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Module 3- Forecasting

Module 3- Forecasting

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Published by: Rakshith Salian on Jan 14, 2013
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Forecasting

Agenda

• Sales Potential and Sales Forecasting

• Different Methods for the above

• Converting industry forecast into company sales forecast
• Evaluation of forecasts

Sales Potential
• A sales potential is an estimate of the maximum possible sales opportunities present in a particular market segment open to a specified company selling a good or service during a stated future period
• To illustrate, an estimate of the number of low- priced pocket cameras that might be sold in San Mateo County, California, during the calendar year 1987 by the Eastman Kodak Company would be the 1987 San Mateo County sales potential for Eastman Kodak lowprice pocket cameras

Sales Potential

• In other words, Sales potentials are quantitative estimates of the maximum possible sales opportunities present in particular market segments open to a specified company selling a good or service during a stated future period
• They are derived from market potentials after analyses of historical market share relationships and adjustments for changes in companies’ and competitors’ selling strategies and practices

Sales Potential V/s Market Potential

•A Sales potential indicates sales opportunities available to a particular manufacturer, such as to Eastman Kodak Company, while Market potential indicates sales opportunities available to an entire industry, say steel industry

Sales Forecast

• A Sales Forecast is an estimate of sales, in dollars or physical units, in a future period under a particular marketing program and an assumed set of economic and other factors outside the unit for which the forecast is made • A sales forecast may be for a single product or for an entire product line • It may be for a manufacturer’s entire marketing area, or for any sub- division of it

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Sales Forecasting Methods

Jury of Executive Opinion

• The Delphi Technique • Poll of Sales Force Opinion • Projection of Past Sales • Time- series Analysis • Exponential Smoothing • • • • Evaluation of past sales projection methods Survey of Customer’s Buying Plans Regression Analysis Econometric Model Building and Simulation

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Jury of Executive Opinion There are two steps in this method:

i. High- ranking executives estimate probable sales, and,
ii. An average estimate is calculated

• The assumption is that the executives are well informed about the industry outlook and the company’s market position, capabilities and marketing program • All should support their estimates with factual material and explain their rationales

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Jury of Executive Opinion Method Companies using the jury of executive opinion method do so because of the following 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 wellinformed people
3. This may be the only feasible approach if the company is so young that it has not yet accumulated the experience to use other forecasting methods 4. This method may be used when adequate sales and market statistics are missing, or when these figures have not yet been put into the form required for more sophisticated forecasting methods 7

The Delphi Technique
• Several years ago, researchers at the Rand Corporation developed a

technique for predicting the future that is called the Delphi Technique • This is a version of the Jury of Executive Opinion Method in which those giving opinions are selected for their “expertise”

• The panel of experts responds to a sequence of questionnaires in which the responses to one questionnaire are used to produce the next questionnaire •Thus information available to some and not to other experts is disseminated to all, enabling all to base their final forecasts on “all available” information

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Poll of Sales Force Opinion Method • In the Poll of Sales Force Opinion Method, often tagged “the grass- roots approach”, individual sales personnel forecast sales for their territories; then individual forecasts are combined and modified, as management thinks necessary, to form the company sales forecast • This approach appeal to practical sales managers because forecasting responsibility is assigned to those who produce the results

• Refer Page No. 44 of Cundifff and Still Text for strengths and weaknesses of Poll of Sales Force Opinion Method

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Projection of Past Sales Method • Next year’s sale= this years sales* this year’s sales/ last year’s sales • Time- series analysis: A statistical procedure for studying historical sales data • Exponential smoothing: A statistical technique for short- range sales forecasting • Next year’s sale= a(this year’s sale)+ (1-a) (this year’s forecast)

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Survey of Customer’s Buying Plans • Here, customers are asked about their future buying plans • Industrial marketers use this approach more than consumer goods marketers, because it is easiest to use where the potential market consists of small numbers of customers and prospects, substantial sales are made to individual accounts, the manufacturer sells direct to users, and customers are concentrated in a few geographical areas( all the more typical of industrial than consumer marketing)

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Regression Analysis • Regression Analysis is a statistical process and, as used in sales forecasting, determines and measures the association between company sales and other variables • It involves fitting an equation to explain sales fluctuations in terms of related and presumably causal variables, substituting for these variables values considered likely during the period to be forecasted, and solving for sales

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Regression Analysis

• There are three major steps in forecasting sales through regression analysis: 1. Identify variables causally related to company sales

2. Determine or estimate the values of these variables related to sales
3. Derive the sales forecast from these estimates

Econometric Model Building and Simulation
• Econometric

model building and simulation is attractive as a sales forecasting method for companies marketing durable goods •This approach uses an equation or system of equations to represent a set of relationships among sales and different demand- determining independent variables • Then, by “plugging in” values (or estimates) for each independent variable (that is, by “simulating” the total situation), sales are forecast •An econometric model (unlike a regression model) is based upon an underlying theory about relationships among a set of variables, and parameters are estimated by statistical analysis of past data •An econometric sales forecasting model is an abstraction of a realworld situation, expressed in equation form and used to predict sales
•For example, the sales equation for a durable good can be written : S= R + N

Converting Industry Forecast to Company Sales Forecast

•Deriving a company sales forecast from an industry sales forecast requires an appraisal of company strengths and weaknesses (as well as marketing programs) against those of competitors •The result is an estimate of expected market share that (when applied to the industry sales forecast) results in forecast of company sales •Forecasting a company’s market share varies in complexity from one industry to another •In the steel industry, the number of competitors is small and market share is stable, so determining a given company’s market share is a simple task- a matter of projecting a past trends and adjusting for anticipated changes in the company’s relative strengths and weaknesses •But in the women’s clothing industry, the number of competitors is large and market shares fluctuate widely, so determination of market share is difficult

Evaluation of Sales Forecasts

•Before submitting forecasts to higher management, sales executives evaluate them carefully, regardless of the extent of their personal involvement in the preparation •Every forecast contains elements of uncertainty •All are based on assumptions •So a first step in evaluating a sales forecast is to examine the assumptions (including any hidden ones) on which it is based •Sales executives should view each assumption critically •Sales executives should evaluate the accuracy and economic value of the forecast as the forecast period advances •Forecasts should be checked against actual results, differences explained, and indicated adjustments made for the remainder of the period

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