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

2. C HAPTER 5 F ORECASTING M ARKET D EMAND AND S ALES B UDGETS

3. Copyright © 2001 by Harcourt, Inc. All rights reserved.  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. L EARNING O BJECTIVES The process of forecasting helps an organization make decisions; it is necessary for determining information about future markets. This chapter should help you understand:

4. Copyright © 2001 by Harcourt, Inc. All rights reserved. M ANAGING S ALES I NFORMATION “Our charge is to design, build, and implement decision support systems that help our field and marketing managers make business decisions.” Dan McKee Marketing decision support systems manager for Marion Merrell Dow, Inc.

5. Copyright © 2001 by Harcourt, Inc. All rights reserved. F ORECASTING M ARKET D EMAND 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.

6. Copyright © 2001 by Harcourt, Inc. All rights reserved. U SES OF S ALES F ORECASTS 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.

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

8. Copyright © 2001 by Harcourt, Inc. All rights reserved. FIGURE 5.1 PLANNING/FORECASTING/BUDGETING SEQUENCE

9. Copyright © 2001 by Harcourt, Inc. All rights reserved. T HE F ORECASTING P ROCESS The forecasting process refers to a series of procedures used to forecast.

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

11. Copyright © 2001 by Harcourt, Inc. All rights reserved. FIGURE 5.2 THE FORECASTING PROCESS

12. Copyright © 2001 by Harcourt, Inc. All rights reserved. FIGURE 5.3 BASIC STEPS IN BREAKDOWN METHOD OF FORECASTING SALES

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

14. Copyright © 2001 by Harcourt, Inc. All rights reserved. S ALES F ORECASTING M ETHODS 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:

15. Copyright © 2001 by Harcourt, Inc. All rights reserved. FIGURE 5.4 THE MORE POPULAR OF MANY FORECASTING METHODS

16. Copyright © 2001 by Harcourt, Inc. All rights reserved. S URVEY F ORECASTING M ETHODS Four basic survey methods are Executive Opinion Sales Force Composite User’s Expectations Build-to-Order

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

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

19. Copyright © 2001 by Harcourt, Inc. All rights reserved. Delphi Method Administering a series of questionnaires to panels of experts.

20. Copyright © 2001 by Harcourt, Inc. All rights reserved. Sales Force Composite Obtaining the opinions of sales personnel concerning future sales.

21. Copyright © 2001 by Harcourt, Inc. All rights reserved. User’s Expectations Consumer and industrial companies often poll their actual or potential customers.

22. Copyright © 2001 by Harcourt, Inc. All rights reserved. Build-to-Order Companies build final products only after firm orders are placed.

23. Copyright © 2001 by Harcourt, Inc. All rights reserved. M ATHEMATICAL F ORECASTING M ETHODS Test markets are a popular method of measuring consumer acceptance of new products.

24. Copyright © 2001 by Harcourt, Inc. All rights reserved. FIGURE 5.5 CITIES COMMONLY USED AS TEST MARKETS – RESIDENTS ARE MOST LIKELY TO SEE NEW PRODUCTS.

25. Copyright © 2001 by Harcourt, Inc. All rights reserved. Time Series Projections Time series methods use chronologically ordered raw data.

26. Copyright © 2001 by Harcourt, Inc. All rights reserved. The trend component. The seasonal component. The cyclical component. The erratic component. Classical approach to time series analysis:

27. Copyright © 2001 by Harcourt, Inc. All rights reserved. Naïve Method Next Year’s Sales = This Year’s Sales X This Year’s Sales Last Year’s Sales

28. Copyright © 2001 by Harcourt, Inc. All rights reserved. Moving Average Moving averages are used to allow for marketplace factors changing at different rates and at different times.

29. Copyright © 2001 by Harcourt, Inc. All rights reserved. P ERIOD S ALES V OLUME S ALES FOR THREE- Y EAR P ERIOD T HREE- Y EAR M OVING A VERAGE 1200 2250 3300750 4350900300 54501100 ( 3) =366.6 6? Period 6 Forecast = 366.6 TABLE 5.1 EXAMPLE OF MOVING-AVERAGE FORECAST

30. Copyright © 2001 by Harcourt, Inc. All rights reserved. E xponential S moothing 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)

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

32. Copyright © 2001 by Harcourt, Inc. All rights reserved. FIGURE 5.6 A TREND FORECAST OF SALES

33. Copyright © 2001 by Harcourt, Inc. All rights reserved. Regression Analysis Regression analysis is a statistical method used to incorporate independent factors that are thought to influence sales into the forecasting procedure.

34. Copyright © 2001 by Harcourt, Inc. All rights reserved. FIGURE 5.7 REGRESSION ANALYSIS

35. Copyright © 2001 by Harcourt, Inc. All rights reserved. FIGURE 5.8 QUESTIONS TO ANSWER TO IMPROVE CHANCES OF HITTING THE FORECASTING BULL’S-EYE

36. Copyright © 2001 by Harcourt, Inc. All rights reserved. TABLE 5.2 GUIDE TO FORECASTING F ORCASTING M ETHOD T IME S PAN M ATHEMATICAL S OPHISTICATION C OMPUTER N EED A CCURACY Executive OpinionShort to mediumMinimalNot essentialLimited Delphi MethodMedium to longMinimalNot essentialLimited; good in dynamic conditions Sales Force CompositeShort to mediumMinimalNot essentialAccurate under dynamic conditions User’s ExpectationsShort to mediumMinimalNot essentialLimited Test MarketsMediumNeeded Accurate Naïve MethodPresent to mediumMinimalNot essentialLimited Moving AverageShort to longMinimalHelpfulAccurate under stable conditions Exponential SmoothingShort to mediumMinimalHelpfulAccurate under stable conditions Least SquaresShort to longNeededDesirableVaries widely Regression AnalysisShort to MediumNeededEssentialAccurate if variable relationships stable

37. Copyright © 2001 by Harcourt, Inc. All rights reserved. T HE S ALES M ANGAGER’S B UDGET The sales force budget is the amount of money available or assigned for a definite period, usually one year.

38. Copyright © 2001 by Harcourt, Inc. All rights reserved. Planning Coordination Control B UDGET P URPOSES

39. Copyright © 2001 by Harcourt, Inc. All rights reserved. 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 plan10. Travel c. Stock options d. Hospitalization

40. Copyright © 2001 by Harcourt, Inc. All rights reserved. B UDGETS S HOULD BE F LEXIBLE Sales, costs, prices, or the competition’s marketing efforts are some factors that may be higher or lower than expected.

41. Copyright © 2001 by Harcourt, Inc. All rights reserved. T HE B OTTOM L INE 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.