chapter 05 forecasting market demand and sales budget.ppt

Copyright © 2001 by Harcourt, Inc. All rights reserved.

CHAPTER 5

FORECASTING MARKET DEMAND AND SALES BUDGETS


The importance of forecasting in a firm’s marketing decision support system.

The uses and different categories of sales forecasts. The two forecasting methods – survey and mathematical – and

their different uses. That the responsibility for approving the final forecast rests at

the top management level. The need for knowledge of computers, because they are used

in forecasting and developing sales budgets.

LEARNING OBJECTIVES

The process of forecasting helps an organization make decisions; it is necessary for determining information about future markets. This chapter should help you understand:


MANAGING SALES INFORMATION

“Our charge is to design, build, and implement decision support systems that help our field and marketing managers make business decisions.”

Dan McKeeMarketing decision support systemsmanager for Marion Merrell Dow, Inc.


FORECASTING MARKET DEMAND

A marketing decision support system (MDSS) is an ongoing, future-oriented structure designed to generate, process, store, and later retrieve information to aid decision making in an organization’s marketing program. It involves problem-solving technology composed of people, knowledge, software, and hardware “wired” into the sales management process.


USES OF SALES FORECASTS

A sales forecast is the estimated dollar or unit sales for a specific future time period based on a proposed marketing plan and an assumed market environment.


1. A sales forecast becomes a basis for setting and maintaining a production schedule – manufacturing.

2. It determines the quantity and timing of needs for labor, equipment, tools, parts, and raw materials – purchasing, personnel.

3. It influences the amount of borrowed capital needed to finance the production and the necessary cash flow to operate the business – controller.

4. It provides a basis for sales quota assignments to various segments of the sales force – sales management.

5. It is the overall base that determines the company’s business and marketing plans, which are further broken down into specific goals – marketing officer.

A sales forecast is important for at least five reasons:


M arketin g P lan

Sales Fo recasts Sales Fo rce B udget

FIGURE 5.1 PLANNING/FORECASTING/BUDGETING SEQUENCE


THE FORECASTING PROCESS

The forecasting process refers to a series of procedures used to forecast.


A market factor is an item or element that (1) exists in a market, (2) may be measured quantitatively, and (3) is related to the demand for a product or service.

A market index is simply a market factor expressed as a percentage relative to some base figure.


F oreca st O bjective

D eterm ine D ependen t a nd I ndepen den t V a ria bles

D evelop F oreca st P rocedure

S elect F oreca st A na lysis M ethod

T ota l F oreca st P rocedure

G a ther an d A na lyz e D a ta

P resen t A ssu m ptions a bou t D a ta

M ak e a n d F ina liz e F oreca st

E va lua te R esu lts versu s F oreca st

FIGURE 5.2 THE FORECASTING PROCESS


FIGURE 5.3 BASIC STEPS IN BREAKDOWN METHOD OF FORECASTING SALES

G eneral E nv iro n m ent Fo recastI n d ustry Sales F o recast

C o m p an y Sales P o ten tialC o m p an y Sales Fo recast

P ro d uct L in esI n d iv id ual P ro d ucts fo r

C usto m ers-T errito ries-R egio n s- D iv isio n s- U.S.A .-W o rld


Company sales potential is the maximum estimated or potential sales the company may reach in a defined time period under given conditions.

The company’s share of the estimated sales for an entire industry is referred to as market share.

Industry sales forecast, or market potential, is the estimated sales for all sellers.


SALES FORECASTING

METHODS

• Survey methods are qualitative and include executive opinion, sales force

composite, and customer’s intention surveys.

• Mathematical methods are test markets, market factors, naïve models, trend

analysis, and correlation analysis.

Two categories of sales forecasting methods exist:


Survey M eth o d s

E xecutiv e O p in io n

U ser’s E x p ectatio n

Sales Fo rce C o m p o site

B u ild - to - O rd er

M ath em atical M eth o d s

T est M arket R egressio n

N aive T ren d

M o v in g A v erage

E x p o n en tial Sm o o th in g

FIGURE 5.4 THE MORE POPULAR OF MANY FORECASTING METHODS


SURVEY FORECASTING METHODS

Four basic survey methods are

• Executive Opinion• Sales Force Composite• User’s Expectations• Build-to-Order


Executive Opinion

1. By one seasoned individual (usually in a small company).

2. By a group of individuals, sometimes called a “jury of executive opinion.”

Executive forecasting is done in two ways:


1. Key executives submit the independent estimates without discussion, and these are averaged into one forecast by the chief executive.

2. The group meets, each person presents separate estimates, differences are resolved, and a consensus is reached.

The group approach uses two methods:


Delphi Method

Administering a series of questionnaires to panels of experts.


Sales Force Composite

Obtaining the opinions of sales personnel concerning future sales.


User’s Expectations

Consumer and industrial companies often poll their actual or potential customers.


Build-to-Order

Companies build final products only after firm orders are placed.


MATHEMATICAL FORECASTING METHODS

Test markets are a popular method of measuring consumer acceptance of new products.


C harlotte, N C

E rie, PA

Syracuse, N Y

T oledo, O H

L ex ington, KYK noxv ille, T N

C hattanooga, T N

P ortland, M E

C harleston, SCSavannah, G A

Jacksonville, F LB aton R ouge, L A

L ittle R ock, A R

O m aha, N E

O klahom a C ity, O K

C orpus C hristi, T X

B eaum ont, T X

Spokane, W A

E ugene, O R

B akersfield, C A

Salt L ake C ity, U T

M adison, W I

T ucson, A Z L ubbock, T X

F resno, C A P eoria, ILJohnstow n, PA

FIGURE 5.5 CITIES COMMONLY USED AS TEST MARKETS – RESIDENTS ARE MOST LIKELY TO SEE NEW PRODUCTS.


Time Series Projections

Time series methods use chronologically ordered raw data.


• The trend component.

• The seasonal component.

• The cyclical component.

• The erratic component.

Classical approach to time series analysis:


Naïve Method

Next Year’s Sales = This Year’s Sales XThis Year’s SalesLast Year’s Sales


Moving Average

Moving averages are used to allow for marketplace factors changing at different rates and at different times.


PERIOD

SALES

VOLUME

SALES FOR

THREE-YEAR PERIOD

THREE-YEAR MOVING AVERAGE

1 200

2 250

3 300 750

4 350 900 300

5 450 1100 ( 3) = 366.6

6 ?

Period 6 Forecast = 366.6

TABLE 5.1 EXAMPLE OF MOVING-AVERAGE FORECAST


Exponential Smoothing

Exponential smoothing is similar to the moving-average forecasting method. It allows consideration of all past data, but less weight is placed on data as it ages.

Next Year’s Sales = a (This Year’s Sales) + (1-a) (This Year’s Forecast)


Trend Projections – Least Squares

Eyeball fitting is simply a plot of the data with a line drawn through them that the forecaster feels most accurately fits the linear trend of the data.


600

500

400

300

200

100

01984

T im e1985 1986 1987 1988 1989 1990

O bserved Sales F orecast Sales

Sale

s

T rend L ine

FIGURE 5.6 A TREND FORECAST OF SALES


Regression Analysis

Regression analysis is a statistical method used to incorporate independent factors that are thought to influence sales into the forecasting procedure.


L inear R elationsh ip

P op ulation (A )

Sale

s

0

C u r v i l i n e a r R e l a t i o n s h i p

P o p u l a t i o n ( B )

Sale

s0

FIGURE 5.7 REGRESSION ANALYSIS


H ave Y ou D eveloped a G ood

Sales F orecasting P rocess?

M arket D ecision Sup p ort System

B reakdow n U se M ultip le F orecasting M ethod s B uild up

FIGURE 5.8 QUESTIONS TO ANSWER TO IMPROVE CHANCES OF HITTING THE FORECASTING BULL’S-EYE

Hav

e Y ou Consid

ered

the B

asics t

o

Incre

asing A

ccuracy

and Selecti

ng Y our

F orecasti

ng Meth

od?

Which F

oreca

st(s)

Meth

od Should

You Use

?

C ould O utside

Sources Help?

90%80%70%60%

140%130%120%110%F

O R E C A S T


TABLE 5.2 GUIDE TO FORECASTING

FORCASTINGMETHOD TIME SPAN

MATHEMATICALSOPHISTICATION

COMPUTERNEED ACCURACY

Executive Opinion Short to medium Minimal Not essential Limited

Delphi Method Medium to long Minimal Not essential Limited; good in dynamic conditions

Sales Force Composite Short to medium Minimal Not essential Accurate under dynamic conditions

User’s Expectations Short to medium Minimal Not essential Limited

Test Markets Medium Needed Needed Accurate

Naïve Method Present to medium Minimal Not essential Limited

Moving Average Short to long Minimal Helpful Accurate under stable conditions

Exponential Smoothing Short to medium Minimal Helpful Accurate under stable conditions

Least Squares Short to long Needed Desirable Varies widely

Regression Analysis Short to Medium Needed Essential Accurate if variable relationships stable


THE SALES MANGAGER’S BUDGET

The sales force budget is the amount of money available or assigned for a definite period, usually one year.


• Planning

• Coordination

• Control

BUDGET PURPOSES


TABLE 5.3 SALES FORCE OPERATING COSTS

1. Base salaries 4. Special incentives

a. Management 5. Office expenses

b. Salespeople 6. Product samples

2. Commissions 7. Selling aids

3. Other compensation 8. Transportation expenses

a. Social Security 9. Entertainment

b. Retirement plan 10. Travel

c. Stock options

d. Hospitalization


BUDGETS SHOULD BE FLEXIBLE

Sales, costs, prices, or the competition’s marketing efforts are some factors that may be higher or lower than expected.


THE BOTTOM LINE

Because of the growing trend in business to centralize data collections, the job of forecasting has become an integral part of a firm’s marketing decision support system (MDSS).

A sales forecast is the estimated dollar or unit sales for a specific future period based on a proposed marketing plan and an assumed market environment.

Firms know sales forecasting is never 100 percent correct.

Two categories of sales forecasting methods are survey methods and mathematical methods.

Because the sales forecast has a major impact on the company, the top executives give final approval.

To create a sales forecast, sales managers should know how to use a computer.

chapter 05 forecasting market demand and sales budget.ppt

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