Ch16 Sales Analysis.docx

MODULE 16 : SALES ANALYSIS Nature of Control Company goals initiate the evaluation and control process by serving as the targets that guide the formulation of plans. Once designed, the plans need to be implemented to become part of the daily operations. The firm needs to collect and organize information about its operations so it can compare these data with its goals to determine how well it is doing. This evaluation and control provide the control for the enterprise. They allow the assessment of where the firm is now versus where it wants to go, so corrective action may be taken. MARKETING AUDIT The most thorough mechanism for evaluating the marketing effort is a marketing audit. A marketing audit is a complete, systematic, objective evaluation of the total marketing effort of a firm. Marketing audits examine the firm’s goals, policies, organization, methods and procedures, and personnel. They also assess the firm’s current position and its strengths and weaknesses so a new course can be plotted if necessary. The two basic types of marketing audits are vertical and horizontal. The HORIZONTAL AUDIT is often referred to as a MARKETING MIX audit in that it examines all the elements that go into the marketing mix. It emphasizes the relative importance of the various elements and the mix between them. In contrast, the VERTICAL AUDIT, singles out selected elements of the marketing operation and subjects them to go to thorough study and evaluation. The horizontal audit is a systems level audit in which the focus is more on the relationship among marketing activities than on any one activity. Certain activities may be isolated for more detailed investigation through the horizontal audit, but that is not its main purpose; that is the purpose of the vertical audit. The vertical audit is a complete, objective, systematic analysis of one part of the total marketing effort. The term SALES MANAGEMENT AUDIT refers to the vertical audit associated with the sales managers’ responsibilities. Objectives The initial step in a horizontal marketing audit is to secure a clear statement of the company’s goals and mission. The goals should be measurable. A marketing audit often uncovers executives operating with different goals and imprecise targets. The goals for personal selling effort must be coordinated with those of the firm. The sales management audit attempts to specify goals for the personal selling function and the role personal selling is to play in the total marketing effort of the firm. It also includes a statement of short-run objectives. Policies The next step is to examine how well the firm’s current policies coincide with its goals. Policies can grow obsolete in dynamic economies. One primary function of the audit is to stimulate management to consider such policies. Thus, the important thing is that the spectrum of sales management policies be systematically evaluated and those that need to be changed be identified. Organisation The marketing audit looks at the organization of the company as a whole and the marketing department in particular. It seeks to determine whether the organization is optimal in terms of the company’s resources and talent. The sales management audit focuses on the organization of the sales force. The dynamic nature of the international environment is causing a number of firms to rethink their organization structures. Methods and Procedures Methods and procedures are the tactical means by which the firm’s policies are carried out. The marketing audit would attempt to assess the quality of execution of each marketing activity. The sales management audit attempts to assess how well those activities that directly influence the personal selling function have been carried out. Personnel The marketing audit also examines the people involved to determine how well they are performing. Most of the attention of the sales management audit is directed at individual salespeople and at branch, district, regional, and other area managers. In such audits, determining where people are now versus where they should be if the personal selling effort were on target is emphasized. Three of the more productive and partially overlapping programmes for making such assessments are sales analysis, cost and profitability analysis, and individual performance evaluation. DECISION SUPPORT SYSTEMS A decision support system (DSS) has been defined as “a coordinated collection of data, systems, tools, and techniques with supporting software and hardware by which the organization gathers and interprets relevant information from business and environment and turns it into a basis for marketing action.” A DSS concentrates on the design of data systems, model systems, and dialog systems that can be used interactively with managers. Data Systems The data system in a DSS includes the processes used to capture and the methods used to store data coming from marketing, finance and manufacturing, as well as information coming from any number of external or internal sources. The typical data syst em has modules containing customer information, general economic and demographic information, competitor information, and industry information, including market trends. The customer information module typically contains information on who buys and who uses the product, where they buy and use it, when, in what situations, quantities, and how often. It could also include information on how the purchase decision is made, the most important factors in making that decision, the influence of advertising or some sales promotion activity on the decision, the price paid, and so on. Marketing research would typically supply some of the information input to the customer information module of the data system. Other inputs might come from the purchase of syndicated commercial marketing information. The module containing general economic and demographic information attempts to capture some of the most relevant facts about what is happening in the external environment. These might be facts on national or international economic activity and trends or they might concern interest rates, unemployment or changes in GNP. The demographic facts concern changes in population, changes in the rate of household formation, or any other factors that could potentially affect the future success of the firm. Many of these inputs come from government data, primarily from the various consensus. One module could contain information on specific competitors. The industry information and market trend module contains general information on what is happening in the industry. This might mean financial information about margins, costs, research and development activities, and capital expenditures. It could mean trends in manufacturing or technology, with respect to either raw materials or processes. The industry module could contain information on new technologies that might affect the production process or create new product substitution capabilities. It also contains information on marketing trends, such as changing distribution patterns or product consumption. The fundamental criterion as to whether a particular piece of data might find itself in the data bank is whether it is useful for marketing decision making. The basic task of a DSS is to capture relevant marketing data in reasonable detail and to put those data in a truly accessible form. It is crucial that the database management capabilities built into the system can logically organize the data the same way a manager does, regardless of the form that organization assumes. Model Systems The model system includes all the routines that allow the user to manipulate the data to conduct the kind of analysis the individual desires. Whenever managers look at data, they have a preconceived idea of how something works and therefore, what is interesting and worthwhile in the data. These ideas are called models. Most managers also want to manipulate data to gain a better understanding of a marketing issue. These manipulations are called procedures. The routines for manipulating the data may range from summing a set of numbers to conducting a complex statistical analysis to finding an optimization strategy using some kind of nonlinear programming routine. At the same time, the most frequent operations are basic ones : segregating numbers into relevant groups, aggregating them, taking ratios, ranking them, picking out exceptional cases, plotting and making tables. Expert systems are computer-based artificial intelligence systems, that attempt to model how experts process information to solve the problem at hand. Dialog System The dialog systems, also called language systems, are most important and clearly differentiate DSSs. The dialog system permits managers, who are not programmers, to explore databases using the system models to produce reports that satisfy their particular information needs. The reports can be tabular or graphical, and the report formats can be specified by individual managers. The dialog systems can be passive, which means the analysis possibilities are presented to the decision makers for selection via menu, a few simple keystrokes, light pen, or a mouse device, or they can be active, requiring the users to state their requests in a command mode. Instead of funneling their data requests through a team of programmers, managers can conduct their analysis by themselves (or through one of their assistants) sitting at a computer terminal using the dialog system. This allows them to target the information they want and not be overwhelmed with irrelevant data. Managers can ask a question and on the basis of the answer, can ask a subsequent question, and then another, and so on. As the availability of on-line databases has increased, so too has the need for better dialog systems. The better dialog systems are what put data at the manager’s fingertips. This is difficult because of the large amount of data available, the speed with which they hit a company, and the fact that data come from various sources. However, bringing together data from the disparate data sources into meaningful reports is often difficult because : The geographic boundaries used by the data suppliers differ from each other and most often from the firm’s own geographic territories. The services typically collect data on different time cycles. Some might provide it weekly, whereas, others might provide it twice a month, monthly or less often. The discrepancies must be reconciled in a meaningful way if the various inputs are going to be combined into effective decision making. This can be handled by distributed network computing. These systems rely on linked workstations. Because, they are linked, users do not have to worry where information is stored on the network of computers usually found in the largest corporations. More importantly, the systems used to access and manipulate the data make use of a common interface or a server. Through that server, the analyst can do data entry, data query, spreadsheet analysis, plots or statistical analysis or can even prepare reports, all through some very simple commands. DSS in Sales Management Decision support systems are action-oriented. They allow managers to use their instincts when seeking answers to problems. They are very adaptable to changing environmental circumstances and different management styles. Decision support systems for managing the personal selling effort promise to be particularly important in the future as the microcomputer revolution continues. Not only is it becoming increasingly likely for branch, regional, and district managers to have microcomputers connected directly to the company’s databases at their desks, but also many companies are outfitting their salespeople with them as well and are developing special applications software. The most common uses of DSSs in sales and sales management are as follows : customer account management database enquiries word processing checking orders forecasts spreadsheets entering orders checking inventory time management prospecting reporting expenses SALES ANALYSIS A sales analysis involves gathering, classifying, comparing, and studying company sales data. It may simply involve the comparison of total company sales in two different time periods. Or it may entail subjecting thousands of component sales (or sales related) figures to a variety of comparisons – among themselves, with external data, and with like figures for earlier periods of time. A major benefit of even the most elementary sales analysis is in highlighting those products, customers, orders, or territories, in which the firm’s sales are concentrated. A heavy concentration is so common that some have labeled the general phenomenon the 80:20 principle. This means it is not at all unusual to find 80 % of the customers or products accounting for only 20 % of total sales. Conversely, the remaining 20% of the customers or products account for 80% of the total sales volume. The same phenomenon applies to orders and territories; only a small percentage of the total number of orders or a few of the firm’s many territories account for the great percentage of its sales. The 80:20 principle describes the general situation, although the exact concentration ratio varies by company. The most cursory analysis should reveal such concentrations. KEY DECISIONS IN A SALES ANALYSIS Those wishing to undertake a sales analysis must decide : the type of evaluation system the source of information the sales breakdowns that will be used Type of Evaluation System The type of evaluation system determines how the sales analysis will be conducted – whether it is a simple sales analysis or a comparative sales analysis. If it is a comparative sales analysis, two additional questions arise: who is to be the base for the comparison? What type of reporting and control system is to be used? In a simple sales analysis, the facts are listed and not measured against any standard. In a comparative analysis or, as it is sometimes called, a performance analysis, comparisons are made. A performance analysis would attempt to go beyond the mere listing of sales to determine where they are greatest and poorest; it would try to make comparisons against some “standard”. Performance index is calculated as the ratio of actual sales to sales quota. Base for Comparison The comparison with quota is only one type of comparison that can be made. Other bases of comparison for a sales analysis include this year’s sales versus last year’s sales or the average of a number of prior year’s sales; this year’s sales versus forecasted sales; sales in one territory versus sales in another’ either absolutely or in relation to the ratios in prior years; and the percentage change in sales from one territory to another, as compared with last year. Such comparisons are certainly better than simply viewing raw sales figures, but they are not generally as productive as a true performance analysis. Types of Reporting System At one extreme, all comparisons are provided. However, the manager may be unable to process it ineffectively, and it becomes a useless pile of unused computer output or a computer screen filled with numbers. At the other extreme, only significant deviations from the norm are highlighted. However, for many sales managers, this extreme deviation reporting does not provide the necessary detail for them to operate most effectively. Deviations just short of the significance cutoff go unnoticed. Probably the most useful reporting system is one in which all comparisons are reported or at least are available for inspection, while the significant deviations are highlighted. This can be done by a separate listing of those sales units beyond the predetermined boundaries or by simply highlighting on the all-comparisons report those deviations that are excessive. Sales managers can thus concentrate on the exceptions while having the full profile of comparisons for assessing the significance of what happened. Sources of Information Generally, the one most productive source document is the sales invoice. From this, the following information can usually be extracted : customer name and location product or service sold volume and dollar amount of the transaction salesperson or agent responsible for the sale end use of the product sold location of customer facility where the product is to be shipped and/or used customer’s industry, class of trade, and/or channel of distribution terms of sale and applicable discount freight paid and/or to be collected shipment point of the order transportation used in the shipment Most companies are likely to use only two or three of these sources of sales information in addition to the sales invoice. Which ones depend on the company and the types of other analyses used to evaluate salespeople. Other sources of information for evaluating salespeople Cash Register Receipts type (cash or credit) and dollar amount of transaction by department by salesperson Salesperson’s Call Reports Customers and prospects called on (company and individual seen; planned or unplanned calls) Products discussed Orders obtained Customers’ product needs and usage Other significant information about customers Distribution of salespeople’s time among customer’s calls, travel, and office work Sales-related activities : meetings, conventions, etc. Salesperson’s expense accounts expenses by day by item (hotel, meals, travel, etc) Individual customer (and prospect) records name and location and customer number number of calls by company salesperson sales by company customer industry, class of trade, and/or trade channel estimated total annual usage of each product or services sold by the company estimated annual purchases from the company of each such product or service location in terms of company sales territory Financial Records sales revenue (by products, geographic markets, customers, class of trade, unit of sales organization) direct sales expenses overhead sales costs profits Credit Memos returns and allowances Warranty Cards indirect measures of dealer sales customer service SALES BREAKDOWNS The most common and instructive procedure is to assemble and tabulate sales by some appropriate groupings, such as : geographic regions, such as states, counties, regions or salespeople’s territories product, package, size, grade or colour customer or customer size market, including class of customer, end use or channel of distribution method of sale, including mail, telephone, or direct salespeople size of order financial arrangement such as cash or charge The classes of information a company may use depend on such things as its size, the diversity of its product line, the geographic extent of its sales area, the number of markets and customers it serves, and the level of management for which the information is to be supplied. These breakdowns are not necessarily mutually exclusive in that the manager has to choose a breakdown by region or product or customer. Rather, sales analyses are most productive when they are done hierarchically, in the sense that one breakdown is carried out within another category. The typical sales analysis results not in a single report but in a family of reports, each reflecting a different level of aggregation, tailored to the person receiving it. A HIERARCHIAL SALES ANALYSIS Report Name Purpose Report Access Region To provide sales information in units and dollars for each sales office or center in the region as well as a regional total Appropriate regional manager Sales office or centre To provide sales information in units and dollars for each district manager assigned to a sales office Appropriate sales office or center manager District To provide sales information in units and dollars for each account supervisor and retail salesperson reporting to the district manager Appropriate district manager Salesperson Summary To provide sales information in units and dollars for each account supervisor and retail salesperson reporting to the district manager Appropriate district manager Salesperson customer/product To provide sales information in units and dollars for each customer on whom the salesperson calls Appropriate salesperson Salesperson/product To provide sales information in units and dollars for each product that the salesperson sells Appropriate salesperson Region/product To provide sales information in units and dollars for each product sold within the region. Similar reports would be available by sales office and by district Appropriate regional manager Region/customer class To provide sales information in units and dollars for each class of customer located in the region. Similar reports would be available by sales office and by district Appropriate regional manager Iceberg principle The typical business engages in many varied activities and collects large volumes of data to support these activities. Thus, it is very common for difficulties or problems in one area to be submerged. On the surface, all appears calm and peaceful, but more careful analyses may reveal submerged problems with jagged edges that can sink the business if they are not attended to properly. Those analyzing the information that is collected need to be especially wary that the summaries they produce by aggregating and averaging data do not hide more than they reveal. Simple versus Comparative Analysis A simple sales analysis focuses only on the sales data and does not examine the differences from the quota. It does not generate any detailed investigation of the figures. The comparative analysis triggers the more intensive investigation and isolates the primary reason for the differences. Isolate and Explode Here the most significant discrepancies between actual and standard are identified and isolated and then examined in detail or exploded. The detail this explosion reveals is then analysed, the most significant discrepancies are again isolated, and these are exploded. The process continues until the real problems are isolated. The isolate and explode principle assumes the company’s information system can provide sales data hierarchically. These alternate types of analysis can also be productive, as can simple one-way categorizing of sales data. However, all these analysis are diagnostics, not decision rules. They do not tell the manager what to do, but only offer clues as to the causes of problems.