Unit 3

Market
Sales Sales

potential

potential
forecast

Sales Forecast Prediction of future sales based on past sales performance and an analysis of expected market conditions Sales forecast is done for a given period and the assumptions made are listed, discussed and validated to achieve levels of accuracy.. Sales Managers in large firms would prepare the forecast:
Customer wise Territory wise Regional Divisional National international

Forecast objectives

Identify Ind and dep variables

Develop Forecast procedure

Finalise the forecast

List all assumptions

Collect, collate & analyse data

Implement the results

Evaluate

1. 2.

Break down approach Build Up approach

1. Break down approach : Industry sales forecast Co. sales forecast Sales forecast for Product lines Individual product line forecast break down to Regional level break down to territory level. 2. Build Up approach

Consists of Qualitative, Quantitative and Causal methods. Qualitative

PERT Experts opinion Survey of Buyers expectations Sales force composite Delphi technique
Nave method Moving average Decomposition met Exponential smoothing

Quantitative ( Time series )

Causal

Simple regression Multiple regression

1.

PERT --- 3 Scenarios. Analysts weigh these 3 estimates to form an

expected value from which they compute a standard deviation. Members of Distribution channels etc.

2.

Experts opinion: Marketing professionals / Consultants / Survey of Buyers expectations:

Buying intentions Selection of potential buyers Extrapolate the data

3.

4. 5.

Sales force composite Delphi Technique

Forecast from individual sales person Overall sales forecast is the aggregate several experts pool in, panel consensus by reprocess the results until a narrow median is agreed upon

What is a: TREND

CYCLE
SEASONAL IRREGULAR

Nave method:
It is a forecasting method which is based on the

assumption that what happened in the immediate past will continue to happen in the immediate future without adjusting them or attempting to establish causal factors.

Not useful as a medium range forecasting tool

Provides a base line to measure other models Assumes seasonality, cyclicality factors and trends are flat.

25

20

15
Sheds

Actual Value Nave Forecast 10

0 February March April May June July Period August September October November December

Def: The moving averages of the company sales of the previous periods are calculated for forecasting the sales of future priods

It assumes the future will be an average of the past performance rather than following a specific linear percentage trend. Minimizes the impact of randomness on individual forecasts since it is an average of several values rather than a simple linear projection. The moving average equation basically sums up the sales in a number of past periods and divides by the number of periods.

Input Data Period Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12

Actual Value 10 12 16 13 17 19 15 20 22 19 21 19

What is the 3 month moving average?

Def: the forecaster allows sales in certain periods to influence the sales forecast more than the sales in other periods by using a smoothing constant a in the equation
Gives more weightage to recent figures and smaller weight to past observations Popular technique for short term forecasting Method is effective when there is random demand and no seasonal fluctuations in the data. Each new forecast is based on previous forecast plus a % of the difference between the forecast and the actual value of the time series at that point. Formula is F ( t + 1) = F ( t) + a { A ( t ) F ( t ) } where F = forecast, t+ 1 is the forecast period, A is actual and a is the smoothing constant. A ( t) F ( t) represents the prediction error.

down ( or decomposed) into major components, such as trend, cycle, seasonal and erratic events. These components are then combined to forecast the sales for the future period.

Def: The companys previous periods of sales data are broken

1. 2. 3.

Seasonality factor is taken into account Forecast consists of 3 steps

Calculation of the seasonality index Prepare the sales forecast Adjust the forecast ( on quarterly basis ) for seasonality. Multiply the quarterly forecast figure by the seasonality index for that quarter.

Note: Adjust with seasonal index It is an average that can be used to compare an actual observation relative to what it would be if there were no seasonal variation. This method is applicable when there are major fluctuations in the demand cycle due to seasonality factor.

Def: It is a statistical method of sales forecasting that derives an equation based on relationship between the company sales ( dependent variable, x) and independent variables ( y1, y2) which influence sales.
If there is one independent variable, it is called simple or linear regression analysis.

If there are two or more independent variables, it is called multiple regression analysis.

Objective: To determine a relationship b/w sales and a variable which is related to sales Study of relationships among variables, a principal purpose of which is to estimate the value of one variable from known or assumed values of other variables related to it. Variables of Interest: To make estimates, identify the effective predictors of the variable of interest: which variables are important indicators and can be measured at the least cost which carry only a little information and which are redundant-- Factor Analysis Experiment: Begin with a hypothesis about how several variables might be related to another variable and the form of the relationship.

Opportunity is missed by most people because it comes dressed in overalls and looks like work