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2 1 3 SALES AND DISTRIBUTION MANAGEMENT L E S S O N 7 : SALES FORECASTING L e a r n i n g O b j e c t i v e s On completion of this lesson,you should be able to Understand the meaning of sale forecasting and salepotential. Diferent methods as to how sales are forecasted. Sale Forecasting and Sale Potential Sales potentials, as defined earlier, are quantitative estimates of the maximum possible sales opportunities present in particularmarket segments open to a specified company selling a good orservice during a stated future period. They are derived frommarket potentials after analyses of historical market sharerelationship and adjustments for changes in companies andcompetitiorsselling strategies and practices.A firms sales potential and its sales forecast are not usuallyidentical-in most instances; the sales potential is larger than thesales forecast. There are several reasons for this: some companies do not have sufficient production capacity to capitalize onthe full sales potential; other firms have not yet developeddistributive networks capable of reaching every potentialcustomer; others do not attempt to realize their total salespotentials because of limited financial resources; and still others,being mote profit oriented than sales oriented, seek to maxi-mize profitable sales and not possible sales. The estimate forsales potential indicates how much a company could sell if ithad all the necessary resources and desired to use them. Thesales forecast is a related but different estimate-it indicates howmuch a company with a given amount of resources can sell if itimplements a particular marketing program. Sales Forcasting Methods A sales forecasting method is a procedure for estimating howmuch of a given product (or product line) can be sold if a givenmarketing program is implemented. No sales forecastingmethod is foolproof-each is subject to some error. Somemethods are unsophisticated, such as the jury of executiveopinion or the poll of sales force opinion. Others involve theapplication of sophisticated statistical techniques, such asregression analysis or econometric model building and simula-tion. Two sales forecasting methods Amy be eithersophisticated or unsophisticated, depending upon how they areused the projection of past sales and the survey of custom-ers buying plans.Well-managed companies do not rely upon a single salesforecasting method but use several. If different methodsproduce roughly the same sales forecasts, then more confidenceis placed in the results. But if different methods produce greatlydifferent sales forecasts, then the sales situation merits furtherstudy. Jury of Executive Opinion There are two steps in this method (1) high ranking executivesestimate probable sales, and (2) n average estimate is calculated.The assumption is that the executives are well informed aboutthe industry outlook and the companys market position,capabilities, and marketing program. All should support theirestimates with factual material and explain their rationales.Companies using the jury of executive opinion method do sofor one or more of four reasons:1.This is a quick and easy way to turn out a forecast.2.This is a way to pool the experience and judgment of well-informed people.3.This may be the only feasible app [roach if the company isso young that it has not yet accumulated the experience touse other forecasting methods.4.This method may be used when adequate sales and marketstatistics are missing, or when these figures have not yetbeen put into the form required for more sophisticatedforecasting methods.The jury of executive opinion method has weaknesses. Itsfindings are based primarily

on opinion, and factual evidence tosupport the forecast is often sketchy. This approach adds to thework load of key executives, requiring them to spend time thatthey would otherwise devote to their areas of main responsibil-ity, and a forecast made by this method is difficult to break down into estimates of probable sales by probable sales byproducts, by time intervals, by markets, by customers, and soon. The Delphi Technique Several years ago researchers at the Rand Corporation developeda technique for predicting the future that is called the Delphitechnique this is a version of the jury of executive opinionmethod in which those giving opinions are selected for theirexpertise. The panel of experts responds to a sequence of questionnaires in which the responses to one questionnaire areused to produce the next questionnaire. Thus, informationavailable to some and not to other experts is disseminated toall, enabling all to base their final forecasts on all availableinformation. Some contend that this technique eliminates thebandwagon effect of majority opinion . Poll of Sales Force Opinion In the poll of sales force opinion method, often tagged thegrass-roots approach, individual sales personnel forecast salesfor their territories; then individual forecasts are combined andmodified, as management thinks necessary, toForm the company sales forecast. This approach appeals topractical sales managers because forecasting responsibility isassigned to those who producer the results. Furthermore, thereis merit in utilizing the specialized knowledge of those inclosest touch with market conditions. Because the salespeoplehelp to develop the forecast, they should have greater confidencein quotas based upon it. An other attractive features is that 1 4 1 1 . 6 2 3 . 2 CopyRight:RaiUniversity SALES AND DISTRIBUTION MANAGEMENT forecasts developed by this method are easy to break downaccording to products, territories, customers, middlemen, andsalesforce.But the poll of sales force opinion approach has weaknesses.Not generally trained to do forecasting, and influenced bycurrent business conditions in their territories, salespersonstend to be overly optimistic or overly pessimistic about salesprospect. They are too near the trees to see the forest-they oftenare unaware of broad changes taking place in the economy andof trends in business conditions outside their own territories.Furthermore , if the forecasts of the sales staff are used insetting quotas, some sales personnel deliberately underestimateso that quotas are reached more easily.To some extent, the weaknesses of this method can beovercome through training the sales force in forecastingtechniques, by orienting them to factors influencing companysales, and by adjusting for consistent biases in individualsalespersons forcasts. For most companies, however, implementing corrective actions is an endless task, because salespersonnel turnover is constantly gong on, and new staff members (whose biases are unknown at the start) submit theirforecasts along with those of veteran sales personnel withknown biases. In short, this method is based to such a largeextent on judgment that it is not approproate for mostcompanies to use is as the only forecasting method. The poll of sales force opinion serves best as a method of getting analternative estimate for use as a check on a sales forecastobtained through some other approach. Projection of Past Sales The projection of past sales method of sales forecasting takes avariety of forms. The simplest is to set the sales forecast for thecoming year at the same figure as the current years actual sales,or the forecast may be made by adding a set percentage to lastyears sales, or to a moving average of the sales figures forseveral past years, for instance, if it is assumed that there will bethe same percentage sales increase next yearAs this year, the forecaster might utilize a nave model projec-tion such asthisyearssaleNext years sales = this years sales *lastyears

salesThis years sales are inevitably related to last years. Similarly, nextyears sales are related to this years and to those of all precedingyears. Projecting present levels is simple and inexpensive forforecasting method and may be appropriate for companies inmore or less stable or mature industries it is rare in suchindustries for a companys sales to vary more than 15 percentplus or minus from the preceding year. Time-series Analysis Not greatly different in principle from the simple projection of past sales is time series analysis, a statistical procedure forstudying historical sales data. This procedure involves isolatingand measuring four chief types of sales variation: long termtrends, cyclical changes, seasonal variations, and irregularfluctuations. Then a mathematical model describing the pastbehavior of the series is selected, assumed values for each typeof sales variation are inserted, and the sales forecast is crankedout.For most companies, time series analysis finds practicalapplication mainly in making long range forecast. Predictions ona year-to-year basis, such as are necessary for an operating salesforecast, generally are little more than approximations. Onlywhere sales patterns are clearly defined and relatively stable fromyear to year is time series analysis appropriately used for shortterm operating sales forecasts.One drawback of time series analysis is that is is difficult to call the turns. Trend and cycle analysis helps in explaining why atrend, once under way, continues, but predicting the turns oftenis more important. When turns for the better are called correctly,management can capitalize upon sales opportunities; whenturns for the worst are called correctly, management can cutlosses. Exponential Smoothing On e statistical technique for short range sales forecasting,exponential smoothing, is a type of moving average thatrepresents a weighted sum of all past numbered in a timeseries, with the heaviest weight placed on the most recent data.To illustrate, consider this simple but widely used form of exponential smoothing a weighted average of this years sales iscombined with the forecast of this years sales to arrive at theforecast for next years sales. The forecasting equation, in otherwords, isnext years sales = a (this years sales) + (1- a) (this yearsforecast) the a in the equation is called the smoothing con-stant and is set between 0.0 and1.00 if, for example, actual salesfor this year came to 320 units of product, the sales forecast forthis year was 350 units , and the smoothing constant was(0.30)(320)+ (0.7)(350) = 341 units of productsDetermining the value of a is the main problem. If the seriesof sales data change slowly, a should be small to retain the effectof earlier observations. If the series changes rapidly, should belarge so that the forecasts respond to these changes. In practice,a is estimated by trying several values and making retrospectivetests of the associated forecast error. The value leading to thesmallest forecast error is then chosen for future smoothing. Evaluation of Past Sales Projection Methods The key limitation of all past sales projection methods of lies inthe assumptions that past sales history is the sole factorinfluencing future sales. No allowance is made for significantchanges made by the company in its marketing program or byits competitors in theirs. Nor is allowance made for sharp andrapid upswings or downturns in business activity, nor is it usualto correct for poor sales performance extending over previousperiods.The accuracy of the forecast arrived at through projecting pastsales depends largely upon how close the company is to themarket saturation point. If the market is nearly 100 percentsaturated, some argue that it is defensible to predict sales byapplying a certain percentage figure to cumulative past sales of the product still in the hands of users to determine annualreplacement demand. However, most often the company whoseproduct has achieved nearly 10 percent market saturation finds,since most companies of this sort market durables or CopyRight:RaiUniversity 1 1 2 3 1 5 SALES AND DISTRIBUTION MANAGEMENT

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semidurables, that its prospective customers can postpone oraccelerate their purchase to a considerable degree.Past sales projection methods are most appropriately used forobtaining check forecasts against which forecasts securedthrough other means are compared. Most companies makesome use of past sales projection in their sales forecastingprocedures. The availability of numerous computer programsfor time series analysis and exponential smoothing hasacceleratedthispractice. Survey of Customers Buying Plans What more sensible way to forecast than to ask customersabout their future buying plans industrial marketers use thisapproach more than consumer goods marketers, because it iseasiest to use where the potential market consists of smallnumbers of customers and prospects, substantial sales aremade to individual accounts, the manufacture sells direct tousers, and customers are concentrated in a few geographical areas(all more typical of industrial than consumer marketing). Insuch instance, it is relatively inexpensive to survey a sample of customers and prospects to obtain their estimated requirementsfor the product, and to project the results to obtain a salesforecast. Survey results, however, need tempering bymanagements specialized knowledge and by contemplatedchanges in marketing programs. Few companies base forecastsexclusively on a survey of customers buying plans. The mainreason lies in the inherent assumptions that customer knowwhat they are going to do and that buyers plans, once made,will not change.Even though the survey of customers buying plans is generallyan unsophisticated forecasting method, it can be rather sophisti-cate that is, if it is a true survey (in the marketing research sense)and if the selection of respondents is by probability sampling.However, since it gathers opinions rather than measures actions,substantial nonsampling error is present. Respondents do notalways have well formulated buying plans, and, even if they do,they are not always willing to relate them. In practice, mostcompanies using this approach appear to pay little attention tothe composition of sample and devote minimum effort tomeasuring sampling and nonsampling errors. . 6 2 3 . 2