05 - Sales Planning & Forecasting

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SALES AND DISTRIBUTIONMANAGEMENT

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05 Sales Planning

andForecasting

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Sales and Sales Planning In sales, the goal is revenue-driven.

A sales or sales territory plan is more than the salesforce having the knowledge of their product pricing,

features and capabilities.

The basic plan starts with annual gross sales.

A sales forecast is an essential tool for managing a

business of any size. It is a month-by-month forecast of the level of sales

the firm expects to achieve.

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Strategic Planning Strategic planning includes making decisions about

the companys long-term objectives and strategies.

In most large, multiproduct and multi-business

organisations, planning is done at various

organisational levels:

Corporate strategic plan

Divisional and/or business unit strategic plans

Product functional plans.

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Planning In A Large Organisation

Each SBU has a separate business, a set ofcompetitors and customers and a managerresponsible for strategic planning, performance,and control.

Corporate Office

SBU

A

SBU

C

SBU

B

Product

x

Product

y

Product

z

Organisational

Levels

Organisation Structure Type of

Planning

Corporate CorporateStrategic

Planning

Division /

Business Unit /

SBU

Divisional /

SBU Strategic

Planning

ProductProduct /

Operational

Planning

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Corporate Strategic Planning Corporate strategic planning is developed at the

companys headquarters to guide the whole

organisation. The planning process includes four

steps or planning activities:

Developing corporate mission and objectives

Defining strategic business units (SBUs) Allocation of resources to SBUs

Developing corporate strategies to fill the strategic

planning gap

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Strategic Business Unit (SBU)An SBU is a group of related businesses

that can be treated as a unified entity for the

purpose of strategic planning.

The principle underlying the SBU grouping

is that all related products, related from the

standpoint of function, should fall underone SBU.

In basic factors, mission, objectives, competition

and strategy, one SBU will be distinct from another.


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Titan IndustriesTitan Industries has four SBUsWatches,

Jewellery business, Eye wear and Precision

engineering.


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Titan IndustriesTanishq offers a premium range of innovatively created gold

jewellery. Under Eye wear, Titan Industries offers sunglasses

under its Fastrack brand.

The Precision Engineering division of Titan Industries

supplies precision components to the aviation and the

automotive industry.


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Role of Marketing in Organisational PlanningOrganisational

Level

(and Strategy

Level)

Role of Marketing Key Tasks Formal Name

Corporate

(Corporate

Strategy)

Provide customer and competition

information

Support customer orientation

Corporate

Marketing

Business

Unit/SBU/Divisi

on(Business

Strategy)

Provide customer and competition

analysis

Develop competitive advantage,

target markets, value proposition,

positioning

Strategic

Marketing

Functional

i) Marketing

StrategyEvolve and implement marketing

plan including marketing-mix

strategy, and sales strategy

Allocate resources

Marketing

Management


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Role of Marketing in Organisational PlanningType of

Planning

Role of Marketing Key Tasks Formal Name

Functional

ii) Sales

Strategy

Classification of accounts

Relationship strategy

Selling methods or approaches

Sales channel strategy

Strategic

Sales


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Marketing and Sales Strategies Figure below shows how sales strategy is developed from marketing

strategy

Marketing

Strategy

* IMC: Integrated Marketing Communication

Target

market

strategy

(Long-

term)

Marketin

g mix

strategy

(Short-term)

Product

/ servicestrategy

Promotion

/ IMC*

strategy

Price

strategy

Distribution

strategy

Sales

promotion

strategy

Advertising

strategy

Personalselling / sales

strategy

Public relations &

Publicity strategy

Direct

marketing

strategy

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Sales Forecasting Sales forecasting is crucial because without a proper

sales forecast the marketing executive cannot

determine the type of marketing programme to usein order to attain the desired sales and marketing

objectives.

It is based on a number of assumptions regardingcustomer and competitor behaviour as well as the

market environment and therefore its reliability

depends upon the extent of culmination of the

uncertainty as predicted.

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What is a Sales Forecast? A sales forecast predicts the value of sales

over a period of time. All business firms like to know how much of

a given product they are likely to sell in a

given market and in a given period.

Whether the sales would increase ordecrease from the current levels and if so, by

how much.

What would be the share of the firm?

Demand measurement and sales forecastingprovide this vital knowledge.

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Why Study Demand?

Finance - How much cash is required

for operations andinvestments?

Operations - How much capacity and

output levels are to be

established?

Purchase - What is the right amountof supplies needed?

Human - What is the optimum

Resource level of manpower?

Marketing - What is the Sales Forecast?


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Wrong Sales Forecast Excessive Inventories or Inadequate

Inventories. Sales Forecasts are based on estimates of

Demand.

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What is Market?Market refers to the group of consumers or

organisations that is interested in the product, has

the wherewithal to purchase the product and is

permitted by law and other regulations to acquire the

product.

Total population Potential market

Available market

Qualified available market

Target market Penetrated market

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Market Demand

Market Demand for a product is the total volumethat would be bought by a

defined customer group

in a defined geographical area

in a defined time period

in a defined marketing environment

under a defined marketing programme

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Market DemandMarket demand shows the total demand ofall the consumers in the market at variousprices.

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Market Demand Functions

Q1

Q2

Industry Marketing Expenditure

M

arketDemandin

the

SpecificPeriod

Market Potential

Market

Forecast

Market

Minimum

Q2 - Q1 = Small / Non expansible Market

Q2 - Q1 = Big / Expansible Market


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Market Potential Market potential refers to the upper limit of

market demand.

It is the limit approached by the market

demand as industrys marketing

expenditures approach infinity for a givenenvironment.

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Assignment You are launching an English Daily,

AccurateTimes on all India basis.

Estimate the market potential for all

newspapers in India.

Make suitable assumptions.

What could be the market potential for

AccurateTimes?

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Market Forecast

Market forecast refers to that part of the

market demand that will materializewith the level of marketing effort the

industry will put in during the period of

the forecast.

Market forecast is also called market

size.

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Company Potential Company Demand &


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Company Potential, Company Demand &Company Forecast

Company potential is the maximum sales that an

individual firm can achieve in a given market, under

ideal conditions and on the assumption that the idealmarketing effort is being made.

Company demand refers to the portion of company

potential. It is the companys estimated share of

market demand at alternative levels of companyeffort in a given time period.

Company forecast, also called company sales

forecast refers to that portion of the company

demand which the company actually expects tocapture with the chosen marketing effort.

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Sales Forecast Short & Long-term

The short-term sales forecast in effect provides the

essential financial dimension to sales in terms of

expected sales revenue and expenses required. Ithelps in assessing the cash inflow and outflow

needs and their sources.

A long-term sales forecast (say for a period of 5years or so) on the other hand, focuses on capital

budgeting needs and process of the firm.

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Sales Budget

A sales budget is a detailed schedule showing the

expected sales in rupees and units of production.

It is a financial planning tool detailing allocation ofresources and selling efforts to achieve the sales

forecast for a period of time, usually one year.

The production budget is prepared after the sales

budget. The sales budget is the starting point in preparing

the master budget.

The sales budget is constructed by multiplying the

budgeted sales in units by the selling price.

It is an estimated amount of anticipated sales

allocated by product, territory or person, prepared

weekly, monthly or annually.

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Sales Forecast Functions

Used by company decision-makers to translate

changing market environment into specific goals

and plans for business operation

Estimate future revenue

Used as the starting point for short-and long-termplanning

Cash flow, production schedules and inventory

levels are determined by sales forecast

Accurate sales forecasting contributes to overall

organizational effectiveness

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Factors influencing the Sales Forecast

Marketing Plans

Industry Trends

Market Demand

Economic Influences

Demographic Changes

Social Changes

Political Developments

Legal Developments

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Forecasting Approaches

Two basic approaches:

Top-down or Break-down approach

Bottom-up or Build-up approach

Some companies use both approaches to

increase their confidence in the forecast.

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Top-down / Break-down Approach

Forecast relevant external environmentalfactors

Estimate industry sales or market potential

Calculate company sales potential = market

potential x company share Decide company sales forecast (lower than

company sales potential because sales

potential is maximum estimated sales,

without any constraints)

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Bottom-up / Build-up Approach

Salespersons estimate sales expected from their

customers

Area / Branch managers combine sales

forecasts received from salespersons

Regional / Zonal managers combine salesforecasts received from area / branch managers

Sales / marketing head combines sales forecasts

received from regional / zonal managers into

company sales forecast, which is presented toCEO for discussion and approval

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Sales Forecasting Methods

Qualitative Methods Quantitative Methods

Executive opinion Moving averages

Delphi method Exponential smoothing

Sales force composite Decomposition

Survey of buyers

intentions

Nave / Ratio method

Test marketing Regression analysis

Econometric analysis


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Sales Forecasting Methods (Qualitative Methods)Executive opinion method Most widely used

Procedure includes getting views of topexecutives of the company regarding futuresales and/ or average of all executivesindividual opinion

Advantages : quick forecast, lessexpensive

Disadvantages : subjective, difficult tobreak-down the forecastinto subunits

Accuracy : fair

Time required : short to medium (1 4weeks)

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Sales Forecasting Methods (Qualitative Methods)Delphi method Process includes a coordinator getting forecasts

separately from experts, summarizing theforecasts, giving the summary report to experts,who are asked to make another prediction

The process is repeated till some consensus isreached

Experts are company managers, consultants,intermediaries and trade associations

Advantages : objective, good accuracy

Disadvantages : getting experts, no

breakdown into subunits Time required : medium (3/4 weeks) to long

(2/3 months)

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Sales Forecasting Methods (Qualitative Methods)Sales force composite method An example of bottom-up or grass-roots

approach Procedure consists of each salesperson

estimating sales. Company sales forecast ismade up of all salespersons sales estimates

Advantages : Salespeople are involved,

breakdown into subunitspossible

Disadvantages: Optimistic or pessimistic

forecasts, medium tolong time required Accuracy : fair to good (if trained)

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Sales Forecasting Methods (Qualitative Methods)Survey of Buyers Intentions Method Process includes asking customers about their

intentions to buy the companys products andservices

Questionnaire may contain other relevantquestions

Advantages : gives more marketinformation, can forecastnew and existingproducts, good accuracy

Disadvantages: some buyers unwilling to

respond, time required islong (3-6 months), mediumto high cost

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l F h d ( l h d )


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Sales Forecasting Methods (Qualitative Methods)Test Marketing Method Methods used for consumer market testing: full

blown, controlled and simulated test marketing

Methods used for business market testing: alphaand beta testing

Advantages : used for new or modifiedproducts, good accuracy,minimizes risk of nationallaunch

Disadvantages : Competitors may disturb

if some methods are used,medium to high cost,medium to long timerequired

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T t M k ti M th d


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Test Marketing Methods

Concept Test

This involves presenting the product concept to anappropriate target consumers and getting their

reactions.

The concepts can be presented symbolically or

physically.

However the more the tested concept resembles thefinal product or experience, the more dependable

concept testing is.

In recent times, companies are also using virtualreality to test product concepts. This entails the use

of sensory devices to stimulate reality.

k h d


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Full-blown Test Market

The ultimate way to test a new consumer product

is to put it into full-blown test markets.

The company chooses a few representative cities

and the sales force tries to sell the trade on

carrying the product and giving it good shelf

exposure, full advertising and promotionalstrategy, similar to the one use in the home

market.

Simulated Test Marketing This entails finding 30 to 40 qualified shoppers

and questioning them about brand familiarity and

preference in a specific product category.

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Controlled Test Marketing

In this method, the number of geographiclocations are tested.

The product is delivered to the participating

stores and the product is placed in astrategic position.

Sales results will be measured electronically

through scanners at the checkout.

S l F ti M th d (Q tit ti M th d )


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Sales Forecasting Methods (Quantitative Methods)

Moving Average Method

Procedure is to calculate the average company sales

for previous years

Moving averages name is due to dropping sales in

the oldest period and replacing it by sales in the

newest period

Advantages : simple and easy to

calculate, low cost, less time,

good accuracy for short term

and stable conditions

Disadvantages : can not predict downturn/

upturn, not used for unstable

market conditions and long-

term forecasts42



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Sales Forecasting Methods (Quantitative Methods)Exponential smoothing method

The forecaster allows sales in certain periods to

influence the sales forecast more than sales in otherperiods

Sales forecast = (L)(actual sales of this year) +

for next period (1-L)(this years sales

forecast)

where (L) is a smoothing constant, ranging greater

than zero and less than 1

Advantages : simple method, low cost, less

time, good accuracy for short

term forecast Disadvantages : smoothing constant is

arbitrary, not used for long-

term and new product

forecast43



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Sales Forecasting Methods (Quantitative Methods)Decomposition Method

Process includes breaking down the companys

previous periods sales data into components liketrend, cycle, seasonal, and erratic events.

These components are recombined to produce sales

forecast.

Advantages : Conceptually sound, fair to

good accuracy, low cost, less

time

Disadvantages : complex statistical method,

historical data needed, usedfor short-term forecasting

only

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Naive / Ratio Method

Assumes what happened in the immediate past will

happen in immediate future Simple formula used:

Advantages : simple to calculate, low cost,less time, accuracy good for

short-term forecasting

Disadvantages : less accurate if past sales

fluctuate

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Naive / Ratio Method

(Formula)

yearlastofsalesActual

yearthisofsalesActualyearthisofsalesActualyearnextforforecastSales

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Regression analysis method

It is a statistical forecasting method.

Process consists of identifying causal relationshipbetween company sales (dependent variable, y) and

independent variable (x), which influences sales

If one independent variable is used, it is called linear

(or simple) regression, using formula; y=a+bx, wherea is the intercept and b is the slope of the trend

line.

In practice, company sales are influenced by several

independent variables, like price, population,

promotional expenditure.

The method used is multiple regression analysis.

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S l F tin M th d (Q ntit ti M th d )


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Regression analysis method

Advantages : Objective, good accuracy,predicts upturn / downturn,

short to medium time, low to

medium cost

Disadvantages : technically complex, largehistorical data needed,

software packages essential

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Econometric analysis method

Procedure includes developing many regression

equations representing

relationships between sales and independent

variables which influence sales

interrelationships between variables

Forecast is prepared by solving these equations

Computers and software packages are used

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Econometric analysis method

Advantages : Good accuracy of forecasts of

economic conditions and

industry sales

Disadvantages : need expertise & large

historical data, medium tolong time, medium to high

cost

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How to Improve Forecasting Accuracy?


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How to Improve Forecasting Accuracy? Sales forecasting is an important & difficult task

Following guidelines may help in improving its

accuracy

Use multiple (2/3) forecasting methods

Select suitable forecasting methods, based on

application, cost, and available time Use few independent variables / factors, based on

discussions with salespeople & customers

Establish a range of sales forecasts minimum,

intermediate and maximum

Use computer software forecasting packages

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Questions


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Questions The sales for Blaze Fashion Wear Ltd are reported in

the table below. What method of forecasting will you

suggest to the company for the year 2012?Year Sales (in Rs

Crores)

2005 100

2006 120

2007 150

2008 180

2009 220

2010 250

2011 300

05 - Sales Planning & Forecasting

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