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The key factor in all operational planning is—

The key factor in all operational planning is—. The Sales Forecast Example: Otis Elevator Otis estimates sales for the coming year by territory and by country.

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The key factor in all operational planning is—

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  1. The key factor in all operational planning is— • The Sales Forecast • Example: Otis Elevator • Otis estimates sales for the coming year by territory and by country. • The sales forecast is used to (1) build the production schedule and procure materials, (2) set the operating budget and project cash flows, and (3) make hiring decisions.

  2. Market vs. Sales Potential • Market Potential—an industry-wide concept. Total expected sales of a given product in the entire industry over a given period of time. • Sales Potential—an individual firm’s projected share of the market potential. • The market for beer in the U.S. in 2003 is estimated at 194 million barrels; Budweiser’s share is estimated at 40% (77.6 million barrels).

  3. Sales Potential vs. Sales Forecast • Sales potential is an estimate of what would be sold within a given time period under ideal market conditions; maximum share that could be achieved • Sales forecast is an estimate of what will be sold within a given time period under the company’s proposed marketing plan and resource allocation (these are “expected” conditions—they vary from the ideal).

  4. Techniques for Estimating Sales or Market Potential • Market Factor Derivation • Surveys of Buyer Intentions • Test Markets

  5. Market Factor Derivation: • Market Factor—an item that causes demand for a product or that is related to demand for the product • Example—The number of infant car seats that will be sold is related to (caused by) the # of births. • Lawn Fertilizer—the number of single family dwellings or residences • Carpeting—the number of new construction permits • Economics Textbooks—college enrollments

  6. Survey of Buyer Intentions • Involves questioning (surveying) present and potential customers to find out whether and how much of the product they intend to purchase • Disadvantages? • It’s time consuming. • It’s expensive. • It’s accuracy is questionable—people have a tendency to overstate (exaggerate) their intentions.

  7. Test Marketing • Involves introducing a product on a limited basis under conditions similar to actual market conditions. • Overall, test markets are the most accurate way to estimate sales. • Do not work well for— • (1) Products that have a low rate of consumption—”durables” that are purchased infrequently. • (2) Products that take a long time to gain acceptance—risky or culturally “foreign”

  8. The NAICS System • “North American Industry Classification” System • The government assigns all types of businesses a NAICS code # to identify the types of products they make or sell • Data are compiled and distributed by code numbers • See page 343.

  9. It’s difficult to accurately forecast sales when— • Products are new—there are no historical sales records to project from. • Product sales fluctuate widely—the product demand is erratic, cyclical, or faddish.

  10. Sales Forecasting Methods • Survey Methods—estimates are based on the opinions of “experts”—e.g., managers, sales reps, the buyers themselves. • Mathematical Models—estimates are derived by applying statistical techniques to historical sales data. • Operational Methods—estimates are based on capacity records and financial data.

  11. Executive Opinion • The oldest and simplest method of forecasting • Used extensively by small and medium-sized companies • Top executives and other managers derive the sales forecast based on experience, observation, and intuition. • It’s quick and easy, but very unscientific.

  12. Sales Force Composite • Each salesperson projects what he/she expects to sell in his/her territory—the territory estimates are summed to get an aggregate forecast. • Disadvantage—sales reps estimate what they believe is “fair”—they may be optimistic or pessimistic depending upon what is needed.

  13. Moving Average vs. Exponential Smoothing • Moving Average—the same as a simple arithmetic average—all sales periods carry the same weight. • Exponential Smoothing—a type of ‘weighted’ average—different sales periods carry different weights. • Large smoothing constant—gives recent periods more weight or influence. • Small smoothing constant—gives older (earlier) periods more weight or influence.

  14. Parts of the Budget • Sales Budget—an estimate of the revenue from the # of units of product expected to be sold • Selling Expense Budget—an estimate of the costs and expenditures incurred in personal selling of the product • Administrative Budget—an estimate of the managerial and other overhead costs resulting from the sales department

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