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Academic Note on Sales Territory Alignment Models

Submitted by Sarthak Mukkar 12IB-041 Territory Alignment is one of the most important jobs of the sales manager. It is also a continuous task. Territories have to be continuously analyzed for account changes, level of competition in each product category, number and quality level of products in the portfolio, types and quality of services and customer support to be provided and other improvements. Territory alignment is time consuming and manual process where charts, maps and topographical data are taken into account. Alignment of sales territories impacts profits. Practitioners apply techniques, which balance territories with respect to attributes such as workforce potential and workload. The models specified below answer the following concerns of salespeople and are aimed to 1. Reducing Sales Cost 2. Reducing Travel time of salespeople 3. Streamlining and better schedule planning. 4. Better distribution of workload among the sales people 5. Increased customer concentration and effectiveness Managers have been facing the issue of balancing Territory for long but not much analytical work was done to solve the issue before early 70s when respectable researchers, notably, Hess & Samuels, Easingwood, Lodish, separately, came forward with their own solutions to the problem. Hess & Samuels came up with a model where they assigned geographical units to salesmen such that each salesman has equal activity. To further clearly define activity, they used measures such as calls required by accounts in a unit, sales potential of the unit, the units number of customers or present sales. Similarly, Easingwood developed an analytical approach to determine regions and territories with equal workload. However, his model did not include a very important factor of the travel time of salesman, assuming it to be equal for all accounts. Leonard M. Lodish, in 1975, developed an analytical model, based out of the experiences of CALLPLAN, which is a model-based system he developed in 1971 to help salesmen determine the number of calls to make to each account and each prospect in order to maximize the profit contribution of his territory. The model is still applauded by the literati. It basically tries to take into account

almost all the time factors, which the salesman can face while planning his travel, and also, tries to minimize the wastage of time as well as intelligently allocate among the different accounts. Several modifications and improvements were later made to that of Lodishs CALLPLAN model; such as Glaze and Weinberg, in 1979, further improved Lodishs proposal to find a Profit Contribution Maximizing Solution; where the CALLPLAN model was combined with other assignment models to improve problem of the balancing of territories This note talks first gives a brief of the famous CALLPLAN model without going into its details and then introduces an improvement, Contribution Optimizing Sales Territory Alignment (COSTA) Model, which simultaneously determines the optimal selling time allocation across SCUs per territory as well as the optimal assignment of SCUs to a set of territories pre-specified by base locations of the salesmen. CALLPLAN proposes a heuristic solution to: Solve the problem of allocating selling time across accounts by assuming one super territory in which the selling time is equal to the sum of selling times available to all salespeople. Reassign accounts step-by-step intuitively, so that individual selling time constraints are met and the marginal profits of selling time has become as equal as possible CALLPLAN assumes there is some relationship between the times a salesman spends with the account and the accounts sales volume. Territories to be realigned are divided into mutually exclusive, collectively exhaustive sub areas based on decision variables, such as which salesman should cover which area, how many trips should he make and how much time should he be spending in calling on accounts once he is in the area. Let J subareas be defined such that accounts, usually called during the same trip, included in the same sub area. Natural grouping, rather than the same locality or region defines the subareas. Let usj denote the average time per round trip for salesman s to area j. changing the location of salesman would involve changing the travel time to the area. The model assumes the time per trip to a subarea is independent of the number of trips made to other subareas.

The model decides on the following parameters: Designation of which salesman is to be assigned to each subarea Wsj = { 1 if salesman s is assigned to j subarea 0 otherwise tsj : The amount of time, during the planning period, salesman s should spend in area j. nsj : The number of trips salesman should make to the area. xi : average number of calls to make on account i during planning period.

Thus, the following equation can be concluded: Wsj = 1 for j = 1, 2, . J


If Tsj is the total time available with the salesman for selling and travelling over the selling period. Obviously, the number of trips made to the area multiplied by the travel time per trip plus the time taken to reach the area has to be lesser than or equal to Tsj . Thus, Wsj(nsj usj + tsj ) Tsj for s = 1, 2, S

The model further builds on the above equation to analytically explain how to further align the territories with the aim of maximizing the profit response in a subarea during the planning period, and then through complex equations, predicts the sales reactions when then call rates are increased/decreased over time. More details about the model can be easily found through secondary research. Though the CALLPLAN model is pretty exhaustive in terms of the breadth of the subject area covered, I shall now move on from the CALLPLAN model to discussing an improvement, COSTA, which was offered sometime in the late 70s. COSTA: Contribution Optimizing Sales Territory Alignment COSTA simultaneously determines the optimal selling time allocation across SCUs per territory as well as the optimal assignment of SCUs to a set of territories pre specified by the base locations of salespersons. The reason COSTA model is being discussed here is that: Despite its theoretical inferiority, it is easier to understand, requires only a moderate amount of data and feasible solutions can even be produced by hand. It optimizes profit contribution without relying on the assumption of equal marginal profit of selling time across SCUs of all territories. It works with aggregate sales response functions at the level of SCUs. This aggregation requires substantially less data and is also attractive for companies that cannot calibrate sales response functions at the level of accounts. It utilizes the concept of incorporating travel time effects directly to the sales response function per SCU, depending on the assignment to a certain salesperson. It is suitable for sales response functions of any given concave form. The powerful algorithm developed for COSTA solves even large sales territory alignment problems within short computing time. It takes time travel as well as travel cost into consideration when solving the problem of allocating selling time across SCUs per territory. The Basic Idea of COSTA is to establish a relationship between sales territory design and its profit contribution. Using an appropriate algorithm, it is then possible to determine the territory alignment that maximizes profit contribution.

To establish such a relationship COSTA estimates a sales response function at the SCU level, which offers the advantage that relatively less data is required than if individual accounts were considered. The sales response function considered is: Sj,r = fj,r(tj,r,call) (j belongs to J, r belongs to R) Where: Sj,r : Sales in the rth SCU if assigned to the jth salesperson J : Index set of territories represented by the base locations of the salesperson R : Index set of Sales Coverage Units tj,r,call : Total call time of jth salesman in rth SCU fj,r(tj,r,call) : sales response function providing sales in the rth SCU if the jth salesperson devotes a time of t j,r,call to calling. The above equation introduces what COSTA calls, is the Sales Response Function. The model then, concentrates on various facets of the function to further expand the equation and then derives the following equation:


This sales response function might differ across SCUs and salespersons. Thus, we can model the effect of varying characteristics across SCUs and salespersons so that we can take into account, for example, the effect of varying selling abilities across salespersons or the negative effect of disrupting an existing relationship between accounts and their salespersons.

Conclusion: Though, in this academic note, I have sighted only two popular analytical models, a lot of research has been done for aligning the sales territory on different considerations of sales profit, salesman travel time, salesman call time and using different units for calculation, such as accounts or SCUs or even whole territories. However, I think that all these models can be used more effectively when the company has real time data. In todays highly volatile market, companies have to always keep a track of the constantly changing business environment and should use real time data to track both accounts as well as salesmen so that proper utilization of salesmen time can be done. A typical example can be taken of Marico industries, which uses Geographic Information Systems (GIS) software to design territories, which contains detailed maps of specific regions and allows user to enter additional information, such as demographic data of the market to help managers overcome design problems. Thus, though the sales territory balancing softwares might be built using the CALLPLAN and COSTA models, todays managers need not devote their time to solving complex equations, rather, they have to keep a tab on whether or not the data they are using is up to date and how further detailed information they can get on the daily interactions of their salesmen with their accounts. References: 1. Sales Territory Alignment to Maximize profit by Leonard M. Lodish. JMR, Journal of Marketing Research; Feb1975 2. COSTA: Contribution Optimizing Sales Territory Alignment by Bernd Skiera, Sonke Albers, Marketing Science, Summer 1998. 3. Sales Territory Alignment: An Overlooked Productivity Tool by Andris A. Zoltners and Sally E. Lorimer 4. Chapter 4. Management of Sales Territories and Quotas. from 'Sales and Distribution Management: Text and Cases' by Krishna K Havaldar & Vasant M Cavale