SALES AND DISTRIBUTION MANAGEMENT

05 Sales Planning and Forecasting

Planning
Planning ahead for seasonal fluctuations and unexpected emergencies allows for dealing with challenges and at least partially reduces stress. Planning is deciding now what we are going to do later, including how and when we are going to do it. Without planning we cannot get anything done efficiently and effectively. Successful companies practice market-oriented strategic planning. The aim of strategic planning is to achieve targeted profits and growth in the face of continual changing markets and environment.

Sales and Sales Planning

In sales, the goal is revenue-driven. A sales or sales territory plan is more than the sales force 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.

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.

Planning In A Large Organisation

Organisational Levels
Corporate

Organisation Structure

Type of Planning
Corporate Strategic Planning
SBU C

Corporate Office

Division / Business Unit / SBU Product

SBU A

SBU B

Divisional / SBU Strategic Planning Product / Operational Planning

Product x

Product y

Product z

Each SBU has a separate business, a set of competitors and customers and a manager responsible for strategic planning, performance, and control.
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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

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 under one SBU. In basic factors, mission, objectives, competition and strategy, one SBU will be distinct from another.

Titan Industries
Titan Industries has four SBUs Watches, Jewellery business, Eye wear and Precision engineering.

Titan Industries
Tanishq 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 Planning

Organisational Level (and Strategy Level)

Role of Marketing Key Tasks

Formal Name

Corporate (Corporate Strategy)

Provide customer and competition information Support customer orientation Provide customer and competition analysis Develop competitive advantage, target markets, value proposition, positioning

Corporate Marketing

Business Unit/SBU/Divisi on (Business Strategy)

Strategic Marketing

Functional Evolve and implement marketing i) Marketing plan including marketing-mix Strategy strategy, and sales strategy Allocate resources

Marketing Management

Role of Marketing in Organisational Planning

Type of Planning Functional ii) Sales Strategy Role of Marketing Key Tasks Formal Name

Classification of accounts Relationship strategy Selling methods or approaches Sales channel strategy

Strategic Sales

Marketing and Sales Strategies

Figure below shows how sales strategy is developed from marketing strategy
Product / service strategy Target market strategy (Longterm) Marketing Strategy Marketin g mix strategy (Shortterm) Price strategy Public relations & Publicity strategy Promotion / IMC* strategy Sales promotion strategy

Advertising strategy Personal selling / sales strategy

Distribution strategy

Direct marketing strategy

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* IMC: Integrated Marketing Communication

Sales Forecasting
Sales forecasting is crucial because without a proper sales forecast the marketing executive cannot determine the type of marketing programme to use in order to attain the desired sales and marketing objectives. It is based on a number of assumptions regarding customer 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 or decrease from the current levels and if so, by how much. What would be the share of the firm? Demand measurement and sales forecasting provide this vital knowledge.

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Why Study Demand?

Finance How much cash is required for operations and investments? How much capacity and output levels are to be established? What is the right amount of supplies needed? What is the optimum level of manpower? What is the Sales Forecast?

Operations
Purchase Human Resource Marketing

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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 volume that 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 Demand Market demand shows the total demand of all the consumers in the market at various prices.

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Market Demand Functions

Market Potential Market Demand in the Specific Period Q2

Market Forecast Market Minimum

Q1

Industry Marketing Expenditure Q2 - Q1 = Small / Non expansible Market Q2 - Q1 = Big / Expansible Market

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 given environment.

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Assignment
You are launching an English Accurate Times on all India basis. Daily,

Estimate the market newspapers in India.

potential

for

all

Make suitable assumptions.

What could be the market potential for Accurate Times?

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Market Forecast
Market forecast refers to that part of the market demand that will materialize with 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 is the maximum sales that an individual firm can achieve in a given market, under ideal conditions and on the assumption that the ideal marketing 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 company effort 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 to capture with the chosen marketing effort.

Company Potential, Company Demand & Company Forecast

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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. It helps in assessing the cash inflow and outflow needs and their sources. A long-term sales forecast (say for a period of 5 years 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 of resources 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-term planning 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 environmental factors 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 sales forecasts received from area / branch managers Sales / marketing head combines sales forecasts received from regional / zonal managers into company sales forecast, which is presented to CEO for discussion and approval

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Sales Forecasting Methods

Qualitative Methods
Executive opinion Delphi method

Quantitative Methods
Moving averages Exponential smoothing

Sales force composite

Survey of buyers intentions Test marketing

Decomposition
Nave / Ratio method Regression analysis Econometric analysis

Sales Forecasting Methods (Qualitative Methods)

Executive opinion method Most widely used Procedure includes getting views of top executives of the company regarding future sales and/ or average of all executives individual opinion Advantages : quick forecast, less expensive Disadvantages : subjective, difficult to break-down the forecast into subunits Accuracy : fair Time required : short to medium (1 4 weeks)
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Sales Forecasting Methods (Qualitative Methods)

Delphi method Process includes a coordinator getting forecasts separately from experts, summarizing the forecasts, giving the summary report to experts, who are asked to make another prediction The process is repeated till some consensus is reached 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 is made up of all salespersons sales estimates Advantages : Salespeople are involved, breakdown into subunits possible Disadvantages: Optimistic or pessimistic forecasts, medium to long 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 and services Questionnaire may contain other relevant questions Advantages : gives more market information, can forecast new and existing products, good accuracy Disadvantages: some buyers unwilling to respond, time required is long (3-6 months), medium to high cost
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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: alpha and beta testing
Advantages : used for new or modified products, good accuracy, minimizes risk of national launch Competitors may disturb if some methods are used, medium to high cost, medium to long time required
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Disadvantages :

Test Marketing Methods

Concept Test This involves presenting the product concept to an appropriate target consumers and getting their reactions. The concepts can be presented symbolically or physically. However the more the tested concept resembles the final product or experience, the more dependable concept testing is. In recent times, companies are also using virtual reality to test product concepts. This entails the use of sensory devices to stimulate reality.

Test Marketing Methods

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 promotional strategy, 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.

Test Marketing Methods

Controlled Test Marketing In this method, the number of geographic locations are tested. The product is delivered to the participating stores and the product is placed in a strategic position. Sales results will be measured electronically through scanners at the checkout.

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 longterm forecasts
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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 other periods 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 longterm and new product forecast 43

Sales Forecasting Methods (Quantitative Methods)

Decomposition Method Process includes breaking down the companys previous periods sales data into components like trend, cycle, seasonal, and erratic events. These components are recombined to produce sales forecast.
Advantages : Conceptually sound, fair to good accuracy, low cost, less time complex statistical method, historical data needed, used for short-term forecasting only
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Disadvantages :

Sales Forecasting Methods (Quantitative Methods)

Naive / Ratio Method Assumes what happened in the immediate past will happen in immediate future Simple formula used: Advantages

Disadvantages :

simple to calculate, low cost, less time, accuracy good for short-term forecasting less accurate if past sales fluctuate

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Naive / Ratio Method (Formula)

Sales forecast for next year Actual sales of this year

Actual sales of this year Actual sales of last year

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Sales Forecasting Methods (Quantitative Methods)

Regression analysis method It is a statistical forecasting method. Process consists of identifying causal relationship between 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, where a 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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Sales Forecasting Methods (Quantitative Methods)

Regression analysis method Advantages : Objective, good accuracy, predicts upturn / downturn, short to medium time, low to medium cost technically complex, large historical data needed, software packages essential

Disadvantages :

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Sales Forecasting Methods (Quantitative Methods)

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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Sales Forecasting Methods (Quantitative Methods)

Econometric analysis method Advantages : Good accuracy of forecasts of economic conditions and industry sales need expertise & large historical data, medium to long time, medium to high cost

Disadvantages :

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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
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
2005

Sales (in Rs Crores) 100 120

150 180 220 250

2006
2007 2008 2009 2010

2011

300
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