Developing Sales Forecasts

Sales Forecasts Objectives: Objectives: Determining sales force size. Determining sales force size. Designing territories. Designing territories. Establishing sales quotas and sales budgets. Establishing sales quotas and sales budgets. Determining sales compensation levels. Determining sales compensation levels. Evaluating sales person performance. Evaluating sales person performance. Evaluating prospective accounts. Evaluating prospective accounts.

Types of Forecasts Dimensions: Dimensions: Product level.( industry sales, company sales, product line sales, product form sales) Product level.( industry sales, company sales, product line sales, product form sales) Geographical area.( country, region, territory) Geographical area.( country, region, territory) Time period. (Short, Medium, Long) Time period. (Short, Medium, Long)

Types of Forecast Market Potential Market Potential The best possible level of industry sales in a given geographic area for a specific period. The best possible level of industry sales in a given geographic area for a specific period. Market Forecast Market Forecast The expected level of industry sales in a given geographic area for a specific period The expected level of industry sales in a given geographic area for a specific period Sales Potential Sales Potential The best possible level of firm sales in a given geographic area for a specific period Sales Forecast Sales Forecast The expected level of industry sales in a given geographic area for a specific period The expected level of industry sales in a given geographic area for a specific period

Top-Down and Bottom-Up Forecasting Approaches Top-Down Top-Down Developing forecasts at the business unit level then breaking it down into zone, region, district, territory and account. Developing forecasts at the business unit level then breaking it down into zone, region, district, territory and account. Bottom-Up Bottom-Up Developing forecast for different accounts, then combine account forecasts into territories, district, and company forecasts. Developing forecast for different accounts, then combine account forecasts into territories, district, and company forecasts.

Moving Averages Method Simple and straightforward. Simple and straightforward. Calculating the average company sales for previous years then dividing it on the number of years involved. Calculating the average company sales for previous years then dividing it on the number of years involved. The company sales forecast for next year is the average of actual company sales for the past X years. The company sales forecast for next year is the average of actual company sales for the past X years. Sales forecast for the next year = Sales forecast for the next year = actual sales for the past 4 years /number of years (4)

Moving Averages Method The most popular method for short and medium range forecast. The most popular method for short and medium range forecast. Not accurate if sales vary substantially different from year to year or if there are major differences in business environment. Not accurate if sales vary substantially different from year to year or if there are major differences in business environment. Suited for large no. of products. Suited for large no. of products. Good for products with stable sales. Good for products with stable sales.

Moving Averages Method Require large amounts of historical data. Require large amounts of historical data. Assign equal weight to each year ia a disadventage. Assign equal weight to each year ia a disadventage.

Exponential Smoothing A type of modified moving average method A type of modified moving average method but the company sales in the most recent year are weighted differently. but the company sales in the most recent year are weighted differently. The critical aspect is determining the weight for this year. The critical aspect is determining the weight for this year. Examine different weights for historical sales data to determine which weight would have generated the most accurate sales forecast in the past. Examine different weights for historical sales data to determine which weight would have generated the most accurate sales forecast in the past.

Exponential Smoothing Simple to use and understand. Simple to use and understand. Gives more weight to recent year. Gives more weight to recent year. Requires little data. Requires little data. Good accuracy for short term forecast. Good accuracy for short term forecast. Searching for the appropriated weight takes time. Searching for the appropriated weight takes time. Poor for medium and long range forecast. Poor for medium and long range forecast.

Decomposition Method Trend Trend e.g. 5% growth in sales due to increase in population. e.g. 5% growth in sales due to increase in population. Cycle Cycle e.g. Recession cycle -10% e.g. Recession cycle -10% Seasonal Seasonal e.g. 4 th Q sales is higher by 25% e.g. 4 th Q sales is higher by 25% Erratic events Erratic events e.g. increased tension in the middle east -5% e.g. increased tension in the middle east -5% Conceptually sound but it requires complex statistical approaches. Conceptually sound but it requires complex statistical approaches.

Decomposition Method Simple to understand. Simple to understand. Takes into consideration several important factors. Takes into consideration several important factors. Requires large amount of data. Requires large amount of data. Not so good for long range forecasts. Not so good for long range forecasts.

Breakdown Method Market Factor Method is used to break the company forecast down into zone, region or district level. Market Factor Method is used to break the company forecast down into zone, region or district level. The Buying Power Index BPI The Buying Power Index BPI BPI = ( 5I+2P+3R )/10 BPI = ( 5I+2P+3R )/10 I % of personal income in the area I % of personal income in the area P %of population in the area P %of population in the area R % of retail sales in the area R % of retail sales in the area

The Survey of Buyers Intentions Method Asking individual accounts about their purchasing plans for a future periods and translate it into account forecast through mail or phone surveys or personal interviews. Asking individual accounts about their purchasing plans for a future periods and translate it into account forecast through mail or phone surveys or personal interviews. Based on customers buying plans. Based on customers buying plans. Inexpensive method if customer base is small. Inexpensive method if customer base is small. Intentions frequently do not translate in actual purchases. Intentions frequently do not translate in actual purchases. Some firms do not want to disclose their intentions. Some firms do not want to disclose their intentions.

The Jury of Executive Opinion Method Team based approach. Team based approach. Inside executive use their expert knowledge to forecast sales to individual accounts then discussed until consensus is reached. Inside executive use their expert knowledge to forecast sales to individual accounts then discussed until consensus is reached. More accurate long range forecasts than individually based approaches. More accurate long range forecasts than individually based approaches. Requires excessive amount of managers time. Requires excessive amount of managers time. Managers are far from the marketplace. Managers are far from the marketplace.

The Jury of Executive Opinion Method Not suitable for firms with large number of products. Not suitable for firms with large number of products. Influential people may dominate the process. Influential people may dominate the process. People far from the market do not have the market sense. People far from the market do not have the market sense.

The Delphi Method A structured type of jury executives method. A structured type of jury executives method. Selection of panel of managers. Selection of panel of managers. Each member submit anonymous forecast for each account. Each member submit anonymous forecast for each account. Summary is sent to each panel member with reasons for lowest and highest forecast to review and send again anonymous forecast. Summary is sent to each panel member with reasons for lowest and highest forecast to review and send again anonymous forecast. Process is repeated until reaching a consensus Process is repeated until reaching a consensus

The Delphi Method No group or committees meetings. No group or committees meetings. Receive inputs from others in isolated environments. Receive inputs from others in isolated environments. Allow mind changing. Allow mind changing. Participants are selected based on their willingness. Participants are selected based on their willingness. Takes long time to accomplish and reach a consensus. Takes long time to accomplish and reach a consensus.

The Sales Force Composite Method Sales people provide forecast for their accounts on specially designed forms or via computers. Sales people provide forecast for their accounts on specially designed forms or via computers. Sales people are provided with detailed information about their accounts and feedback concerning accuracy of their previous feedback. Sales people are provided with detailed information about their accounts and feedback concerning accuracy of their previous feedback. It uses input from persons closed to actual markets. It uses input from persons closed to actual markets. Enhance sales force morale. Enhance sales force morale.

The Sales Force Composite Method Provide detailed forecast by product, account and territory. Provide detailed forecast by product, account and territory. Sales people may underestimate their forecasts. Sales people may underestimate their forecasts. Can take their time from the field. Can take their time from the field. S.R. may lack the impact of the economy knowledge. S.R. may lack the impact of the economy knowledge.

Forecasting Methods, General Remarks Bottom up approaches are more popular than the top down approaches. Bottom up approaches are more popular than the top down approaches. Selection of forecast method depends on the forecasting period. Selection of forecast method depends on the forecasting period. Each method has certain advantages and disadvantages. Each method has certain advantages and disadvantages. Most firms use multiple forecasting methods. Most firms use multiple forecasting methods.

Selection of Forecasting Method Accuracy. Accuracy. Ease of use. Ease of use. Data requirements. Data requirements. Familiarity with method. Familiarity with method.