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Copyright © 2010, S L Gupta Excel Books Sales and Distribution Management Text & Cases (2 nd Edition) S L Gupta 10-1 Sales Forecasting, Quotas and Territory Management Basics of Sales Management Ch-10 Block : I Chapte r 10 Sales Forecasting, Quotas and Territory Management
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Page 1: Chapter 10 Sales Forecasting, Quotas and Territory Management-Sales and Distribution Management

Copyright © 2010, S L Gupta

Excel BooksSales and Distribution Management Text & Cases (2nd Edition) S L Gupta10-1

Sales Forecasting, Quotas and Territory Management

Basics of Sales Management

Ch-10

Block: I

Chapter

10Sales Forecasting, Quotasand Territory Management

Page 2: Chapter 10 Sales Forecasting, Quotas and Territory Management-Sales and Distribution Management

Copyright © 2010, S L Gupta

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Introduction

Demand forecasting is a useful tool for planning. It helps estimate and forecast

the market share of a firm. Most firms are very often confronted with the task of

projecting future sales of their product. Identifying future sales problems is no

easy task for companies, small or big. In some cases, it is very difficult to get any

information about future market sales. Sales forecasting is not just an estimation

of sales; it is also matching sales opportunities — actual and potential—with sales

planning and procedures.

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Sales Forecasting

Sales forecasting, according to Cundiff and Still, is “an estimate of sales during a

specified future period which is tied to a proposed marketing plan and which

assumes a particular set of uncontrollable and competitive forces.”

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Purpose of sales forecasting

Steps in Sales Forecasting

1. Defining the objectives to be achieved.

2. Dividing various products into homogeneous groups.

3. Analysing the importance of various factors to be studied for sales

forecasting.

4. Selecting the method.

5. Collecting and analysing the related information.

6. Drawing conclusions from the analysis made.

7. Implementing the decisions taken.

8. Reviewing and revising the sales forecasting from time to time.

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Types of Forecast

The term forecast is ordinarily used to refer to a prediction for a future period. Although this usage is technically correct, it is too general for managerial value.

A useful way for viewing what is being forecast is presented in figure above.

Four different types of forecasts emerge from this classification scheme:

1. Market Potential

2. Market Forecast

3. Sales Potential

4. Sales Forecast

Market Potential Market Potential

Sales Potential Sales Potential

Industry Level

Firm Level

Best PossibleResults

Expected Resultsfor given strategy

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Meaning of Sales Forecast The sales forecast is a prediction of expected sales for a specified period. It is an estimate for sales in rupee or units for a specified future period. In other words, it is basic tool for anticipating the nature of future sales or sales prediction. According to Cundiff and Still, is “an estimate of sales during a specified future period which period is tied to a proposed marketing plan and which assumes a particular set of uncontrollable and competitive forces”. According to Stuits, “A sales forecast is an estimate of the amount or unit for a specified future period under marketing plan or programme”. According to American marketing Association “forecasting is an estimate of sales in dollars or physical units for a specified future period under a proposed marketing plan or program and under an assumed set of economic and other forces outside the unit for which the forecast is made. The forecast may be for a specified item of merchandise or for an entire line.”

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Objectives of Sales Forecasting

The objectives of sales forecasting may be studied under the following two major

heads

1. Short - run (range) objectives.

2. Long - run (range) objectives.

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Short - Run objectives

1. Formulation of suitable production policy so as to meet the demand as per

the sales forecast.

2. To make provision for the regular supply of raw material etc. for the

production on the basis of sales forecast.

3. To make the best utilization of machines on the basis of sales forecast.

4. To make the regular supply of labour force as per the sales forecast.

5. To determine an appropriate price policy for a given period.

6. To estimate and provide the requisite working capital on the basis of sales

forecast.

7. To establish sales quotes targets for different market segments.

8. To estimate stock requirements for unfinished semi-unfinished and finished

products for a specified period of time.

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Long Run objectives

1. Estimating cash inflows from sales.

2. Provision for capital expenditure.

3. Planning of plant capacity so as to meet the future demand.

4. Manpower planning so that production and distribution may not suffer in the

long run.

5. Planning for acquisition of raw materials so as to meet the future demand.

6. Determining the dividend policy.

7. Establishing coordination between various functions of on organization.

8. Reducing selling costs and thereby reduces the final cost of the product.

9. To estimate future profits of the business enterprise.

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Factors affecting or Influencing sales forecasting

1. Business Environment

2. Conditions within the industry

3. Internal Conditions of the business Enterprise

4. Socio Economic Conditions

5. Factors Affecting Export Trade

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Steps in sales Forecasting1. Forecasting of General Economic Conditions: General economic conditions within the boundaries of the nation, do effect the purchasing power of the individual customer. The standard yardstick for assessing general economic conditions will be: gross national product, per capita income, personal income, personal consumption expenditure, level of employment and the consumer price index.2. Forecast of Industry Sales: Though the industry forecast are available from

the trade associations and chambers of commerce, a SWOT analysis of the competition prevailing could throw much light on the competition within the industry.3. Preparing Forecast of Company Sales: The sales manager, while preparing the sales budgets of the company has to forecast the company and product sales for the coming year. The entire planning of the organization for production, manpower, financial arrangements, and revenue calculations will depend upon the accuracy of the sales manager's forecast.

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Choice Modeling

Discrete choice, volumetric choice, and conjoint models are analytical methods used to understand the behaviour of consumer purchasing behaviour. Our Advanced Analytics Consultants set up carefully controlled experiments in which consumers are simply asked to choose how many of each product to buy, given predetermined sets of realistic conditions.

Discrete Modeling

Discrete choice modeling is ideal for each product categories where only one purchase is made over a longer period of time. In these carefully controlled experiments, current and potential customers are asked which one product they would buy, given a realistic scenario including all of the products of services that compete with one another in the marketplace. In each scenario, the respondent is presented with a different set of marketing stimuli and asked which brand or product would be purchased. The type of decision that the respondents make in each scenario is designed to mimic the real market, and again each variables' importance is being determined implicitly.

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Marketing Mix Modeling

Marketing mix modeling measures the potential value of all marketing inputs

and identifies marketing investments that are most likely to produce long-

term revenue growth.

Typically, Marketing Mix Modeling involves the use of multiple regression

techniques to help predict the optimal mix of marketing variables. Regression

is based on a number of inputs and how these relate to an outcome such as

sales or profits. Once the model is built and validated, the input variables can

be manipulated to determine the net effect on a company's sales or profits.

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The data that go into creating a Marketing Mix Model include: Economic data Industry data Category data Advertising data

Promotional data Competitive data Service data

Product Data Pricing Data Features & Performance

Market Outcome Data Sales Revenues Profits

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Methods of Sales ForecastingSurvey MethodThe survey method is based on the opinion of buyers and consumers. It is useful with respect to industrial products but not as far as consumer goods are concerned.Expert OpinionAccording to this method, a company invites the opinions of executives and consultants who are acknowledged experts in studying sales trends.Market Studies MethodThis method is commonly used by marketers for consumer goods. It is also known as the Market Test Method. A market test provides data about consumers and the marketing mix.Sales Force Opinion MethodThis method estimates the buyers intentions from experienced personnel in the sales force. They can easily forecast for their respective territories.

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Statistical Methods

Statistical methods are considered to be superior techniques of sales forecasting because their reliability is higher than that of other techniques. Some commonly used statistical methods are given below:

Commonly Used Statistical Methods

Trend Method

This method provides a rough trend of the forecast on the basis of past experience. It does not, however, take into account the changing environment. It is a simple method for business forecasting on the basis of past performance.

Graphical Method

According to this method, sales data are plotted on graph paper and a graph is drawn for a number of years. This is a simple and inexpensive method.

Time Series Method

This method is used for long periods duly taking into account cyclical changes, seasonal variations and irregular fluctuations.

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Time Series Method

“A time series may be defined as a collection of magnitudes belonging to different time periods, of some variable or composite variables, such as production of steel, per capita income, gross national product, price of tobacco, or index of industrial production.”

Ya-uin-chou

1980 1981 1982 1983 1984 1985

Sales (Rs)

0

Years

X

y

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The Time Series Method shows the future trends of sales. The various techniques

that can be used for determining these trends are:

Freehold or Graphical Method

Semi-average Method

Moving Average Method

Method of Least Squares.

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1988 1989 1990 1991 1992 1993

Sales (Rs)

0

Years

X

yFreehold or Graphical

Method:

This is the simplest

method for obtaining a

straight line. A trend line

is fitted by freehand to

know future sales.

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Semi Average Method: According to this method, data are divided into two parts,

preferably with the same number of years.

For example, (3-year semi-averages)

Year Sale (Rs. Lakhs)

1986 12

1987 13

1988 12

1989 14

1990 13

1991 161986 1987 1988 1989 1990 1991

SALESin (Rs)Lakhs

0

Years

X

y

Actual Line

Trend Line

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Moving Averages Method: According to this method, a trend is determined by

moving averages. Therefore, out of the averages such as 3-yearly moving, 5-

yearly moving and 7-yearly moving average, the five-yearly moving average will

be computed as follows:

Least Squares Method: This method is most commonly used in practice. The

straight line is represented by the equation:

yc = a + bx

For example: Fit a straight line trend for the following series. Estimate the value

for 1994.

A B C D E 5

B C D E F 5

C D E F G 5

Year: 1987 1988 1989 1990 1991 1992 1993

Sales: 80 90 92 83 94 99 92

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Sales Quotas

A sales quota refers to an expected routine assignment to sales units, such as

territory, districts and branches, etc. Sales quotas are also assigned to individual

salespeople over a particular time period and are used to plan, control and

evaluate the selling activities of a company. Sales control is facilitated by setting

quotas to use in appraising the performances of sales force. Sales control is

tightened by setting quotas on expenses and profitability of sales volume. They

are tactical in nature and are thus derived from the sales force strategic

objectives. Strategies stem from marketing and sales plans, sales forecasts and

budgets. Thus, quotas are guides for what needs to be done and a means of

evaluating how well they have been done.

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Importance of Sales Quotas

Sales quotas serve several purposes. The important objectives are shown in the

diagram below:

Sales Quotas

Quotas provide performance targetsQuotas provide standards Quotas provide control Quotas are motivational

Sales Objectives

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Purpose of setting sales quotas

Provides Goals and Incentives.

Evaluating performance.

Controlling the sales person activities.

Uncovering strengths and weaknesses in the selling structure.

Improving the compensation Plan's effectiveness.

Controlling the Selling Expenses.

Enhancing sales Contests,

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Types of Sales Quotas

A sales organisation can set many types of quotas. The most common quotas are

shown in the following diagram:

Types of Sales Quotas

Sales Volume Quotas

ProfitQuotas

Expense Quotas

ActivityQuotas

QuotaCombinations

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Sales Volume Quotas

Sales volume quotas include sales in rupees or product unit objectives for a specific period of time.

Sales volume quotas are first set for the entire year. The yearly total volume quota is then set for shorter time periods, such as three months, six months and nine months. The sales force is assigned their yearly quotas. Sales targets are set for the year for sales force so their aim is to sell throughout the year to achieve the total sales objective. The sales volume quotas can be set in the following areas:

Sales ValumeQuotas

Product line Product range Sales divisionSales territories Sales districts Branch offices Sales force (Individual)

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Profit Quotas

Profit quotas are particularly useful in multiproduct companies where different

products contribute to varying levels of profits. It creates opportunities for the

salesperson to make optimum use of time.

Expense Quotas

Expense quotas are related to selling costs within reasonable limits. Some

companies set quotas for expenses linked to different levels of sales attained by

their sales force.

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Activity QuotasThese quotas set objectives for job-related duties useful for attaining salespeople’s performance targets. Activity quotas are required to make the sales force perform other activities which have long-term implications on the goodwill of the firm. A sales organisation must set a target level of performance for salespersons. Some common types of activity quotas prevalent in Indian companies are as follows

Activity quotas typically should not be a basis for rewards. Rather, their attachment helps the manager better understand why salespeople do or do not meet their sales volume quota.Quota CombinationsMany companies use a combination of these quotas. The two most commonly combined are sales volume and activity quotas. These quotas influence selling and non-selling activities.

Number of sales presentations madeNumber of service calls madeNumber of dealers visitedNumber of calls made for recoveryNumber of new accounts opened

Common Types of Activity Quotas

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Territory Management

The following diagram outlines the activities of territory management

Trade relations/Dealer relations

Potential business

Coverage

Reports

Territory size

Portfolio of accounts

Selling techniques

Customer satisfaction

Selling abilities

Activities of

Territory

Management

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Why Establish Sales Territories?

A company can develop and use sales territories for various reasons. Some of

the reasons are as follows:

To obtain entire coverage of the market

To establish a salesperson’s responsibility

To evaluate performance

To improve customer relations

To reduce sales expenses

To allow better matching of salesperson to customer

To benefit salespeople and the company.

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Factors to be Considered when Designing Territories

In setting up or designing sales territories, these four steps must be followed:

1. Selecting a basic geographical control unit

2. Determining sales potentials in control unit

3. Combining control units into tentative territories

4. Adjusting for coverage difficulty and reallocating tentative territories.

The two basic approaches commonly used for designing sales territories are discussed below. Market Build-up Approach

In this approach, an estimation of the present and potential products/services demand is made by looking at how the market is built up, who are its

present/potential users, how much do they consume and at what frequency. The Workload Approach

This approach is designed by WJ Talley on the basis of the workload performed by salespersons.

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Assigning to Territories

Some salespeople can handle large territories and the travel associated with

them, some territories require experienced salespeople, and some are best

suited to new people. There are a few factors a manager needs to consider

when assigning both new and experienced people to territories.

In today’s complex selling situation, the presence of a well-thought-out daily

and weekly route plan is required for effective management. The following

may be considered basic route patterns of a territory.

Straight Line Pattern Base First Call

C

C

C

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Clover Leaf Pattern Major City Pattern

CC

C

C

C

CC

C

Base

2 3

4 5

1

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Sales Forecasting and Global Factors With globalization of trade, it has became difficult to forecast accurately, more particularly for the long-term. Technological changes, sudden appearance of a competitor from any part of the world, selling the goods at competitive prices or even resorting to dumping, are some of the problems faced in accurate forecasting. It requires a well planned effort to take into consideration the factors influencing the sales strategy, so that sales forecasting may be a realistic one, as far as possible. This situation has been drafted by Warren J Keegan as follows:

In terms of cultural sensitivity, consumer products are more sensitive than industrial products. Another rule of thumb is that food products, especially those served at home, frequently exhibit the highest degree of cultural sensitivity. What this means to managers is that some products of daily life use are likely to demand significant adaptation. Others require only partial adaptation and still others are best left unchanged. Cont….

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Companies differ in both their willingness and capability to identify and produce profitable product adaptations. Unfortunately, too many stage one and stage two companies are oblivious to the foregoing issues. One new-product expert has described three stages that a company must go through as follows

1. Cave dweller. The primary motivation behind launching new products internationally is to dispose of excess production or increase plant-capacity utilization.

2. Naive nationalist. The company recognizes growth opportunities outside the domestic market. It realizes that cultures and markets differ from country to

country and, as a result, it sees product adaptation as the only solution.

3. Globally sensitive. This company views regions or the entire world as a competitive marketplace. New-product opportunities are evaluated across countries, with some standardization planned as well as some differentiation to accommodate cultural variances. New-product planning processes and control systems are reasonably standardized.


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