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Chapter 05

Chapter 05

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


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

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

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

“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.

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

future-oriented structure designed to generate. and later retrieve information to aid decision making in an organization’s marketing program. It involves problem-solving technology composed of people. All rights reserved. and hardware “wired” into the sales management process. Inc. store. Copyright © 2001 by Harcourt. process.FORECASTING MARKET DEMAND A marketing decision support system (MDSS) is an ongoing. knowledge. software. .

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

All rights reserved. A sales forecast becomes a basis for setting and maintaining a production schedule – manufacturing. 3. It provides a basis for sales quota assignments to various segments of the sales force – sales management. Copyright © 2001 by Harcourt. which are further broken down into specific goals – marketing officer. It determines the quantity and timing of needs for labor. .A sales forecast is important for at least five reasons: 1. 4. It is the overall base that determines the company’s business and marketing plans. tools. personnel. 5. Inc. parts. It influences the amount of borrowed capital needed to finance the production and the necessary cash flow to operate the business – controller. and raw materials – purchasing. equipment. 2.

. All rights reserved.1 PLANNING/FORECASTING/BUDGETING SEQUENCE Marketing Plan Sales Forecasts Sales Force Budget Copyright © 2001 by Harcourt. Inc.FIGURE 5.

. Inc. All rights reserved. Copyright © 2001 by Harcourt.THE FORECASTING PROCESS The forecasting process refers to a series of procedures used to forecast.

and (3) is related to the demand for a product or service. All rights reserved. (2) may be measured quantitatively. Copyright © 2001 by Harcourt. . A market index is simply a market factor expressed as a percentage relative to some base figure. Inc.A market factor is an item or element that (1) exists in a market.

2 THE FORECASTING PROCESS Fr c s o e at Oje tiv bc e Determine Dependent and Independent Variables D pocs e l Fa vo r t e e Peu r de o r c ScFcs etoa l e r t e As Md nys e o ai t l h El a Rus v ut e l a e st vru Feat es s o c s r T lF cs o oa t r t a e Pcdr r eu o e Pn sm s re A tn et sp s ui o at a bD o t u a Grn nz a aAe te d a h l y D a t a Mn iae a a Fi k d nz e l Fa oc t rs e Copyright © 2001 by Harcourt. .FIGURE 5. All rights reserved. Inc.

-World fo r Copyright © 2001 by Harcourt.A. . Inc.FIGURE 5. All rights reserved.3 BASIC STEPS IN BREAKDOWN METHOD OF FORECASTING SALES General Environment Forecast Industry Sales Forecast Company Sales Potential Company Sales Forecast Product Lines Individual Products Customers-Territories-Regions-Divisions-U.S.

The company’s share of the estimated sales for an entire industry is referred to as market share. or market potential. Copyright © 2001 by Harcourt. is the estimated sales for all sellers. Inc. All rights reserved.Industry sales forecast. . Company sales potential is the maximum estimated or potential sales the company may reach in a defined time period under given conditions.

trend analysis.SALES FORECASTING METHODS Two categories of sales forecasting methods exist: • Survey methods are qualitative and include executive opinion. All rights reserved. Inc. sales force composite. market factors. naïve models. Copyright © 2001 by Harcourt. . and customer’s intention surveys. • Mathematical methods are test markets. and correlation analysis.

Inc. All rights reserved.4 THE MORE POPULAR OF MANY FORECASTING METHODS SM u es r t v h e o y d Mle aa t s t tM hah e m o i c d Executive Opinion User’s Expectation Build-toOrder Test Market N a i v e Regression T r e n d Sales Force Composite Moving Average Exponential Smoothing Copyright © 2001 by Harcourt. .FIGURE 5.

SURVEY FORECASTING METHODS Four basic survey methods are • Executive Opinion • Sales Force Composite • User’s Expectations • Build-to-Order Copyright © 2001 by Harcourt. . Inc. All rights reserved.

By a group of individuals. Inc. All rights reserved. 2. By one seasoned individual (usually in a small company).” Copyright © 2001 by Harcourt. sometimes called a “jury of executive opinion. .Executive Opinion Executive forecasting is done in two ways: 1.

The group approach uses two methods: 1. and these are averaged into one forecast by the chief executive. Inc. All rights reserved. 2. Copyright © 2001 by Harcourt. Key executives submit the independent estimates without discussion. each person presents separate estimates. differences are resolved. . The group meets. and a consensus is reached.

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

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

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

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

Copyright © 2001 by Harcourt.MATHEMATICAL FORECASTING METHODS Test markets are a popular method of measuring consumer acceptance of new products. Inc. All rights reserved. .

UT Omaha. GA Jacksonville. NE Syracuse. OR Portland. IL Lexington. AR Baton Rouge. TX Corpus Christi. TX Salt Lake City. WI Fresno.FIGURE 5. . CA Bakersfield. NC Charleston. NY Erie. Spokane. FL Little Rock. WA Eugene.5 CITIES COMMONLY USED AS TEST MARKETS – RESIDENTS ARE MOST LIKELY TO SEE NEW PRODUCTS. CA Oklahoma City. TN Chattanooga. OK Tucson. PA Toledo. LA Beaumont. Inc. PA Peoria. KY Knoxville. TX Copyright © 2001 by Harcourt. All rights reserved. OH Johnstown. AZ Lubbock. ME Madison. TN Charlotte. SC Savannah.

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

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

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

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

All rights reserved. .6 Copyright © 2001 by Harcourt.6 Period 6 Forecast = 366.1 EXAMPLE OF MOVING-AVERAGE FORECAST PERIOD 1 2 3 4 5 6 SALES VOLUME 200 250 300 350 450 ? SALES FOR THREE-YEAR THREE-YEAR PERIOD MOVING AVERAGE 750 900 1100 ( 3) = 300 366. Inc.TABLE 5.

It allows consideration of all past data. but less weight is placed on data as it ages.Exponential Smoothing Exponential smoothing is similar to the movingaverage forecasting method. All rights reserved. Inc. . Next Year’s Sales = a (This Year’s Sales) + (1-a) (This Year’s Forecast) Copyright © 2001 by Harcourt.

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

6 A TREND FORECAST OF SALES Observed Sales 600 500 400 Trend Line Forecast Sales Sales 300 200 100 0 1984 1985 1986 1987 Time 1988 1989 1990 Copyright © 2001 by Harcourt.FIGURE 5. . Inc. All rights reserved.

Copyright © 2001 by Harcourt. 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. Inc. .

. All rights reserved. Inc.FIGURE 5.7 REGRESSION ANALYSIS Linear Relationship Curvilinear Relationship Sales 0 Population (A) Sales 0 Population (B) Copyright © 2001 by Harcourt.

All rights reserved.FIGURE 5. Inc. e s id ? ut lp O e d sH ul ce Co our S r te pu lp? o m He e C re th a d ftw ul So Co nd a .8 QUESTIONS TO ANSWER TO IMPROVE CHANCES OF HITTING THE FORECASTING BULL’S-EYE H th av I e e an ncr Ba Yo Fo d ea si u re Se sin cs Co ca le g to n s st cti A in n cc ide g gY u re M o ra d et ur cy ho d? W M hi Yo eth ch u od Fo U S re se h ca ? ou s t ld (s ) F 140% 130% 120% 110% Have You Developed a Good Sales Forecasting Process? Market Decision Support System Breakdown Use Multiple Forecasting Methods Buildup O R E C A S T 90% 80% 70% 60% Copyright © 2001 by Harcourt.

good in dynamic conditions Accurate under dynamic conditions Limited Accurate Limited Accurate under stable conditions Accurate under stable conditions Varies widely Accurate if variable relationships stable Copyright © 2001 by Harcourt. Inc.2 GUIDE TO FORECASTING FORCASTING METHOD Executive Opinion Delphi Method Sales Force Composite User’s Expectations Test Markets Naïve Method Moving Average Exponential Smoothing Least Squares Regression Analysis TIME SPAN Short to medium Medium to long Short to medium Short to medium Medium Present to medium Short to long Short to medium Short to long Short to Medium MATHEMATICAL SOPHISTICATION Minimal Minimal Minimal Minimal Needed Minimal Minimal Minimal Needed Needed COMPUTER NEED Not essential Not essential Not essential Not essential Needed Not essential Helpful Helpful Desirable Essential Limited ACCURACY Limited.TABLE 5. . All rights reserved.

usually one year. All rights reserved. . Inc. Copyright © 2001 by Harcourt.THE SALES MANGAGER’S BUDGET The sales force budget is the amount of money available or assigned for a definite period.

.BUDGET PURPOSES • Planning • Coordination • Control Copyright © 2001 by Harcourt. All rights reserved. Inc.

Management b. Selling aids 8. Retirement plan c. Special incentives 5. Product samples 7. Social Security b.3 SALES FORCE OPERATING COSTS 1. Commissions 3. All rights reserved. Transportation expenses 9.TABLE 5. . Salespeople 2. Stock options d. Base salaries a. Entertainment 10. Hospitalization 4. Office expenses 6. Inc. Travel Copyright © 2001 by Harcourt. Other compensation a.

. prices. Copyright © 2001 by Harcourt. Inc.BUDGETS SHOULD BE FLEXIBLE Sales. All rights reserved. or the competition’s marketing efforts are some factors that may be higher or lower than expected. costs.

Firms know sales forecasting is never 100 percent correct. To create a sales forecast. Copyright © 2001 by Harcourt. the top executives give final approval. Inc. Two categories of sales forecasting methods are survey methods and mathematical methods. the job of forecasting has become an integral part of a firm’s marketing decision support system (MDSS). All rights reserved. . Because the sales forecast has a major impact on the company. sales managers should know how to use a computer.THE BOTTOM LINE Because of the growing trend in business to centralize data collections. 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.

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