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Sales and operations planning

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Jump to: navigation, search Sales and operations planning (S&OP) is an integrated business management process through which the executive/leadership team continually achieves focus, alignment and synchronization among all functions of the organization. The S&OP plan includes an updated sales plan, production plan, inventory plan, customer lead time (backlog) plan, new product development plan, strategic initiative plan and resulting financial plan. Plan frequency and planning horizon depend on the specifics of the industry. Short product life cycles and high demand volatility require a tighter S&OP planning as steadily consumed products. Done well, the S&OP process also enables effective supply chain management. A properly implemented S&OP process routinely reviews customer demand and supply resources and re-plans quantitatively across an agreed rolling horizon. The re-planning process focuses on changes from the previously agreed sales and operations plan. While it helps the management team to understand how the company achieved its current level of performance, its primary focus is on future actions and anticipated results. Companies that have an integrated business management process use the S&OP process to monitor the execution of the companys strategies. [1] .

Contents
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1 Definitions 2 The planning process 3 S&OP best practices 4 See also 5 External links 6 References

Definitions
APICS defines S&OP as the "function of setting the overall level of manufacturing output (production plan) and other activities to best satisfy the current planned levels of sales (sales plan and/or forecasts), while meeting general business objectives of profitability, productivity, competitive customer lead times, etc., as expressed in the overall business plan. One of its primary purposes is to establish production rates that will achieve managements objective of maintaining, raising, or lowering inventories or backlogs, while usually attempting to keep the workforce relatively stable. It must extend through a planning horizon sufficient to plan the labor, equipment, facilities, material, and finances required to accomplish the production plan. As this plan affects many company functions, it is normally prepared with information from marketing, manufacturing, engineering, finance, materials, etc."[2] Sales and operations planning has also been described as "a set of decision-making processes to balance demand and supply, to integrate financial planning and operational planning, and to link high level strategic plans with day-to-day operations"[3].

The planning process


S&OP is the result of monthly planning activities. It is usually based on an Annual Operations Plan (AOP) that acts as the company's annual target in terms of sales and supply. Therefore, the sales and operations plans are a means to gradually accomplish the AOP targets - by linking monthly sales and marketing planning directly to the operations side of a business[4]. The process for deciding upon the monthly S&OP is illustrated in the figure below.

S&OP best practices


S&OP best practices share a common set of approaches, namely: (1) reliance on a phased approach; (2) development of an outside-in sequence of S&OP initiatives; and (3) a focus on critical information, not just more data. Rely on a Phased Approach S&OP is much more an integrated set of business processes and technologies than a single, all-encompassing process or technology. If you just focus on the implementation of a new technology and think that S&OP will miraculously take shape, youre wrong. Develop an Outside-In Sequence of S&OP Initiatives

Typically, the events that will have the most profound and negative impact on your sales and operations planning are those outside of your control. For the most part, these are due to the decisions and actions of your customers, partners, and competitors, which have a direct impact on your revenue and your competitors strategy. Focus on More Information, Less Data Another key to successful S&OP is clean, current, and accurate data. Plans are often slowed down by the effort of gathering data that has minimal importance to the overall project. It is important to ensure that you know exactly what business problem you are trying to resolve and understand the minimum data necessary for the project.

Getting Started With Sales & Operations Planning


John R. Dougherty
Introduction What do you mean weve got to start planning sales and production?" said the general manager. "How do you think weve been running this company for the last 25 years?" Of course, shes right. Every company does some form of Sales and Operations Planning already. But hundreds of companies implementing or operating integrated manufacturing planning and control systems (MRP II) have discovered startling benefits to be gained by formalizing and integrating this planning process. This involves a monthly review process by top management and all functional areas of the company. Its ultimate goal is to always keep the detailed sales, manufacturing, purchasing and capacity planning systems in synchronization with the latest high level plans of management (the business plan). This presentation assumes understanding of the basic philosophies, concepts and mechanics of Sales and Operations Planning, Master Production Scheduling and MRP. The purpose of this presentation is to provide a simple, step-by-step implementation plan to get it off the ground quickly and effectively. Points of Emphasis The underlined portions of the following APICS Dictionary (Sixth Edition) definitions highlight the key points for developing the Sales and Operations Planning process and involving the right people. Business Plan - A statement of long-range strategy and income, cost and profit objectives usually accompanied by budgets, projected balance sheet, and a cash flow (source and application of funds) statement. It is usually stated in terms of dollars and grouped by product family. The business plan and the sales and operations plan, although frequently stated in different terms, should be in agreement with each other. See: manufacturing resource planning." Implication - Top management usually plans in sales, profit, etc. dollars, but to run the factory, a production plan stated in units, and always equal to the dollarized business plan, is required. Sales & Operations Planning - The function of setting the overall level of manufacturing output (production plan) and other activities to best satisfy the current planned levels of sales (sales plan and/or forecasts), while meeting general business objectives of profitability, productivity, competitive customer lead times, etc., as expressed in the overall business plan. One of its primary purposes is to establish production rates that will achieve managements objective of maintaining, raising, or lowering inventories or backlogs, while usually attempting to keep the work force relatively stable. It must extend through a

planning horizon sufficient to plan the labor, equipment, facilities, material, and finances required to accomplish the production plan. As this plan affects many company functions, it is normally prepared with information from marketing, manufacturing, engineering, finance, materials, etc." Implication - If top management wishes to truly control inventories, backlogs and employment levels, it must ensure that the level of manufacturing output scheduled recognizes current sales plans and backlogs. Concurrence from all company functions that can affect or be affected by the plans, is vital to ensure realism and commitment. The production plan must be stated in a unit of measure, by product family, that can be converted and reconciled to detailed end item schedules (the master production schedule). Master Production Schedule (MPS) - The anticipated build schedule for those items assigned to the master scheduler. The master scheduler maintains this schedule and, in turn, it becomes a set of planning numbers which "drives" material requirements planning. It represents what the company plans to produce expressed in specific configurations, quantities and dates. The master production schedule is not a sales forecast which represents a statement of demand. The master production schedule must take into account the forecast, the production plan, and other important considerations such as backlog, availability of material, availability of capacity, management policy and goals, etc. Syn: master schedule. See: "closed-loop MRP". Implication - For the master production schedule to achieve managements objectives, it must exactly match the production plan (and reflect goals, constraints, etc.) and satisfy the sales plan. Rough Cut Capacity Planning - The process of converting the production plan and/or the master production schedule into capacity needs for key resources: manpower, machinery, warehouse space, vendors capabilities and, in some cases, money. Product load profiles are often used to accomplish this. Syn: resource requirements planning. See: "capacity requirements planning". Implication - The production plan and master production schedule must match each other and be achieved for managements goals to be met. But, to be achieved, they require recognizing the physical constraints of the factory and vendors, and the financial constraints of budgets and cash flow plans. Rough Cut Capacity Planning allows production plans and master production schedules (and changes thereto) to be checked and adjusted for reality. Time Fence - A policy or guideline established to note where various restrictions or changes in operating procedures take place. For example, changes to the master production schedule can be accomplished easily beyond the cumulative lead time whereas changes inside the cumulative lead time becomes increasingly more difficult to a point where changes should be resisted. Time fences can be used to define these points." Implication - When Rough Cut Capacity Planning, forecast changes, customer orders or the constraints of demonstrated capacity identify the need for rescheduling decisions, the procurement lead times of the various product families need to be considered. Top management and all affected functions must formulate policy that routinizes the proper decision making guidelines, participants and management approval levels. General Implication - These definitions outline the mechanics necessary to effectively integrate a good Sales and Operating Plan with the other functions of a closed-loop MRP II system. The implications noted clearly define the need for active leadership and participation by top management and all functional areas of a company. This is necessary during the design, implementation and ongoing operation of formal Sales and Operations Planning and full MRP II. Who Must Be Involved?

Based on the company-wide impact of this process described above, it should be clear that the general manager, president or chief executive officer (CEO) needs to oversee this function. This process drives the planning and execution systems, which dictate customer service and profitability. Therefore, the executive responsible for the profitability and growth of the company needs to control Sales and Operations Planning. The functional heads (vice presidents or directors) of marketing, manufacturing, design, finance and materials must also participate for the same reason. The master production scheduler, production and inventory control manager and marketing manager should also be present to propose needed plan changes and note and implement management decisions. But often it is difficult to gain such an audience in the early stages, as represented by the general managers quote that began this presentation. How can these vital participants be enlisted? How To Get Started Educate the Participants. Gaining interest and involvement is a laborious and slow process, unless there is a clear understanding of the goals, the impact and the process itself, involved in Sales and Operations Planning. The educational steps listed below are not interchangeable, but should be followed completely in sequence: Type of Class MRP II for Top Management (outside class) Participants Top Management Purpose Understand whole MRP II process, the role Sales and Operations Planning plays, Top Managements role, the payback. Same as above, but with more mechanical detail Understand how to implement and operate the system Determine how the concepts will be applied at this company, set operating policies, assign implementation responsibilities Same as above, but in more procedural detail for Sales and Operations Planning, Master Scheduling and all other functions of MRP II.

MRP II - Full Detail (outside class) Sales & Operations Planning and Master Scheduling (outside class) 2-Hour In-House Educational Sessions (approximately 20)

Middle Management All

Top Management

2-Hour In-House Educational Sessions (approximately 40)

Middle Management

Note: The balance of the steps outlined below can occur concurrently with the in-house sessions.

Define Planning Families. Most companies group their products into families or lines, but often based on the customers perspective (i.e., products bought together such as a particular computer CPU with its matching printers, CRTs, etc.). It is vital to additionally or alternatively define families from a manufacturing viewpoint. The basic rule to follow is that all products in a family must have a consistently proportional impact on costs, revenues and factory and supplier capacities. For example, a family could include knives, forks and spoons from a series of different patterns of silverware. Though knives, forks and spoons require widely varying manufacturing resources, a weighted average can be applied to the total number of pieces produced. Since knives, forks and spoons are sold in a consistent mix (place settings), if the production plan for the total pieces is changed, the impact on the critical manufacturing resources can be determined by multiplying the new plan times the weighted averages (load profiles) for each resource. All products must be grouped in 10 to 12 families (a number capable of review in a 2 hour meeting). The units of measure in which the family production plans are expressed must also relate to the manufacturing process - pieces, sets, pounds, gallons, cases, etc. This allows the proper expression of rough cut capacity planning factors and demonstrated capacities. These physical units of measure can then be converted back to dollars for financial analysis. Define the Format. A standard format to display forecasts (sales plans), customer orders, production plans, backlogs and inventories needs to be determined up front. A suggested format is shown in Figure 1. This format should be extended for the full planning horizon (12 to 24 months). Individual companies often expand this format to also include dollarization of the key unit data. Prepare Pilot Data. A few families should be selected which will best demonstrate the benefit of the Sales and Operations Planning process. These may include families subject to seasonal demand, marketing promotions, volatile swings in actual demand versus forecast and/or limited capability to adjust manufacturing output rates. Forecasts, actual customer demands, production and inventory plans and actuals should be posted for the prior three months. Plans, forecasts and customer orders for at least the next three months (to start) should also be posted. The starting production plans can be derived from the current planning process or annual budgets or current master schedules, depending on whats available. Any plans or forecasts that appear to require review or alteration should be highlighted. Marketing and planning personnel should jointly prepare suggested changes for top management review and approval. Develop a Proposed Sales & Operations Planning Policy and Meeting Agenda. The policy should include: Objective of the process. Schedule of future meetings. Attendees and their individual. Responsibilities (such as "VP Marketing - review of actuals versus forecasts/sales plans and changes to the future"). A description of the mechanics of the planning process (how forecasts/sales plans, backlogs, inventory goals, production plans, etc. are to be considered, by product family).

A description of how demonstrated capacities by product family will be maintained and utilized. A description of the Rough Cut Capacity Planning techniques to be used. A guideline for determining which families will be reviewed in the meeting, based on actual variances from forecasts and plans. A guideline for developing and approving various changes to the plans depending on the timing and impact of the changes (e.g., different approvals required for overtime, subcontract, new hires, etc.). A statement defining how the plans will be used to establish financial plans, budgets and detailed Master Production Schedules and line item forecasts. A timed agenda for a monthly review meeting, to last no longer than 2 hours. Begin Monthly Meetings. The first few meetings often run longer since everyone is still becoming familiar with the process, formats, etc. It may take a few monthly meetings to fine tune the process and finalize the procedures and formats. Until everything is final, it may be advisable to just review the initial pilot families, or to only gradually add new families. Implement Full Sales & Operations Planning. The following key issues need to be resolved to ensure that the full benefits of Sales and Operations Planning can be achieved: Horizon. Establish how far out you need to plan based on the cumulative product replenishment cycle (manufacturing and purchase lead times) and the visibility required for planning changes in capacity (internal manufacturing, new plants and suppliers). Near the end of the horizon, data may be grouped quarterly. Rolling Forecasts/Sales Plans. The shipment forecast/plan needs to be maintained continually through the full horizon, not just determined annually. Bookings Versus Shipments. The forecast/ sales plan must be expressed by customer requested ship dates, not by when the orders are received. In make-to-order companies this may involve developing standard lead time offset averages by product family, to convert planned booking dates into shipment dates. Some companies find it useful to track shipments and bookings versus the customer backlog, to provide early analysis by marketing of potential forecast changes. Production Plans. If the initial numbers used are annual budget figures or a summing up of current master production schedules, the process of maintaining a rolling, monthly-updated production plan, separate from the master production schedules, must be developed. Ongoing measurement of how closely the summary of the master production schedules matches the production plans, by month, within tolerances established by family, should be initiated. Appropriate adjustments to the plan, based on changing customer demands, forecasts/sales plans and inventory levels should then be implemented. Measurements. A set of standard measurements, by family, should be published and reviewed at each meeting. These should include Customer service

Sales versus forecast/plan Shipment $s Master production schedule versus production plan Actual production versus master production schedules versus plan Level and frequency of schedule changes, within time zones. Establish Demonstrated Capacity. For each family, the number of units possible to be manufactured each month should be determined from recent past history. The historical averages should not be exceeded unless known increases in capacity are implemented. The plan should reflect the inevitable learning curve of introducing new people, suppliers or equipment. Full Family Planning. Once the pilot families are being effectively managed through the full horizon, all other families should be added to the process, for the full horizon, representing virtually all manufacturing activity. The use of "average product" planning items for design-to-order business is often required, in both Sales and Operatins Planning planning and Master Production Scheduling. The use of planning bills of material will be needed at the master production schedule level. Rough Cut Capacity Planning. Key manufacturing and supplier capacity (and short term schedule change) constraints should be identified by family and expressed as load factors that can be multiplied by the planned quantities to produce expected resource requirements. These may include: Total people People by department or skill Key work centers/lines - bottlenecks - fully loaded - proprietary (no alternates) - prone to break down Space Key suppliers (expressed in units or for key purchased materials) Inspection and Q.C. Design/engineering Dollar levels of inventories. Key operating objectives should be similarly expressed and analyzed. These may include: Shipment $s

Production $s Inventory $s Profit $s Work force utilization Work force stabilization Inventory levels to support seasonal build-ups or safety stock for products.

Time Zones (Fences). Depending on the lead times to procure and manufacture products within a given family, changing a schedule at different points in the future represents varying degrees of difficulty and cost. Exactly where these zones are for each family must be defined. Appropriate levels of analysis and approval should then be prescribed for proposed changes in each zone. Factors to consider include the amount of potential disruption in the factory and at suppliers, the potential extra cost (air freight, overtime, etc.), the impact on other commitments and the amount of increased inventory investment by delaying parts of the schedule already partially completed. Management Objectives and Policies. A well functioning Sales and Operations Planning system will improve the ability to achieve objectives and follow policies. But it often also highlights the potential for changing policies to better meet the objectives. Such opportunities include: Make-to-stock versus make-to-order versus finish-to-order, by product line or individual product Target inventory levels - amount - at what level in the structure Desired backlogs, lead times and customer service levels Level labor loads Seasonal build-ups New product introductions.

Style of the Meeting. Several key approaches should be encouraged to maximize the benefits of this process. First, the various functions should avoid blameplacing and competitiveness. This causes defensiveness and less than optimal cooperation. The focus should be on how to change or better achieve future plans or forecasts, not on penalizing poor prior predictions.

Second, the focus should be on future months plans (generally 3 or more months into the future). Short term plans are very difficult and costly to alter. It is managements job to deal with the uncertainty of the future, and change forecasts and plans far enough in advance to better avoid short term emergencies. Third, a firm rule should be enforced forbidding time to be spent on "post-mortems" as to why a particular customer order was missed. The meeting should deal only with overall rates of shipment and production. Individual issues should be discussed outside this meeting. Specifics should be discussed only if there is potential impact on meeting future plans. Finally, this process and the meeting should evolve to the point where middle management identifies problems and formulates suggested solutions before the meeting, so that top managements time can be preserved for only evaluating and approving the proposals. A "pre-meeting meeting" of middle management (manufacturing, materials, marketing, design, finance, etc.) often proves fruitful. Final Result A good Sales and Operations Planning process can start to produce benefits even before full MRP II is operational. It provides a single set of company numbers, maintained monthly and expressed at a summary level appropriate for top management review. Good Sales and Operations Plans provide ready answers to: - Why have inventory levels changed? - Why have customer service levels changed? - Why has profitability changed? All of these questions can be tied back to performance versus the plans and forecasts, and the changes made to them. Price, cost and volume variances, from both a sales and a manufacturing viewpoint, are easily visible. This process fosters an approach of Executive Consensus in running the business as opposed to one of Functional Selfishness and Competitiveness between manufacturing, materials, marketing, design, finance, etc. Summary Formal Sales and Operations Planning provides a single set of numbers and a routinized process to ensure that top managements objectives and plans are realistic and accurately reconciled to the detailed scheduling done in a company. The top executives and heads of all functional areas in the company must participate in this process, along with scheduling and marketing personnel. Getting started first requires education. The next steps include defining families and formats, preparing pilot data, developing a policy and meeting agenda and finally, beginning the monthly meetings. There are several keys to effectively implementing this process including: defining the horizon, maintaining a rolling forecast/sales plan, converting bookings to shipment forecasts/plans, developing the plans and measurements for all families, establishing demonstrated capacity, initiating Rough Cut Capacity Planning, defining time zone criteria and incorporating management objectives and policies, and their potential alteration, while maintaining several key rules of style in making the meetings and the whole process effective.

The final result is plans, and a process to maintain them, that all functions commit to and can be held accountable for.

Conduct a Sales Forecast


Overview A sales forecast is a prediction based on past sales performance and an analysis of expected market conditions. The true value in making a forecast is that it forces us to look at the future objectively. The company that takes note of the past stays aware of the present and precisely analyzes that information to see into the future. Conducting a sales forecast will provide your business with an evaluation of past and current sales levels and annual growth, and allow you to compare your company to industry norms. It will also help you establish your policies so that you easily can monitor your prices and operating costs to guarantee profits, and make you aware of minor problems before they become major problems. After reading this article, you should understand: The importance of sales forecasting The different methods used to create sales forecasts How often you should forecast What you need to prepare a sales forecast Where to go to collect the information to produce a sales forecast What factors will affect sales

Outline:

I. II. III. IV. V. VI. VII. VIII. IX. X.

The Importance of Sales Forecasting What Information Is Needed to Prepare a Sales Forecast? How Long and How Often Should One Forecast? Forecasting Techniques How Sales Forecasting Applies to a New Business How to Produce a Sales Forecast You and Your Staff Can Believe In Benchmarking - Actual Sales vs. Forecast Who Should Prepare Sales Forecasts? Software as a Tool for Sales Forecasting Resources

I. The Importance of Sales Forecasting Sales forecasting is a self-assessment tool for a company. You have to keep taking the pulse of your company to know how healthy it is. A sales forecast reports, graphs and analyzes the pulse of your business. It can make the difference between just surviving and being highly successful in business. It is a vital cornerstone of a company's budget. The future direction of the company may rest on the accuracy of your sales forecasting. Companies that implement accurate sales forecasting processes realize important benefits such as:

1. 2. 3. 4. 5. 6. 7.

Enhanced cash flow Knowing when and how much to buy In-depth knowledge of customers and the products they order The ability to plan for production and capacity The ability to identify the pattern or trend of sales Determine the value of a business above the value of its current assets Ability to determine the expected return on investment (This can be very helpful if the company is trying to obtain financing from investors or other lending institutions)

The combination of these benefits may result in: Increased revenue Increased customer retention Decreased costs Increased efficiency

For sales forecasting to be valuable to your business, it must not be treated as an isolated exercise. Rather, it must be integrated into all facets of your organization. Back to Outline II. What Information Is Needed to Prepare a Sales Forecast? Since the forecast is based on your company's previous sales, it is necessary to know your dollar sales volume for the past several years. To complete a thorough sales forecast, you also need to take into consideration all of the elements, both internal and external, that can affect sales. Mathematically, it is possible to forecast sales with some precision. Realistically, however, this precision can be dulled because of external market and economic factors that are beyond your control. The following are some of the external factors that can affect sales: Seasonality of the business Relative state of the economy Direct and indirect competition Political events Styles or fashions Consumer earnings Population changes Weather Productivity changes

Sales forecasting requires sufficiently detailed analysis of both the external and internal factors related to the sales function. Internal factors that can affect sales are somewhat more controllable, such as: Labor problems Credit policy changes Sales motivation plans Inventory shortages Working capital shortage Price changes Change in distribution method

Production capability shortage New product lines

The sales forecast must be qualified by asking the following questions:

1. 2. 3. 4. 5.

What are the items to be forecasted (individual product lines or business units)? How far in the future should the forecast extend? How frequently should the forecast be made? How frequently should the forecast be reviewed? What would constitute an acceptable tolerance of forecast error?

The following internal data will be scrutinized and analyzed when conducting a sales forecast. Therefore, this data must be prepared on a consistent basis:

1. 2. 3. 4.

Accounting records Financial statements Sales-call reports After-sales service demands from clients

It is significant to note that if you sell more than one type of product or service, you should prepare a separate sales forecast for each service or product group. The more focused your sales forecast is, the more precise its outcome will be. Back to Outline III. How Long and How Often Should One Forecast? A sales forecast needs to be performed, reviewed and compared with actual performance results on a regular basis. Think of it as a routine tune-up that keeps the gears of your business running smoothly so your company can achieve a higher performance record. Although every business owner's comfort level may be different, sales forecasts should be conducted monthly during the first year, and quarterly after that. The more often you forecast, the better your chances of weeding out extreme variations in yearto-year sales. It will also possibly identify a trend or level of variations that is more realistically oriented to probable future sales patterns. Although any forecast has a percentage of uncertainty, the farther into the future you project, the greater your uncertainty. As a rule, there are three lengths of time for sales forecasting:

1. Short-range forecasts are for fewer than three months. They are used to make continual decisions about planning, 2.
scheduling, inventory and staffing in production, procurement and logistics activities. Intermediate forecasts have a span of three months to two years. They are used for budgetary planning, cost control, marketing new products, sales force compensation plans, facility planning, capacity planning and process selection and distribution planning. Long-range forecasts cover more than two years. They are used to decide whether to enter new markets, develop new products or services, expand or create new facilities, or arrange long-term procurement contracts.

3.

Perhaps the simplest method is to assume that the percentage increase (or decrease) in sales will continue and that no market factors will influence sales performance more in the future than in the past. Back to Outline IV. Forecasting Techniques

Sales forecasting isn't that difficult. In fact, even if you've never conducted a formal, written forecast, you've probably used at least some sort of informal method, whether you know it or not. To prove this point, answer the following questions.

1. Have you ever questioned your inventory requirements? 2. 3. 4. 5. 6. 7. 8. 9. 10.


YesNo Have you ever checked that there were sufficient salespeople to cover all territories? YesNo Have you ever questioned your total sales? YesNo Have you ever checked what volume has been achieved with a specific customer? YesNo Have you ever analyzed what causes a slump or jump in sales in a particular region? YesNo If you answered "Yes" to any of these questions, you've conducted an informal sales forecast. There are two main approaches to sales forecasting: quantitative and qualitative, or judgmental. Often companies utilize both methods at the same time. Simply stated the word quantitative means estimating a particular, indefinite or considerable amount of anything. Quantitative techniques rely primarily on numbers to conclude forecasts. These numbers are multiplied, added or correlated and then placed in a formula to predict the company's sales. You can start by building up to aggregate totals of market demand, or start with these totals and work the numbers down into more focused forecasts for individual products. Quantitative techniques are calculated from important numbers such as sales volume, gross national product, disposable income, and total number of buyers in the market. These numbers have been shown to have significant value in forecasting. If demand for your product is highly stable and predictable, the forecast consists of past sales and inflation to predict future sales. In formula form, it is simply: Past Sales + Percentage of Inflation Factor = Sales Forecast Monthly Forecasts In the event that monthly variations over a period of years have been small, another method of forecasting can be based on the distribution of sales by months. Suppose, for instance, that a short-term forecast is being made for the month of October. For the past several years, sales in October have totaled 12.5 percent of annual sales. During the same period, August sales have averaged 10 percent of annual sales. Sales during the previous August were $16,000. $16,000 / .10 = $160,000 (estimated annual sales)

Projected sales for October will be 12.5 percent of $160,000 (or $20,000). Sales for other months can be forecast in the same way.

Next Step: Compute Your Monthly Sales Forecast (Qualitative Method) (Remember that if you sell more than one product or service, you'll need to prepare a separate forecast for each line and combine them to get a company-wide forecast.) Enter your last month's sales Enter the percentage of annual sales this figure historically represents Estimated annual sales = Enter the percentage of annual sales the forecasted month's sales typically represent Sales forecast = $ % $ % $

Annual Sales Forecasts A good starting point for any company conducting an annual forecast is the prior year's sales. Let's say in the last year, for example, Company X, a clothing manufacturer, has sales of $1 million. We will make several assumptions in determining Company X's sales for the current year. First, the company expects all of its current customer contracts to be renewed, and they expect to land a new contract worth $100,000. Finally, we are assuming apparel industry experts' predictions of 10 percent market growth in the current year are accurate. The sales forecast calculation would be as follows: Last year sales = $1,000,000 Value of new contract in the current year = 100,000 Total projected sales = $1,100,000 Projected market growth = .10 Current year sales projection = 1,100,000 (.1) = 110,000 110,000 + $1,000,000 = $1,210,000 Next Step: Compute Your Annual Sales Forecast Project your current year annual sales by entering the figures for your own company into the following formula. Last year sales = Total value of additional contracts you expect to land during the next year = Total value of contracts that will not be renewed during the next year = Projected sales subtotal = The percentage increase projected by experts for your industry's growth = The percentage decrease projected by experts for your industry's decline = Current year sales forecast = $ $ $ $ % -OR% $

Keep in mind that fluctuations can result between your projected sales and actual sales due to uncontrollable external factors, such as economic and political changes, employee turnover, technical and mechanical difficulties, and trend shifts. If the market behavior becomes less predictable, more diverse and complex forecasting methods are necessary. Many more factors need to be researched and placed into the formula. Generally forecasters will use more than one method. The following is a list of the different quantitative techniques; more detailed information can be found in most introductory books on statistical methods.

1. Correlation analysis, which uses one set of data to forecast another set of highly correlated data. 2. The market factor index method, which uses a formula incorporating factors predictive of sales volume to derive a 3. 4. 5. 6.
market index figure. The chain ratio method, which multiplies a base number by various qualifying percentages to derive forecasts. The total market demand technique multiplies number of buyers by expected number of purchases, and cost per buyer, to derive forecast figures. The market buildup approach, which totals estimated sales figures for individual products or market segments to derive forecast figures. Time series projections, which projects past sales trends into future periods. It considers, trend, cycle, seasonal and random factors.

Qualitative, or judgmental, forecasting does not rely on numbers to conclude forecast, but rather on intangible factors. This method is especially common when sufficient historical data isn't available, i.e., for a new business or a less-established market environment. Groups whose judgment is normally surveyed in preparing a qualitative forecast include the experts in the field, the sales force and the customers. Combining historical data with the judgment of people or groups presumed to have superior knowledge of sales only adds to the reliability and integrity to a company's sales forecast. Experience has proven that grass roots forecasts can be surprisingly accurate. Back to Outline V. How Sales Forecasting Applies to a New Business Statistics show that 80 percent of new business startups never survive the first three years. Nine out of 10 of those business failures are caused by poor management decisions. Implementing sales forecasting forces a new business to base decisions on facts rather than hunches. Since you have no historical information on your new business, i.e., past sales, you need to look elsewhere. You need to consider the following:

1. How well does your competition satisfy the needs of its potential customers? 2. Note the population and economic growth in your location. 3. Develop a customer profile.
Experienced business people will tell you that a good rule of thumb is that 20 percent of your customers account for 80 percent of your sales. If you can identify this 20 percent, you can begin to develop a profile of your main markets. After you've identified your primary markets, then you need to determine trends in your industry. Now you need to know the approximate size and location of your planned trading area. Your trading area is how far your average customer will travel to shop, as well as how far you are prepared to distribute and promote your product or service. It is helpful to recognize the personality of your trading area, which can be found by talking to other neighborhood business owners, contacting the Chamber of Commerce, and reading the local papers.

At this point, you should be able to estimate your sales on a monthly basis for a year. The basis for your sales forecast could be the average monthly sales of a few similar-sized competitors that are operating in a similar market. To estimate their sales, you have to list, profile and study your competitors. This is accomplished by visiting either their stores or the stores where their products are offered. You need to analyze their customer volumes, the location, hours of operation, traffic patterns, busy periods, quality of their goods and services, prices, product lines carried, promotional techniques, positioning, product catalogues and other handouts. If possible, talk to customers and sales staff. Back to Outline VI. How to Produce a Sales Forecast You and Your Staff Can Believe In Though sales forecasting may seem number-driven, to succeed it needs to be people-driven as well. That means that the people in your business need to feel part of achieving the sales forecast. There are some simple rules you can follow to increase the probability of getting a forecast you can count on and one that people will do whatever is necessary to achieve. Action Plan for Achieving Forecasting Buy-In From Your Staff:

1. Share your expectations. Salespeople need to know the annual sales growth rate that you are looking for. Information
and communication are key ingredients in securing an accurate sales forecast. It also creates a feeling of personal responsibility for the results. Ask the right questions and insist on real answers. The real answers will contain evidence to support the numbers. Evidence means hard facts, not merely hunches, about what will directly affect your customers and their future purchasing decisions. Insist that everyone in your organization do their homework and talk to customers on a regular basis. Make sure your salespeople understand that a sales forecast is for everyone's benefit. Personalize the numbers by showing how the success of your company is tied to the success of its employees. Also, point out exactly how each department's role fits into the bottom line. Ensure accuracy in the sales forecast to prevent unforeseen layoffs or scrambling to find new personnel. Employees should feel confident that solid projections will ensure the safety of their jobs. Get a second opinion. Have the forecast checked by a financial or accounting professional. Show them the factors you have considered and explain why you think the figures are realistic. Once you believe the numbers are substantiated, accept what they say about your company. From that point on, all efforts should be directed toward meeting the projection. Regularly review and revisit the figures with key employees on a monthly basis to ensure that you're on track. Your skills at forecasting will improve with experience, particularly if you treat it as an ongoing "live" forecast.

2.

3.

4. 5. 6.

Back to Outline VII. Benchmarking - Actual Sales vs. Forecast It's a given that no one can forecast with 100 percent accuracy. Yet we can say with 100 percent accuracy that a poor forecast will negatively impact your company. Of course, you'll never completely eliminate the uncertainty in forecasts, but you can reduce it to a manageable level. By collecting proven facts and testing any major assumptions in a forecast before you conduct the forecast, you can greatly reduce the guesswork and increase the accuracy of your forecast. Problems arise not only when forecasts are too high, but also when they are too low. If a forecast is too optimistic, cash is often tied up in slow-moving inventory, and profit margins are reduced due to wasted overhead. On the other hand, if a forecast is too pessimistic, the result is poor delivery performance, dissatisfied customers and shortfalls in revenue because of

limited product availability. Trends between past forecasts and actual performance need to be established and fed back to the forecaster to correct their optimism or pessimism in future forecasting. There are a number of reasons for slight deviations between projections and actual performance. Perhaps the forecasting process was viewed separately from the rest of the organization; or external factors, such as trends or new legislation, weren't taken into consideration. Significant discrepancies, however, such as a deviation of 15 percent or more in a month, or a cumulative deviation of 10 percent in a year, signals a need for much more detailed analysis to determine what has occurred. Self-Assessment Answer this questionnaire to determine the soundness of your company's sales forecasting system.

1. Are customer requirements analyzed in the development of your forecast? 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.
YesNo Does your sales forecast include a buffer to allow for error? YesNo Is the best judgment of the group exercised in improving forecast data, methods and techniques used? YesNo Are changes in the forecast promptly reflected in production and inventory planning? YesNo Are your sales forecasts tracked by comparing actual demand with the forecast? YesNo Are your sales forecasts reviewed regularly by sales, distribution and manufacturing? YesNo If you answered "No" to any of the questions, you will want to question the integrity and accuracy of your projection methods. Back to Outline VIII. Who Should Prepare Sales Forecasts? Most business experts agree that sales forecasting should be a joint effort. Generally the best people to perform such activities are those most closely involved with the company's sales activities. Involvement includes not only direct relationships with customers, but also an awareness of market conditions. Including key staff members from production, inventory management and marketing promotes a spirit of teamwork and improves your ability to make projections. The decreasing cost of personal computers has made it possible for small- and mid-sized companies to handle forecasting internally. However, there are also many firms that you can contract with to assist you. Locate them by obtaining referrals from your peers or checking trade publications. Back to Outline IX. Software as a Tool for Sales Forecasting

Projections become even more precise when software programs written specifically for sales forecasting are utilized. Investing in a simple but effective forecasting package can also free up the time of valuable personnel. All basic sales forecasting software packages evaluate the history of your business, extrapolate pertinent information, and offer a forecast of your company's future. When shopping for a good software package, look for the following features:

1. 2. 3. 4. 5.

Capability to adjust for special factors, i.e., promotion and price changes Documents underlying forecasting assumptions An effective management review and communication step Historical data-tracking and plotting of current performance against past trends and future projections Allows multiple parties (e.g., sales, marketing, manufacturing and logistics) to enhance, manipulate and use the forecast

Unfortunately, such programs are not usually stocked in computer software stores. To locate the companies that produce this type of software, you can contact professional associations, check ads in your professional magazines, and talk with other businesspeople for recommendations. The Internet is a great additional source for seeking out these companies, and a simple search will bring up several choices. As you research forecasting software you will find those that run the gamut of very affordable to very expensive. Some examples include: Strategic Planning Software ($29), Ward System Group's Neuroshell PREDICTOR ($395) and ParkerSoft Products' Exforecaster 1.0 ($99) and Fastcast ($600.00). Before purchasing a program, it is advisable to either download or request a demo program for evaluation. Be aware that some software programs are not stand-alone and often require another program such as Excel and Oracle Personal Express to be installed on your computer. Sales forecasting is an unwieldy and difficult process, yet doing it correctly is key to understanding what's in store for your business' future. The numbers you come up with will permeate almost every aspect of your company, making it all the more important to ensure accurate forecasts. By using the information presented here, you can develop a realistic projection for the future performance of your organization.

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