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ASSIGNMENT

Note: Questions asked in the mail are answered in the end.

COST:

Cost of Extra Position per quarter = Averages sales per employee * Proportion of employee costs to annual sales/4.

This assumes extra positions are distributed randomly across roles.

In this case, we are taking the average sales for the last 4 quarters and the average number of employees for last 4 quarters to even
out any randomness in the average sales per employee figure

The proportion of employee costs to total annual sales can be sourced from annual report.

As we are collecting quarterly data, we are assuming that we can do course correction every quarter. This explains the (1/4).

Cost of unfilled position = cost of extra position * (1+ Operating Profit)

Operating Profit in 2014 = 18% (17,9255 lakh)

Net Sales in 2014 = 98,0627 lakh

Employee Cost in 2014 = 77222 lakh

Proportion of Employee Cost to Annual Sales = 77222/980627 = 0.079

METHODS:

In the following methods, all four forecasted quarters are dependent on the actual employee strength of the previous quarter, i.e., the following
methods of forecasting can be used only for single quarter.

Moving Average (M.A.)


Moving Average Weighted (M.A.W.)
Exponential Smoothening (E.S.)

a. Exponential Smoothening (Best Method):

We found that with Alpha = 0.9, Exponential Smoothening is the most efficient method at forecasting. Cost = 176.82 lakhs Rupees.

By assuming such a high Alpha, we are inherently assuming that the company will not go under a layoff or downsizing period post 2015.
This assumption, till date, is true. As this is a branch of Nestl S.A., we believe that Nestl India Ltd. will not undergo any massive
changes until and unless there will be any change in the countrys foreign policy (rare chance).

Note: By varying the Alpha value from 0.2 to 0.9, we found that only if Alpha is less than 0.86, then the Moving Average Weighted
Method becomes the most efficient method.

We also found that the above three methods are lot more cost efficient than other methods because:

1. They dont consider sales data. Hence, avoid the effect of the uncertain dip in sales caused due to Maggi ban in 2015.
2. Each of these methods try to average out the curve. Averaging was significant as the employee strength of Nestle India has less
fluctuation.

However, as we have suggested above, M.A., M.A.W. and E.S. methods can only predict for a single quarter. Hence, to find the efficiency
of these methods, we should check the cost for Gap Analysis for the 29th quarter. We can observe that Exponential Smoothening is still
the best method with alpha value at least equal to 0.86. The second-best method after exponential method is Moving Average Method.

Note: With exponential smoothening (alpha = 0.86), we allow little more fluctuations during forecasting. Cost = 179.21 Lakhs Rupees

b. Moving Average:

Assumptions: No. of Samples, n = 4

We are assuming that the employee strength can be forecasted based on the average of last four quarters.

Cost = 185.20 lakhs rupees


This is the second-best method to predict a single quarter employee hire data.

c. Moving Average Weighted:

Assumptions; No. of Samples, n = 4.

We have used Solver tool to minimize the gap cost using various weights. We have tried to minimize the total cost. However, as this
method is only useful for individual quarter, we have also tried to minimize the 29th quarter cost using Solver.

Minimum Total Cost Minimum 29th q cost


n 4 n 4
w1 0.523001 w1 0.4975
w2 0.0885 w2 0.0975
w3 0.3 w3 0.3075
w4 0.0885 w4 0.0975

Cost = 179.75 lakhs rupees

This is the second-best method to predict next four quarters employee hire data.

d. Trend Overall/Moving/Seasonal

In the overall Trend analysis, we are assuming that the employee hire pattern follows a linear trend from 2008 to 2015. Cost = 461.28
lakhs rupees
In the Moving trend analysis, we are assuming that the trend is repeated every year. Cost = 209.18 lakh rupees
In the Seasonal Trend analysis, we are assuming that the trend is repeated seasonally. (every respective quarter). Cost = 1189.5 lakh
rupees

We can see that except Moving Trend analysis method, rest of the trend analysis methods are quite ineffective as 2015-employee-
strength data doesnt follow the existing trend (due to uncertainties pertaining to Maggi Ban).

Note: Moving Trend analysis method is the best method if we are forecasting for multiple quarters.
e. Ratio Analysis (Fixed/Moving):
In the ratio analysis, we are trying to predict the future employee strength based on future sales. However, in 2015, due to Maggi ban
followed by the ban-lift, there were huge fluctuation in the sales of Nestle India Ltd. Hence, this method is not a good predictor.

f. Regression:
Despite of having t-stat>2 and Adjusted R Square Value >64%, the huge gap in the actual data and regression forecast can be contributed
to the Maggi ban event. 2 reasons:

1. During this period, the company went through a strategic restructure by hiring more no. of employees in managerial positions to
stabilize the company. Later, after the ban lift, more no. of employees in entry-level positions were recruited.

2. Sales was the lowest in last 3 years due to the Maggi ban incident. This was unprecedented.

Quarter Moving
Average Exponential
Moving Weighted Exponential Smoothening
Moving Average (min 29th Moving Seasonal Smoothening (alpha = Fixed Moving
Average Weighted cost) Trend Trend Trend (alpha = 0.9) 0.77) Ratio Ratio Regression
29th 73.45165 77.44359 76.6452 344.25 56.68551 1124.928 64.66939 64.66939 1288.575 96.60489 156.6
Cost (rupees 30th 85.42746 94.20973 94.20973 10.37904 99.79844 3.19355 48.70164 51.0968 1738.09 1377.218 904.5731
in lakhs) 31st 11.475 0 1.35 54 25.5484 57.375 59.4 57.375 657.0729 518.9519 338.5163
32nd 14.85 8.1 9.45 52.65 27.14518 3.991938 4.05 6.075 505.575 387.45 232.875
Total 185.2041 179.7533 181.6549 461.279 209.1775 1189.488 176.821 179.2162 4189.313 2380.225 1632.564

1. Brief description of the findings is given above.


2. It is better to predict using past employee data only instead of using future sales data also due to the sudden dip in sales in Nestle
due to Maggi ban.
3. Best method for calculating demand:
a. Money Saved: Exponential Smoothening
b. Accuracy: Exponential Smoothening
c. Ease of calculation: Moving Trend
d. Ability to extrapolate: Moving Trend
4. Interpretation of Ratio and R square values in terms of employment trends in organizational industry in given below.

In the Ratio analysis, the ratio of the existing sales/employee strength was not affected by the uncertain reduction of 2015. Similarly,
adjusted R square value was 0.897785997 in Regression method which is greater than 0.82. Hence, the forecast was supposed to be
good. But lowered correlation between sales and employee strength in 2015, R2 value failed to forecast properly.

Reference:

1. https://www.nestle.in/investors/stockandfinancials/annualreports