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GROUP 8
Sales Budget
There are several benefits an organization derives from budgeting. They are
Improved planning
Better communication and coordination
Performance evaluation
Psychological benefits
Avoiding uncontrolled expenditure
Types of Budget
Sales budgets
Selling expense budget
Administrative budget
A sales budget gives a plan showing the expected sales for a specified period
in the future.
Selling expense budgets details the schedule of expenses that may be
incurred by the sales department to achieve planned sales.
Administrative budget specifies the budgetary allocations for general
administrative expenses that would be incurred by the sales department.
Affordability method
Percentage-of-sales method
Competitive parity method
Objective-and-task method
Return-oriented method.
Sales Forecasting
Businesses are forced to look well ahead in order to plan their investments,
launch new products, and decide when to close or withdraw products and so
on. The sales forecasting process is a critical one for most businesses.
Types Of Forecasting
There are two major types of forecasting, which can be broadly described as
macro and micro:
Selection Of Forecasting
(1) The degree of accuracy required if the decisions that are to be made on
the basis of the sales forecast have high risks attached to them, then it
stands to reason that the forecast should be prepared as accurately as
possible. However, this involves more cost
(2) The availability of data and information- in some markets there is a
wealth of available sales information (e.g. clothing retail, food retailing,
holidays); in others it is hard to find reliable, up-to-date information.
(3) The time horizon that the sales forecast is intended to cover. For
example, are we forecasting next weeks sales, or are we trying to forecast
what will happen to the overall size of the market in the next five years?
(4)The position of the products in its life cycle. For example, for products at
the introductory stage of the product life cycle, less sales data and
information may be available than for products at the maturity stage when
time series can be a useful forecasting method.
Forecasting Process
Forecast Objective
Control
Sales Control
Like any other control system, sales control requires the establishment of
standards, the evaluation of actual performance and the correction of
deviation in performance. Sales control implies not only managerial action
with regard to actual sales, but it also embraces all other marketing functions
required for the even flow of products or services form producers to
consumers.
All promotional and auxiliary efforts in marketing require as much control as
the actual selling efforts demand.
To ensure the right amounts of those products make it to the shelves and
into customers hands, Nestl relies on forecasting. After all, even the best
marketing promotions can backfire if the shelves are empty when the
customers show up for their favorite foods.
Its also the nature of the food and beverage industry that makes operational
planning a challenge. Seasonal influences, being dependent on the weather
to provide a good harvest, swings in demand, other retail trends and the
perishable nature of many products make it difficult to plan production and
organize logistics.
In this industry, products are processed in very large batches to keep unit
prices low, ensure quality and take advantage of raw ingredient availability.
This make-to-stock production strategy contrasts with the make-to-order
principle frequently seen in other sectors such as the automobile industry.
To have the right quantity of the right products at the right place and time,
we rely heavily on being able to predict the orders our customers will place
as precisely as possible, says Baumgartner.
Other business metrics, such as budgets and sales targets, are also
important factors. The overarching goal, according to Baumgartner, is to be
able to take proactive measures instead of simply reacting. To accomplish
this, Nestl focuses on strong alignment processes, stronger collaboration
with customers and the use of the proper forecasting methodology.
Before using SAS, Nestl was primarily using SAP APOs underlying
forecasting techniques, together with models from the open-source statistical
software R, integrated into APO. Those forecasts were then revised by the
Nestl demand planners. SAS enhances this, and thus complements SAP APO
perfectly.
So its not the statistical methodology thats the problem for Baumgartner
and his team. The critical factor in this complex environment is being able to
assess the reliability of forecasts. Two elements have attracted the most
attention within this context: dealing with volatility, and SAS.
Of particular importance for demand planning are the so-called mad bulls,
a term Nestl uses to characterize highly volatile products with high volume.
A mad bull can be a product like Nescaf, which normally sells quite regularly
throughout the year, but whose volumes are pushed through trade
promotions. A simple statistical calculation is no more useful in generating a
demand forecast than the experience of a demand planner for these less
predictable items. The only way out is to explain the volatility in the past by
annotating the history. Baumgartner and his team rely on the forecast value
added (FVA) methodology as their indicator. The FVA describes the degree to
Last but not least, Nestl emphasizes that even a system as sophisticated as
SAS Forecast Server cannot replace professional demand planners.
Particularly for mad bulls, being connected in the business, with high
credibility, experience and knowledge is key. With more time available to
tackle the complicated products, planners are able to make more successful
production decisions. And that means really having enough Nestl ice cream
at the beach when those hot summer days finally arrive.
Innovator and expert in sales forecasting Charles Chase has helped Nestl
improve its forecast accuracy and make multi-million dollar reductions in
their inventory by removing human judgement and enabling the predicting of
future demand through demand shaping.
Companies are more global today than ever before; lead times have been
extended with the effective practise of lean management made difficult by
the volatility of demand. The use of safety stock or inventory to protect
against variability is no longer so viable and, as Chase asserts, companies
now need to understand and measure that variability in demand and be able
to predict it more accurately with an enterprise-wide solution, which can look
at millions of forecasts up and down a product hierarchy.
The technology that Chase pioneered senses demand signals rather than
trend and seasonality, automatically telling a business what demand signals
are actually influencing consumers purchasing of products up and down a
hierarchy.
It will automatically measure the effect of advertising and price, allowing for
demand shaping up and down the hierarchy and the running of what if?
scenarios.
Chase said: Companies can ask: what if I raise price in July by three
percent? What if I add another sales promotion in August and I increased
advertising for the rest of the year by 10 percent, how will that impact future
demand?
So now you are being proactive versus reactive, you are not reacting to the
forecast but proactively driving the forecast and can do demand sensing and
demand shaping for thousands of products automatically.
The whole idea is you want to combine data analytics and domain
knowledge on an exception basis and you want to practice lean forecasting
and forecast value-added, these other technologies can only sense demand
signals for trend in seasonality.
Get well-ahead
The Nestl team wanted the ability to sense demand signals associated with
sales promotions, price, advertising, in-store merchandising and economic
factors to better understand what things influence consumers to buy their
products. Once they were able to measure that mathematically, they wanted
to be able to use that information to run what-if scenarios to shape future
demand.
Chase added: Using our technology today, when Nestls sales and
marketing people get together and want to run a sales promotion, say a buyone-get-one-free that they ran in the past, our system then calculates the
unit lift that was associated with that particular promotion in the past and
tells them whether it was significant in driving incremental demand, or unit
demand. Once it does that it then goes out to the financial system and
determines whether or not it actually made any money.
A lot of these sales promotions are designed for trial, not to make revenue,
but companies are not getting as much trial as they think. Rather, they are
actually subsidising brand-loyal customers who buy from promotion to
promotion, so we want those promotions to not only drive incremental
demand, but also revenue and profit.
So if it does also drive revenue and profit they say: we want to use that
promotion, we want to run that promotion again, in weeks 36, 37 and 38,
and thats how they shape future demand.
Skewed judgement
Four and a half years ago, said Chase, 80 percent of all Nestls forecasts
were touched by human judgement every cycle with only 20 percent being
driven by mathematics, data and what he calls domain knowledge.
Judgement, said Chase, means I can just arbitrarily change the number
to meet my needs, domain knowledge means I am able to run this
promotion, discover what the impact of that promotion is and then if that
impact is significant then I want to use it to influence future demand, or
shape future demand.
Today, 80 percent of the Nestls forecasts are driven right out of the
solution with no human judgement at all, and only 20 percent require any
kind of human judgement, the first year they implemented it was three years
ago, they found that every one percent improvement in forecast accuracy
translated into a two percent reduction in inventory safety stock. They were
eventually able to take out anywhere between 14- 20 percent of their
inventory safety stock, reduce it and still meet consumer demand with this
improved forecasting capability. If you have US $100 million in inventory
thats a US $20 million reduction.
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MIHIR ANAND
RAUNAQ JAIN
SIDHARTHA JOSHI
PRIYESH KANANI
CHINTAN MARU
BRAHMI SHAH
SHIKHA SHETTY
SWATHI SHIVSHANKAR