Developing Forecasts

1
Developing Forecasts

• Appendix Four

2
Importance of Forecasting

• Determining salesforce size
• Designing territories
• Establishing quotas and selling budgets
• Determining sales compensation levels
• Evaluating salesperson performance
• Evaluating prospective accounts

3
Types of Forecasts
4
Example Pimentels Ride Pimping Co.

• In Bakersfield, during next year
• Market Potential every car in Bakersfield gets
  pimped during the next year
• 200,000 cars x 20,000 per car 4 billion
• Market Forecast based selling efforts of
  various pimping companies, expect to see
  1,000,000
• Sales Potential most Pimentels could get is
  500,000wont get cars pimped by their owners
• Sales Forecast current strategy targets
  middle-aged men, mid-life crises, 100,000

5
Uses of Forecasts

• Market potential
• Sales potential
• Allocation of selling effort
• Salesforce size
• Territory design
• Market forecast
• Sales forecast
• Quotas
• Selling budgets

6
Forecasting Approaches

• Top Down Bottom Up
• SBU
• Zone
• Region
• District
• Territory
• Account

7
Top-Down Forecasting Approaches

• Company forecasting methods
• Moving averages
• Exponential smoothing
• Decomposition methods
• Breakdown methods

8
Top-Down Forecasting Approaches

• Company forecasting methods (cont.)
• Moving averages
• Based on average company sales for previous years
• Straightforward, simple calculations
• Assumes that sales are relatively consistent and
  that there are no major changes in the business
  environment.

9
Moving Averages

• How many years?

10
Moving Averages Example
11
Top-Down Forecasting Approaches

• Company forecasting methods (cont.)
• Exponential smoothing
• Weighted moving averages
• Determining appropriate weight (a) is critical
• a is how much the most recent year counts
• Sales forecast for next year
• (a)
  (actual sales this year)
• (1-a)
  (forecast for this year)

12
Exponential Smoothing Example
13
Exponential Smoothing Example
Sales forecast for next year (a) (actual sales
this year) (1-a) (forecast for this year)
(0.2) (8,644,000) (1- 0.2) (8,484,000)
8,516,000
14
Top-Down Forecasting Approaches

• Company forecasting methods (cont.)
• Decomposition methods
• Four components from previous sales data
• Trend
• Cycle
• Seasonal
• Erratic events
• Conceptually sound
• Require complex statistical methods

15
Decomposition Method Example

• Sales in 2004 100,000
• Trend growth trend of 5
• Cycle expect 10 drop due to economic slowdown
• Seasonal (not relevant yet, doing a forecast for
  whole year first)
• Erratic events recent jump in gasoline prices
  expected to cause 15 drop in business

16
Decomposition Method Example

• Basic arithmetic reminders
• For 5 increase in sales,
• multiply by 105 ( 1.05)
• For 10 decrease in sales,
• multiply by 90 ( 0.9)

17
Decomposition Method Example

• Sales in 2004 100,000
• Trend 5
• Cycle -10
• Erratic events -15
• Forecast for 2005 100,000 (1.05) (0.9) (0.85)
• 80,325

18
Decomposition Method Example

• Seasonal component due to Christmas shopping
  4th quarter sales are 30 higher than other
  quarters
• 3q 1.3q 1
• q 1 / 4.3
• Sales forecast for each of first 3 quarters
• 80,325 / 4.3 18,680
• Sales forecast for 4th quarter
• 18,680 (1.3) 24,284

19
Decomposition Method Example

• Text uses different method for seasonal
  component
• Split sales into four quarters
• 80,325 / 4 20,081
• But 4th quarter is 30 higher
• 20,081 (1.3) 26,105
• The rest of the sales forecast is split between
  the other three quarters
• (80,325 - 26,105)/3 18,073

20
Decomposition Method Example
Difference due to rounding
21
Top-Down Forecasting Approaches

• Breakdown methods
• Market factor methods
• BPI (Buying Power Index)
• BPI (5I 2P 3 R) / 10
• I of U.S. disposable income
• P of U.S. population
• R of U.S. retail sales
• Readily available
• Most appropriate for often-purchased consumer
  goods

22
Bottom-Up Forecasting Approaches

• Survey of buyer intentions method
• Jury of executive opinion method
• Delphi method
• Salesforce composite method

23
Bottom-Up Forecasting Approaches

• Survey of buyer intentions method
• Asks individual accounts (customers) about
  purchasing plans for future period
• Translates these into account forecasts
• Forecasts combined to create forecasts for higher
  levels
• Purchasing plans may be distorted
• Too much effort
• Dont want to tip off competitors
• May pad intentions

24
Bottom-Up Forecasting Approaches

• Jury of executive opinion method
• Executives use expert knowledge to forecast sales
  for individual accounts
• Averaged or discussed to form consensus
• More accurate long-range, industry-level
  forecasts
• Most popular method for forecasts six months or
  longer

25
Bottom-Up Forecasting Approaches

• Delphi method
• Structured form of jury of executive opinion
  Panel of managers
• Advantages

Forecasts
Consensus
Review
Report
26
Bottom-Up Forecasting Approaches

• Salesforce composite method
• Salespeople provide forecasts for assigned
  accounts
• Pipeline report, funnel report
• 3-month rolling forecast
• Improving salespeoples forecasts
• Train forecasting procedures
• Detailed account information
• Feedback on accuracy of previous forecasts

27
Selecting Forecasting Methods
Trade-off

• Accuracy

• Lower cost
• Familiarity with the method
• Lower data requirements
• Ease of implementation

28
Multiple Forecasting Approaches

• Most firms use multiple methods
• Combine results for a final forecast
• Greater confidence in the forecast if different
  methods produce similar sales forecasts