How Do We Develop a Unit Sales Forecast?
 
What is this? This tutorial suggests a methodology for developing a sales forecast.

What is the purpose? Some teams might have difficulty accurately projecting demand for products: Producing too few products will result in lost sales opportunities. Building too many products will result in inventory carrying costs.

How do I use it? An accurate sales forecast will help teams "fine tune" their plans and optimize financial performance.

Let's suppose we have a product called "Ash" in the Size segment. Begin by finding the market size and the number of competing products to get an expected average. Consider whether products will enter or exit the segment. Check each competitor's production capabilities. Finally, compare the merits of our product versus the competition. Here are the steps in detail.

  1. Turn to the Capstone® Courier, page 9, the Size Segment.
  2. Multiply "Total Available Unit Sales" by (1 plus growth rate) to discover the demand this year.
  3. Drop to the bottom of the page. Count the number of competing products.
  4. Adjust your count if you think products will enter or leave the segment.
  5. Make similar count adjustments to reflect very strong or very weak products.
  6. Divide demand by your count. The result is an estimate for the average product's demand.
  7. Turn to the Capstone® Courier, page 4, "Production Analysis".
  8. Can the competing products make enough units to meet their demand? If not, expect to pick up sales.
  9. Compare your December Customer Survey score with competitors. Are you above or below average? Adjust your estimate accordingly.
  10. Consider your new decisions and what you think your competitors will do. Adjust your estimate accordingly.
  11. Do you have sufficient capacity to meet your demand? If not, adjust to the limits of your inventory.
Tip: Unless your competitors are kind to you, it is unlikely that your product will do better than twice average, and extremely unlikely that you can do three times average. Your competitors may not offer the best in personal hygiene, but they are not stupid.

Tip: Often your product picks up sales from the fringes of other segments. Do not count on these sales. It becomes more difficult to straddle segments with each passing year.

Tip: Although your estimate is far, far better than the computer's, it is still an estimate. Suppose you arrive at 500 thousand units. After some thought, you decide that it is unlikely sales will fall below 400 thousand, or that demand will exceed 600 thousand. Enter 400 on your Marketing Spreadsheet and 600 on your Production spreadsheet (making adjustments for old inventory.) This forces the Proformas to offer you a worst case scenario, with depressed sales and high inventory. If you apply this approach to all products and still have a positive cash balance, you are unlikely to see Capstone's loan shark, Big Al, because of inventory surprises. To see your best case scenario, enter your production numbers on the Marketing spreadsheet. Now your Proformas reflect a world where you sell everything. Reality will probably fall somewhere in between.

Can we trust the computer's "Unit Sales Forecast"?

No! The computer's forecast is based upon poor assumptions -- for example, that you are competing against middle-of-the-road products and that January is the same as December. It has no clue about what your competitors will do, or whether products will enter or leave the segment. In short, the computer's unit sales forecast is only good as a benchmarking tool. If you change your price or change your marketing mix, you can get some idea of the impact upon this year's demand on a percentage basis. The burden for developing a forecast is on your team. To override the computer's forecast, enter your own estimate in the "Your Sales Forecast" column.