𝑜𝑓 𝑖𝑚𝑖𝑡𝑎𝑡𝑖𝑜𝑛 ∗ 𝑎𝑑𝑜𝑝𝑡𝑒𝑟𝑠 ∗ 𝑟𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑝𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 (𝑖𝑚𝑖𝑡𝑎𝑡𝑖𝑜𝑛 𝑒𝑓𝑓𝑒𝑐𝑡).

The coefficient of innovation and imitation influence the number of customers who will
purchase the product at time t. The coefficient of innovation describes the degree of innovativeness
and so the value of the innovation effect. The imitation effect is influenced by the number of
adapters.

The p and q parameters are responsible for the shape of the Bass model. The Bass model
assumes that the sales of every product increases to the peak and decline afterward, like the product
life cycle. In Figure 2 shows two examples of the shape of the Bass model (Bass, 1969). The left curve
shows the classical product life cycle curve with an increase in sales in the beginning till the peak and
a decline afterwards in this case the q is smaller as the p parameter. Contrary, when the p is smaller
as the q parameter the sales start with a peak and decline afterwards (Figure 2).

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 Figure 2: Visual presentation q>p (l) and q<p (r) Bass(1969).

Bass (1969) developed the following mathematical model to estimate the coefficient of
innovation and imitation based on the sales of product. The model contributes to an understanding
of the process of new product adoption and provide good predictions of the sales peak and the
timing of the peak when applied to historical data (Bass, 1969).
𝑆𝑡 = 𝑝 ∗ 𝑚 + (𝑞 − 𝑝)𝑌𝑡 + 𝑞/𝑚 𝑌𝑡2

S(t)= actual sales (adoption) at time t.

P = coefficient of innovation.
q = coefficient of imitation.
m = potential number of sales.
Y(t) = number of previous buyers at time t.

At the point Y (0) = 0, the constant p is the probability of an initial purchase at T=0 and
present the importance of innovators for the sales of the product. So, parameter p is the coefficient
of innovation, independent of the number of previous buyers. The last part of the equation, (q/m)
*Y(T), represent the pressure operating on imitators as the number of previous buyers increases. The
parameter q is the coefficient of imitation, positively influenced by previous buyers. The last
parameter is m is equal to the total number of potential buyers.

In order to make a prediction about the sales at time t without historical data available, Bass
(1969) developed the model and excluded the number of previous buyers. The final formulation of
the Bass model is:

(𝑝 + 𝑞)2 𝑒 −(𝑝+𝑞)𝑡
𝑆(𝑡) = 𝑚 𝑞
𝑝 (1 + 𝑒 −(𝑝+𝑞)𝑡 )2
𝑝

S(t)= actual sales (adoption) at time t.

P = coefficient of innovation.
q = coefficient of imitation.
m = potential number of sales.

The Bass model is a good performing model for viewing the demand of new products for two
reasons (Bass, 2004). At first, the model avoids the unrealistic optimism that most producers face
after an exponential growth in the sales of a new product. Second, the Bass model gives a good
framework to see what the influence of innovators are on the first sales of a product. Different
papers in the literature introduced extensions on the above formula of the Bass model in order to
improve the performance of the forecast. The next Section goes deeper into the extensions and their
performance.

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2.3 Extensions of the Bass model
Two extensions of the Bass model have shown to be appropriate for many practical
applications (Bass F. M., 2004). The first extension includes decision variables, like price and
advertisement, into the model. The second extension encompasses the division between introducing
a new generation of a product or a totally new product to the market. These two extensions will be
further elaborated on below to create more insight into their performance on calculating the first
sales of new products.

2.3.1 Bass model including decision variables

The decision variables price and advertisement have an influence on the demand of new
products. The price of a product is often an important factor that helps to shape the demand (Shen,
Duenyas, & Kapuscinski, 2013). On top of that, price fluctuations for new products are common.
Therefore, it seems highly desirable to include the effects of decision variables into the Bass model.
Robinson & Lakhani (1975) introduced at first an extension of the Bass model including decision
variables. The paper concluded that decision variables should only be included in the Bass model,
when the shape of the product life cycle would be maintained (Robinson & Lakhani, 1975). This
means that the decision variables cause a shift of the curve and no reshape, so the Bass model can
still be used in an appropriate way.

Shen, Duenyas & Kapuscinski (2014) include the decision variables price and a capacity
constraint into the classical Bass model. The classic Bass model assumes that demand for innovative
products is influenced both by “external” media influence and “internal” word-of-mouth effect
however it excludes price and assumes that capacity is unlimited. The assumption of the Bass model
that capacity is unlimited needs to be questioned, because firms often have significant capacity
constraints. Shen, Duenyas and Kapuscinski (2014) modify the Bass model and take capacity into
account. This paper stated that for a new product, not only does capacity shortage result in
backlogged demand or lost sales, it also slows down the product diffusion process. Customers who
have not received the product are not able to generate positive word-of-mouth effect, so a decrease
of the imitator coefficient (Shen, Duenyas, & Kapuscinski, 2013). Nevertheless, the influence of price
and capacity on the Bass model can be refuted by the fact that price of a product is important for the
inventory level of a product. A price decrease will decrease the inventory level and this can also
happen the other way around. The ability to adjust prices is significantly more important for the
inventory level than the option of producing in advance and holding inventory (Shen, Duenyas, &
Kapuscinski, 2013). On top of that, Bass, Krishman & Jain (1994) compared the performance of the
basic Bass model to a Bass model including decision variables. The results provide both theoretical
and empirical support for the generalized Bass model, without decision variables (Bass, Krishnan, &
Jain, 1994). So, including decision variables into the Bass model will not increase the performance of
the model. However, price is an important variable after introducing the new product to adjust the
inventory level but will not change the shape of the product demand.

2.3.2 Bass model for a new generation product

The next extension, introduced by Norton & Bass (1987), makes a distinction between new
generation products and completely new products. Contrary to completely new products, the new
generation products compete with earlier ones therefore that behavior can be described as
cannibalization (Norton & Bass, 1987). Cannibalization shows the effect of a new generation of the
product that gain additional sales that would have otherwise gone to the existing product
generations. Even so, the introduction of a new generation of product to the market is more popular
than a completely new product (Lee, Kim, Park, & Kang, 2014). For these reasons, the Bass model of

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Norton & Bass (1987) provide different forecasting parameters for different generations. However,
the fit of the model to the data is not greatly improved when the p’s and q’s are allowed to vary by
generation (Bass, 2004).

Consistent with these results, the basic Bass model (without extensions) still dominates other
approaches (with extensions) in many areas of application (Massiani & Gohs, 2015). This thesis uses
the simple Bass model as framework to forecast the demand of newly introduced products.

3. Methodology
This thesis generates a baseline Bass model for a newly introduced product by using looks-like
analysis. Looks-like analysis is an estimation method that formulates the parameters of a baseline
Bass model based on the forecast analysis of an analogous product with similar features and
functions (Ganjeizadeh, Lei, Goraya, & Olivar, 2017). The baseline Bass model is formed and tested in
the following steps:

1. The p, q and m parameters for different products with similar features and functions are
calculated based on that products historical sales.
2. The fit of the different Bass models is compared to the actual sales of the products with use
of MAE, MAPE and visual presentation.
3. The products are randomly divided into a training and test set.
4. The p, q and m for the different training set products are averaged into a baseline Bass
model.
5. The baseline Bass model is tested on the actual sales data of products in the test set.
6. The performance of the baseline Bass model is compared to the fit of the Bass models
formed in step 1.

The methodology is structed as follows. At first the dataset including the different products is
discussed, the next section provides the research design behind the parameter estimation and in the
last section, the forming of the baseline Bass model is described.

3.1 Dataset
The first step in determining a baseline Bass model forecast is to select analogous product
group whose past sales data is already provided. These analogous products must have similar
features, functions and matching time of products’ launch (Goodwin, Dyussekeneva, & Meeran,
2013; Ganjeizadeh, Lei, Goraya, & Olivar, 2017). A matching time of products’ launch is important to
make sure that the economic situation of a product is comparable. The product group that fulfill
these characteristics are cleaning supplement products. All products in this product group have the
same features and function. This thesis makes use sales data of ten products out of the cleaning
supplements product group introduced in the last two years (see Appendix B). The sales dataset is
provided by Slimstock and the data analysis for this thesis is performed by excel and R studio.

3.2 Estimating parameters Bass model

In formulating the Bass model with use of historical data, three parameters need to be
estimated: coefficient of innovation (p), coefficient of imitation (q) and the total market potential
(m). Different methods are proposed in literature to estimate these parameters, named the ordinary
least square (OLS), maximum likelihood estimation (MLE), and nonlinear least squares (NLS). OLS is a
simple method but provides relatively poor performance in accuracy compared to NLS and MLE
(Hong, Koo, & Kim, 2016). The NLS is a preferred method to use compared to MLE, because MLE
seriously underestimates the standard errors of the parameters (Srinivasan & Mason, 1986). NLS
produces valid standard error estimates therefore NLS is a preferred method to MLE. NLS is a good

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performer but is dependent on the starting point of estimates, which quite frequently lead to
abnormal termination of the estimation procedure, using local search methods (Hong, Koo, & Kim,
2016). To summarize, NLS is the best performing method and OLS is the simplest method to use.
Hong, Koo and Kim (2016) developed a method to combine the two strengths of these estimation
methods, the starting point of the NLS is estimated by OLS in order to resolve the estimation errors
of both models therefore the ease of use of the OLS method and the accuracy of the NLS method are
used simultaneously to develop a hybrid method of OLS and NLS (Hong, Koo, & Kim, 2016).

The estimation of the parameters, p, q, and m by time series sales data is performed by the
following steps:

1. OLS regression is performed confirm the following formula introduced by Bass (1969), where,
2
St is equal to the total cumulative sales so far. New variables named 𝑌𝑡−1 and 𝑌𝑡−1 are
created out of the daily sales data,

2
𝑆𝑡 = 𝑎 + 𝑏 𝑌𝑡−1 + 𝑐 𝑌𝑡−1

2. The a, b, c coefficients are used to calculate the Bass model parameters. Bass (1969) stated
that parameter estimates derived from regression analysis provide good descriptions of the
growth of sales. As stated by Bass (1969), the following formulas are used,

−𝑏 ± √𝑏 2 − 4𝑎𝑐
𝑚=
2𝑐
𝑎
𝑝=
𝑚
𝑎
𝑞=𝑏+
𝑚

3. The parameters retrieved from the OLS regression are used as starting point for the NLS
analysis (Hong, Koo, & Kim, 2016). The following formula is used in the NLS regression,
introduced by Bass (1969).

(𝑝 + 𝑞)2 𝑒 −(𝑝+𝑞)𝑡
𝑆(𝑡) = 𝑚 𝑞
𝑝 (1 + 𝑝 𝑒 −(𝑝+𝑞)𝑡 )2

S(t)= actual sales (adoption) at time t.

P = coefficient of innovation.
q = coefficient of imitation.
m = potential number of sales.

After estimating the parameters of the different products, the fit of the Bass model is
compared to the actual daily sales data of the products. The fit is analyzed in a visual and
quantitative way. The Bass model is plotted in the same figure as the actual daily sales of the
products. The Mean Absolute Error (MAE) is used as the quantitative way to analyze the fit of the
Bass model. MEA is the average error between the actual sales value and the Bass model forecast.
The model fits the data perfectly when the MAE is equal to zero. When comparing the performance
of forecasting methods, the MAE is an easy understandable measurement, see the following formula
(Ramos, Santos, & Rebelo, 2015).

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 𝑛
1
𝑀𝐴𝐸 = ∑|𝑦(𝑡) − 𝑥(𝑡)|
𝑛
𝑡=1

n = total number of observations.

y(t) = actual value at time t.
x(t) = Bass model forecast at time t.

However, the problem of the MAE is that the relative size of the error is not clear. Whether
the error is big or small depends on the scale of the number of total sales. The mean absolute error
in percentage terms solves this problem. Percentage errors have the advantage of being scale-
independent, and so are frequently used to compare forecast performance between different data
sets (Ramos, Santos, & Rebelo, 2015). Mean Absolute Percentage Error (MAPE) allows us to compare
forecasts of different series in different scales, see the following formula (Ramos, Santos, & Rebelo,
2015).

𝑛
1 𝑦(𝑡) − 𝑥(𝑡)
𝑀𝐴𝑃𝐸 = ∑ | | ∗ 100
𝑛 𝑦(𝑡)
𝑡=1

n = total number of observations.

y(t) = actual value at time t.
x(t) = Bass model forecast at time t.

This thesis uses both forecasting accuracy testing methods to analyze the fit of the Bass
model compared to the actual sales of the product.

3.3 Baseline Bass model

After analyzing the fit of the Bass model to the actual sales for the different products, the
next step is to compute a baseline Bass model to forecast the sales for a newly introduced product
without use of the matching historical sales data. The term, Guessing by analogy, is an approach
which estimates the p and q parameters with use of products in the data who are most similar to
new product based on diffusion pattern features (Bass, 2004). Looks-like analysis is an estimation
method that formulate the parameters of a baseline Bass model based on forecast analysis with
similar features and functions (Ganjeizadeh, Lei, Goraya, & Olivar, 2017). The use of multiple
analogies led to improved accuracy compared to a single analogous product (Goodwin,
Dyussekeneva, & Meeran, 2013). The average values of the parameters of analogy products provides
useful generalizations for a looks-like analysis, this is a method to formulate the parameters of a
baseline Bass model based on forecast analysis of an analogous product with no historical sales data
available (Mahajan, Muller, & Bass, 1995). Consistent with these statements, the baseline Bass model
parameters are computed by averaging the parameter values of multiple analogies of products.

The dataset consists of ten products. To test the performance of the baseline Bass model,
the products in the dataset are randomly divided into a training and test sets. The training set
consists of eight products which parameters are combined into a baseline Bass model. The fit of the
baseline Bass model is compared to the daily sales data of the two other products in the data set,
namely the test set. To improve accuracy of interpretation, five different baseline Bass models are
computed by randomly formed training/test sets, see Table 1.

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 Baseline Bass Training set: Test set:
model number:
1 Product 1, 2, 3, 5, 6, 7, 8, 9 Product 4 & 10
2 Product 1, 2, 3, 4, 6, 7, 8, 10 Product 5 & 9
3 Product 2, 3, 4, 6, 7, 8, 9, 10 Product 1 & 5
4 Product 1, 2, 5, 6, 7, 8, 9, 10 Product 3 & 4
5 Product 1, 3, 4, 5, 6, 7, 9, 10 Product 2 & 8
Table 1: Test and training set for baseline Bass models.

The fit of the baseline Bass models is analyzed in a visual and quantitative way. The baseline Bass
model is plotted in the same figure as the actual sales data of the test set sales data. The MAE and
MAPE is the quantitative way to analyze the fit of the model.

4. Results
The results of the method are presented and discussed in this section of the thesis. At first, the
OLS and NLS regressions provide the parameters of the Bass models, thereafter the fit of the
different Bass models is compared to the actual sales data of the product. The next step generates
the baseline Bass models, based on the products in the training set. The fit of the baseline Bass
models is compared to the actual sales data of the products in the test set.

4.1 Estimation of Bass model parameters

The first step is estimation of Bass model parameters for the different products. The starting
point of the NLS analysis is estimated by OLS. In Table 2 the retrieved parameters of the Bass model
for the different products from the NLS are presented.

Product innovation imitation potential MAE: MAPE:

number: coefficient p coefficient q number of
adoptions m
1 0,0008441 0,001986 78490 25,33261 1.100667
2 0,001125* 0,01281* 19000* 25,17386 1.048014
3 0,001561* 0,005970* 54950* 39,36765 1.044241
4 0,0006236 0,001578 266600 60,12608 1.075553
5 0,002849* 0,002406 22980* 21,53396 0.6616414
6 0,0008285* 0,004464* 196300* 81,86548 0.7782228
7 0,001502* 0,005533* 29010* 19,50112 1.236734
8 0,001483* 0,005567* 23340* 16,34886 1.175607
9 0,001819* 0,005884* 16130* 12,38266 1.084036
10 0,001196* 0,006424* 36620* 27,44537 1.547503
*P-value<0,05

Table 2: Bass model parameters for the different products.

The NLS regression output in Table 2 shows that the products 1,4 & 5 have one or more
insignificant parameters, which implies an inaccurate Bass model. The sales data of the products do
not follow the product life cycle, which includes an increase in sales in the start-up phase and a
decrease in sales after the peak. Appendix C shows that the Bass model of product 1 and 4 has a
constant upward slope but does not include an expected decrease in sales after the peak. The Bass
model of product 5 has a constant downward slope, so no increase in sales in the beginning.
However, the quantitative analysis presents a relatively low MAE for product 1 which suggests a
good fit of the Bass model. On average, the Bass model of product 1 under or overestimated the
sales daily by 25,33261 units. The MAE of product 4 is 60,12608, see Table 2. The difference between

10
the two MAE values seems high, but the MAPE percentage is comparable. The m parameter of
product 4 is 8.490 compared to 266.600 of product 1, this suggests that both products have a similar
fit for different scales of m. The MAPE of product 5 is 0.6616414% and this is the lowest percentage
for all products. The visual presentation of the product 5 shows that the daily sales are relatively
stable with two peaks as exception. In summary, the visual and quantitative analysis suggest a good
fit of the Bass model for products 1, 4 & 5 despite the insignificant parameters. The Bass models with
significant parameter have a comparable fit to the Bass models with insignificant parameters (Table
2).

The visual explanation for the difference between the MAE and parameter m for products 6
& 10 are presented in Appendix C. Product 6 has a relative stable demand with only two small sales
peaks of one or two days. Product 10 has highly fluctuating demand from day to day, which causes a
high MAE. The difference in MAPE percentage suggest that a product like number 10 with a small m
and highly fluctuating demand is more difficult to forecast by the Bass model, contrary to the high m
parameter and stable demand of product 6. The Bass model is not able to anticipate to huge sales
peaks or follow highly fluctuating demand.

The demand for the different products can fluctuate in different patterns. For example, the
visual presentation in Appendix C shows for product 2 a relative stable demand including a long sales
peak of 30 days. On the other hand, product 3 has a constantly fluctuating demand. Both products
have a different type of fluctuating demand pattern but the MAPE value of product 2 & 3 are close,
namely 1.048014% and 1.044241% (Table 2). The Bass model is capable to find a stable demand
pattern with similar fit for different type of fluctuating demand patterns.

Figure 3: Scatterplot p and q parameters.

The scatterplot in Figure 3 present the p and q parameters of all 10 products. The p
parameter value is between 0,0008441 and 0,002849. The q parameter has a value between
0,001986 and 0,01281. In the next Section, these parameters will be combined to form the
parameters of the baseline Bass model. The parameters for the baseline Bass models are expected to
fall in the center of the scatter plot and so give a good representation of the ten products.

11
 To conclude, the Bass models with insignificant parameter does not follow the classical shape
of the product life cycle but still provide a good fit compared to the Bass models with significant
parameters. Additionally, the Bass model can give the same performance for different demand
pattern types but is not capable to anticipate to huge sales peaks or highly fluctuating demand. The
Bass model finds the best fitted smooth demand pattern.

4.3 Baseline Bass model

The average of the Bass model parameters with historical data available are used to estimate
the parameters of the baseline Bass model and then the ten products are randomly divided in five
different test and training sets. In table 3, the parameters of the five different baseline models are
presented.

Baseline Bass Test set: p: innovation q: imitation m: potential

model number: coefficient coefficient number of
adoptions
1 Product 4 & 10 0,001501 0,005578 55025
2 Product 5 & 9 0,001466 0,005685 56685
3 Product 1 & 5 0,001267 0,006029 80243,75
4 Product 3 & 4 0,001456 0,005634 52733,75
5 Product 2 & 8 0,001403 0,004281 87635
Table 3: Baseline Bass model parameters.

The p and q parameter value of the different baseline Bass models are in a narrow range
compared to the scatterplot in Figure 3 The p value is between 0,001276 and 0,001501 and the q
value between 0,004281 and 0,006029. This range can also be seen as the center of the scatterplot in
Figure 3. The m parameter has a range between 52733,75 and 87635. The baseline Bass model 3 & 4
have a relative high m parameter compared to the other three models.

In Table 4 are the MAE and MAPE of the different baseline models presented compared to
actual sales data of the test set products.

Baseline Bass model: Test product: MAE: MAPE:

1 4 94,5026 0.8141073
1 10 45,85685 2.732825
2 5 72,64369 2.527026
2 9 78,64369 5.001796
3 1 80,92172 2.898496
3 5 109,146 3.826938
4 3 40,82708 0.958675
4 4 98,25854 0.8063263
5 2 105,9897 4.724998
5 8 106,9702 5.423568
Table 4: MAE and MAPE of the different baseline models compared to actual sales data of test set.

The MAPE value of the baseline Bass model, so the Bass model computed by the sales data
of analogy products, is on average higher as the Bass model with historical data available. The worst
performing baseline Bass model is number 5, with a MAPE of 4.724998% and 5.423568%.
Nevertheless, the best performing baseline Bass model (number 4) has with a MAPE percentage
under the 1% a lower MAPE percentage as most Bass models with historical data available. In Figure
4 the visual performance of baseline Bass model 4 & 5 is presented.

12
 Figure 4: Visual presentation of the baseline Bass model number 4 & 5 on the actual sales of the test set.

The baseline Bass model number 5 highly overestimate the actual sales of two products in
the test set. This suggests that the m parameter is overestimated and so that the Bass model
operates at the wrong scale and causes a relatively high MAPE. The baseline Bass model number 4
operates at a better scale, this is supported by the low MAPE value.

Overall, baseline Bass models 1 & 4 provide a similar fit to the data as the Bass model with
historical data available, however baseline Bass model 2, 3 & 5 have a significant higher MAPE
percentage. The visual presentation in figure 4 and Appendix E explains that an overestimation of the
sales causes the high MAPE percentage. The value of the parameter of m and so the scale of the sales
is overestimated. The p and q parameters of the baseline Bass models are in a narrow range
compared to the Bass models with historical data available and can be placed at the center of the
scatterplot in This suggests that the parameters are a decent representation of the product group.

5. Discussion
In confirmation of the findings of Massiani & Gohs (2015), the Bass model is a useful method to
create a smooth demand pattern model about the sales of a product. The Bass model based on the
historical sales of the product gives a good fit to the actual sales of the product even with
insignificant parameters and different sales patterns. The drawback of the Bass model is that the
model cannot respond to high sales peaks or highly fluctuating demand.

For newly introduced product without historical data available is estimating the appropriate
parameters for the Bass model essential for a good prediction of the sales. The problem that the
baseline Bass models face in this thesis, is the value of the parameter of the potential adopters (m)
and so the scale of the sales. This thesis overestimated the value m parameter in most baseline Bass

13
models which causes an increase in the MAPE percentage compared to the Bass model with use of
matching historical data.

The coefficient of imitation and innovation of the baseline Bass models gives a decent
representation for the products in the test set. This suggest that the baseline Bass model parameters
p and q can predict the shape of sales forecast in an appropriate way and so increase the information
about the stages of the product life cycle. This outcome is useful for companies like Slimstock,
because more information about the timing of each stage in the product life cycle helps to find the
best matching inventory strategy and so decreases overestimating or underestimating of their sales
(Aitken, Childerhouse, & Towell, 2003). In this way the Bass model avoids the unrealistic optimism
that follows up after an exponential growth in the sales of a new product (Bass, 2004).

6. Conclusion, Limitations and Future research.

In answering the following research question: “How appropriate is a baseline Bass model as a
practical framework to calculate first sales forecasts for an analogous product?”
A baseline Bass model will help companies like Slimstock to provide more information about the
shape of the product life cycle by estimating representative p, q parameters for the product group
however, it is apparent that the baseline Bass model is not capable to give an accurate estimation of
the m parameter. In most cases, the sales are overestimated by the baseline Bass model.

One of the possible reasons for the instable coefficient m and eventually the insignificant
parameters of products 1, 4 & 5 is the lack of data. The Bass model cannot be applied when not
enough sales data is available (Lee, Kim, Park, & Kang, 2014). This thesis used data of the first year of
a product newly introduced to the market. In most cases this time span does not fulfill the product
life cycle. Massiani (2013) discusses the difficulties of parameter m by questioning the definition of
cumulative sales and the time span related to the cumulative sales. Normally, the Bass model
parameters are based on the whole life cycle of a product including a start-up phase and declining
phase. The m parameter estimated from sales data that does not fulfill the whole product life cycle
seems very restrictive (Massiani, 2013). Srinivasan & Mason (1986) stated: “The results are not
reliable when only 4 years or less are used to estimate the parameters” (Srinivasan & Mason, 1986).
More accurate estimation of the parameters in the baseline Bass model will increase the quality of
the assumptions about the stage in the product life cycle. In order to improve the sales forecast of
newly introduced product, the accuracy of the Bass model parameters needs to be improved.
Therefore, the first suggestion for improvement is estimating the Bass model parameters with sales
data from 4 years or more. Unfortunately, there is a possibility that after 4 years an analogy product
will be produced in another economic environment. In this case, the use of an exogenous retrieved m
parameter can be a useful suggestion for further research.

Massiani & Gohs (2015) propose a two-step approach to combine the estimation of the
parameters in a quantitative way and based on literature. These two steps will decrease the error
related to the instable m parameter. In the first step the q parameter could be estimated from the
Bass model with exogenous determined m. In a second step the p parameter could be estimated by
the exogenous m and estimated q parameter. Additionally, p will be calculated by different
combinations of exogenous retrieved m parameters. The suggestion for further research is to
compare the exogenous parameter and the estimated parameters. One of the options to exogenous
conduct the value of parameter m is looking at past literature. Another option is retrieving the
exogenous m parameter by looking at the influence of online reviews. The influences of various
aspects of online reviews plays an important role when launching new products (Cui, Lui, & Guo,
2012). Online review can increase the credibility about the estimation of parameter m.

14
 Another suggestion for further research is to use decision variables to estimate the m parameter.
Robinson & Lakhani (1975) concluded that the decision variables can cause a shift of the curve and
no reshape. This means that the value of the p and q parameters are constant, but the m parameter
is dependent on decision variables. Further research can investigate the influence of decision
variables on the differences of parameter m between the different products. For example, price can
have a relation with the m parameter. Increase in price can cause a decrease in parameter m and the
other way around. However, it is not possible to include the decision variables into the Bass model
because of the relationship between the p and m parameter. The p value is highly sensitive to the
market potential parameter m. So, for plausible values of m, p varies on a high scale (Massiani &
Gohs, 2015).

15
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Ganjeizadeh, F., Lei, H., Goraya, P., & Olivar, E. (2017). Applying Looks-like Analysis and Bass Diffusion
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Goodwin, P., Dyussekeneva, K., & Meeran, S. (2013). The use of analogies in forecasting the annual
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Jiang, Z., Bass, F., & Bass, P. (2006). Virtual Bass Model and the left-hand data-truncation bias in
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Mahajan, V., Muller, E., & Bass, F. M. (1995). Diffusion of new products: Empirical generalizations and
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Massiani, J. (2013). The use of Stated Preferences to forecast alternative fuel vehicles market
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17
 Appendix
Appendix A: Literature review
Author Year Title Journal Keywords Model Variables used for
used forecasting
Frank M. Bass 1969 A new product Manageme Initial purchase, Growth Number of previous
growth for model nt Science Bass model, Model buyers, coefficient of
consumer durables. forecasting imitation, coefficient
of innovation.
Frank M. Bass 2004 Comments on "A Manageme Bass model, Bass Model Generations, price,
New Product Growth nt Science forecasting, discussion. advertisement.
for Model Consumer new products.
Durables the Bass
Model".
Norton and 1987 A diffusion theory Manageme new products Extension Parameters for the
Bass model of adoption nt Science introduction of Bass repeat buying rate per
and substitution for Model, adopter for each
successive including generation.
generations of high- buying
technology products. behavior of
different
generation
s.
Robinson and 1975 Dynamic price Manageme Bass model Extension
Lakhani models for new- nt Science Bass model
product planning.
Bass et al. 1994 Why the Bass Model Manageme diffusion of new Bass model Imitation, innovation,
fits without decision nt Science products, Bass including price, advertisement.
variables. model, decision decision
variables. variables,
price and
advertising.
A. Negahban 2018 Optimal production- Internation Bass model, Extension
and J.S. Smith sales policies and al Journal forecasting, of Bass
entry time for of new products. Model
successive Production
generations of new Economics
products.
K.B. Kahn 2014 Solving the problems Business New product
of new product Horizons forecasting.
forecasting.

W. Shen, I. 2013 Optimal pricing, Manufactur Bass diffusion A Bass diffusion model
Duenyas and R. production, and ing & model, supply generalizati where price
Kapuscinski. inventory for new Service constraints. on of the production, and
product diffusion Operations classic Bass shipping are decision
under supply Manageme model. variables that need to
constraints. nt be determined during
the whole product life
cycle.

18
P.J. Danaher et 2001 Marketing-mix Journal of Diffusion Model for Marketing-mix
al. variables and the Marketing model, Bass diffusion of variables, such as
diffusion of Research model. successive price.
successive generation
generations of a s of a
technological technologic
innovation. al
innovation
that
explicitly
captures
the effects
of
marketing-
mix
variables.
Jiang, Bass, Bass 2006 Virtual Bass model Internation Bass model, Virtual bass Guessing by analogy
and the left-hand al Journal diffusion, new model
data-trancation bias of Research product
in diffusion of in forecasting.
innovative studies. Marketing
McCarthy and 2001 Implementing Internation Product - Interview based.
Golicic. collaborative al Journal forecasting.
forecasting to of Physical
improve supply chain Distribution
performance. & Logistics
Manageme
nt
Tseng and Hu 2008 Quadratic-interval Expert Bass model, Quadratic- Combined, fuzzy
Bass model for new Systems regression interval regression and Bass
product sales with analysis. Bass model.
diffusion. Application model.
s

P.R. Winters 1960 Forecasting sales by Manageme Forecasting Exponential Historical sales.
exponentially nt Science product sales. ly weighted
weighted moving averages
averages. forecasting.
Cui, Lui and Guo 2012 The effect of online Internation New product
consumer reviews on al journal of sales.
new product sales. electronic
commerce.
Rogers 1962 Diffusion of Simon and Product life
innovations. Schuster cycle

19
 Massiani and 2015 The choice of Bass Research in Bass diffusion Bass model Number of previous
Gohs model coefficients to Transportat model. buyers, coefficient of
forecast diffusion for ion imitation, coefficient
innovative products: Economics of innovation.
An empirical
investigation for new
automotive
technologies.
V. Srinivasa, 1986 Nonlinear Least Marketing Diffusion Bass model Nonlinear least
Charlotte H. Squares Estimation Science models, squares regression
Mason of New Product forecasting,
Diffusion Models new products
Heeler and 1980 Problems in Manageme Rogers, new Bass model Time-series data
Hustad predicting new nt Science products
product growth for forecasting
consumer durables.
Lee, Kim, Park 2014 Pre-launch new Technologic Bass model, Bass model Estimation of the
and Kang product demand al forecasting, parameters by OLS,
forecasting using the forecasting new products. MLE, NLS.
Bass model: A and social
statistical and change
machine learning-
based approach.
Aitken, 2003 The impact of Internation Product life
Childerhouse product life cycle on al Journal cycles
and Towill supply chain of
strategy. Production
Economics
Ganjeizadeh, 2017 Applying Looks-like Procedia Looks-alike Bass model Bass model
Lei, Goraya and analysis and Bass Manufactur analysis parameters
Olivar Diffusion Model ing
Techniques to
Forecast a
Neurostimulator
Device with no
Historical data.
Goodwin, 2013 The use of analogies IMA Journal Diffusion Bass model
Dyussekeneva in forecasting the of models, new
and Meeran annual sales of new Manageme product
electronics products nt forecasting,
Mathemati analogies
cs
Hong, Koo and 2016 Easy, reliable European NLS, OLS, Bass model Hybrid approach of
Kim method for mid- Journal of forecasting, NLS and OLS to
term demand Operations new product estimate the
forecasting based on Research diffusion parameters
the Bass model: A
hybrid approach of
NLS and OLS.

20
 Mahajan, 1995 Diffusion of new Marketing New product Bass model Managerial insight of
Muller and Bass products: empirical Science forecasting and the Bass model.
generalization and extensions
managerial uses
Massiani 2013 The use of stated Italian Bass model Stated -
preference to Journal of Preference
forecast alternative Regional method
fuel vehicles market Sciences
diffusion:
Comparisons with
other methods and
proposal for a
synthetic Utility
function
Ramos, Santos 2015 Performance of state Robotics Forecasting ARIMA MAE, MAPE used to
and Rebelo space and ARIMA and models, MAE, models test accuracy
models for consumer Computer- MAPE
retail sales Integrated
forecasting Manufactur
ing

21
Appendix B: Description of the ten products in the dataset.

Description: Minimum Order Quantity Buffer Stock lead-time (month)

1 MICROVEZELDWEIL 960 1042 0,46

2 MULTI DOEK 3000 0 0,09

3 DOEKJES EXTRA STERK 864 457 0,46

4 MICROVEZELDOEKJES 1056 1365 0,46

5 CITRUS DOEKJES 520 263 0,23

6 SCHOONMAAKDOEKJES 384 1741 0,46

7 DOEKEN COLORS 800 955 0,09

8 ZILVERPOETSDOEK. 4200 0 0,23

9 GELE DWEIL 1024 0 0,09

10 DWEIL 1170 898 0,46

Appendix C: Bass model versus actual sales of the products

Product 1: Product 2:

Product 3: Product 4:

22
Product 5: Product 6:

Product 7: Product 8:

Product 9: Product 10:

Appendix D: R studio code.

## Dataset in the right structure, sales per day.
➢ newData <- read_excel("newData.xlsx", sheet = "Product_1")
➢ cdata1=ddply(newData, c("issueDate"), summarise, sold=max(Day))
## Set the data in time series.
➢ Sales1=ts(cdata10$sold)
## Create new variable consisting of commulative sales and put into time series data
➢ Y1=cumsum(Sales1)
➢ Y1=ts(Y1)
## Create new variable that expresses the Y-1 and Y2.
➢ Y=c(0,Y1[1:(length(Y1)-1)])
➢ Ysq=Y**2
## Regression analysis to compute the coefficients.
➢ out1=lm(Sales1~Y+Ysq)

23
 ➢ a1=out1$coef[1]
➢ b1=out1$coef[2]
➢ c1=out1$coef[3]
## Estimate the value of the parameters following the literature.
➢ Mminus1=(-b1-sqrt(b1**2-4*a1*c1))/(2*c1)
➢ m1=Mminus1
➢ p1=a1/m1
➢ q1=b1+p1
## Plot the predicted sales of the Bass model and the actual sales in one graph.
➢ BassModel=function(p1,q1,m1,T=100)
+ {S=double(T)
+ Y=double(T+1)
+ Y[1]=0
+ for(t in 1:T)
+{
+ S[t]=p1*m1+(q1-p1)*Y[t]-(q1/m1)*Y[t]**2
+ Y[t+1]=Y[t]+S[t]
+}
+ return(list(sales=S, cumSales=cumsum(S)))
+}
➢ Spred1=BassModel(p1,q1,m1,T=400)$sales
➢ Spred1=ts(Spred1)
➢ ts.plot(Spred1, Sales1, col=c("blue","red"), xlab="Days", ylab="Sales")
➢ legend("topleft", legend=c("Bass model","Actual"), fill=c("blue","red"))

## Function nls - estimates parameters using the method of nonlinear least squares.
For every product the following procedure:

➢ T1=1:length(Sales1)
➢ Bass.nls1<-nls(Sales1 ~ M*(((P+Q)^2/P)*exp(-(P+Q)*T1))/ (1+(Q/P)*exp(-(P+Q)*T1))^2,
start=c(list(M=m1,P=p1,Q=q1)))
➢ summary(Bass.nls1)

## Calculate the MAE and MAPE value

➢ MAE(Pred1, Sales1)
➢ MAPE(Pred1, Sales1)

Appendix E: Actual sales test products vs baseline Bass model.

24
Appendix F: Portfolio enclosure
The main goal of the method used in this thesis is cost minimization. An accurate forecasting model
will lead to lower inventory costs and so an increase in profit for the company in dispute. This section
discusses the ethical side effects of the model used in this thesis.

Utilitarianism
Optimization in forecasting first sales forecasts causes welfare for the relating companies but how is
the welfare for the whole society. In ethics this subject is called utilitarianism (Mill, 2016). The main
question is: Is cost minimization relating to this model good for the welfare of the whole society? In
order to evaluate this question, the different stakeholder of the model are discussed. Stakeholders
are members of the society who has direct or indirect relation with the model. All of the stakeholders
have an influence, responsibility or benefit of the model. The different stakeholders are:

- Slimstock: the company developing the management inventory system and invests in the
model improvement. The inventory management system has an responsibility of a good
working system. When the system brakes down, the direct negative effect are for the
stakeholders down the supply chain. Slimstock has an knowledge advantage over their
customers. For their customers it is difficult to value the service that they provide. The only
comparison are the competing inventory management systems. Slimstock and competing
companies in the sector have a responsibility to sell the service for an “fair” price. The
dilemma for Slimstock is to design a better inventory management system as the
competition but at low cost.
- The customers of Slimstock: companies who use the inventory management system, mostly
retail stores. Customers has as objective to minimize costs and so generate profit. The

25
 management inventory system has cost minimization as purpose. The costs of maintaining or
building the inventory management system is not an issue for the customer.
- Customers of the customers of Slimstock. The objective for this group is the best quality-
price ratio for the product they buy.
- Another important stakeholder is the government. The government has an environmental
responsibility. The model developed in this thesis needs to take environmental responsibility.
An adjustment in the demand forecast can cause a change in the use of trucks or other
transportation methods used to fulfill the demand. The model can cause costs minimization
but an increase in CO2 emission as well.

The different stakeholders can receive welfare from the model developed in this thesis. The welfare
gains for one stakeholder can be losses for the other stakeholder. A dilemma about the deviation of
the welfare arises. Slimstock wants to improve the inventory system only when this provides a
benefit for them. The retailers want a constantly updated inventory system, but want to pay
minimum cost for the system. The dilemma for Slimstock is, at what price do we implement the new
model that reduces inventory costs. What is the market share that we gain with introducing the
improvement in comparison with the costs of implementation. The welfare for other stakeholders
needs to be considered as well. What is the welfare for the customers in the retail store? The cost for
a product maybe increase because of the improvement in the system, however this means that the
product is always available (no underestimation of the sales). The last stakeholder, the government:
Does the model causes an increase or decrease on CO2 emission? The dilemma that arise is, what are
the virtual costs for a unit increase in CO2 emission. The model can also cause an decrease in number
of trucks on the road, this gains welfare for the environment. On the other side, less trucks needed
means less drivers needed. People will loose their job because of the model.

To further investigate the question, does the model improve the overall welfare for the society?, the
rules related to what do we find important are essential to define. The objectives/rules of the society
need to be clear. Business can be seen as a game with his own rules. But how do we form these rules
as society? The essence of the "Gordon Gekkoeffect" gives answer to this question. The “Gordon
Gekkoeffect” state that we do not work in a vacuum and what we find acceptable is formed within
the society (Lo, 2015). The four factors that influence the rules of the society are:

1. Authority: The authority issue shifts the problem to the role of the leader. Slimstock will be using
the model in their inventory system. Most negative environmental or job related side responsibilities
shifts to them in this case.

2. Composition: Moral blindness due to the composition of the group. The composition of the
organization shifts the problem to the interests of the group. The main interest of 3 out of 4
stakeholder in this thesis have an objective of cost minimization. The moral side effects of the cost
minimization is a blind spot. In my opinion, the negative side effect of the model by for example
more trucks that have to be on the road is the responsibility of the whole supply chain. More truck
means more CO2 emission and increase of traffic jams.

3. Environment: Competition within the Transport & Supply Chain sector. The environment shifts the
moral issue to what the bigger system thinks of it. Environment is an issue that only the government
has a responsibility for in general. The government need to justify to other countries the level of CO2
emission. The stakeholders who have a responsibility to the next generation mostly falls in the moral
blindness.

4. Incentives: Perspective of individual utility maximization. Incentives shift the moral problem to
what it implies for my own wallet. Stakeholders are intended to prefer the short term benefit over

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the long term benefit. So cost minimization over the moral problems like CO2 emission or dismission
of employees. The model changes the work of first sales forecasting for the planner, this requires
employees with different skills and so in some cases new employees.

In my opinion all the stakeholder involved in the supply chain process need to take responsibility for
the moral and environmental side effects of implementing a new model for first sales forecasting and
so improve the overall welfare. The most difficult question is: who is responsible for what? Slimstock
is the company who causes the changes in the model and so need to take most responsibility.
However, the stakeholder who pays for the change and take the changes in practice are the retail
stores. The next section goes deeper into the chain responsibility dilemma.

Chain responsibility
Cost minimization stimulates a supply chain with more companies involved. More companies
involved in a supply chain means more specialization and so minimization of costs. The drawback
that arise with a broader supply chain is deviation of chain responsibility. Deviation of the
responsibility of the negative side effect of implementing the forecasting model is a difficult
dilemma. Chain responsibility consists of:
- Human rights: Relating to labor condition of employees all over the supply chain. For
example, is Slimstock responsible for employees in the factories who produce the products?
Or, are the customers of Slimstock responsible for the way how the products are used by the
society? For example, many retail stores sell cream patterns. Cream patterns are used as the
hard drug, laughing gas. Are these retail stores responsible for the negative effects on the
society?
- Climate change: as mentioned earlier, the model stimulates a change in the demand
forecasts of different products. This change causes different transportation schedules. The
supply chain is responsible for the climate change. The ethical question is: Is Slimstock
responsible for the climate change when because of the model more trucks will be used by
the retail stores?
- Sustainability: The sustainability paradox means that growth of emerging market, improves
the global living standard and helps the poor to develop, but this growth put pressure on
resources and the environment. The model developed in this thesis causes optimization in
minimizing cost, but if this improvement do not become sustainable the current level of
welfare cannot be maintained. Meadowns at al. (1972) concludes that a steady state
economy is the best solution. Quick improvements in cost minimization needs to be
maintained. Different factors increases the focus on supply chain sustainability. At first, to
reduce risk and improve the financial performance of the supply chain. This a positive aspect
of the generalized Bass model in this thesis, the model increase the information about the
product life cycle and so reduce risk. Secondly, community pressures and government
mandates. For example, the stakeholder government need to come up with incentives to
reduce the CO2 emission. The last factor is attracting customers that value sustainability. This
is not only the case for Slimstock, but this is the responsibility for the whole supply chain.

In my opinion chain responsibility is challenging to spread between the different stakeholders of the
supply chain, but every stakeholder need to do what the stakeholder is capable of. This is difficult,
because sustainability is challenging when it requires efforts that do not provide obvious return on
investment for companies. On the other side, when stakeholder focus on the long term in most cases
sustainability equals profit for companies.

References
Mill, J. S. (2016). Utilitarianism. In Seven Masterpieces of Philosophy (pp. 337-383).
Routledge.

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 Meadows, D. H., Meadows, D. L., Randers, J., & Behrens, W. W. (2016). The Limits to growth:
A report for the Club of Rome’s project on the predicament of mankind. Washington, DC: Potomac
Associates; 1972.

Lo, A. W. (2015). The Gordon Gekko effect: The role of culture in the financial industry (No.
w21267). National Bureau of Economic Research.

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