Last Updated on March 12, 2024 by Lukas Rieder
Planning from Market into Company
An organization’s strategy defines with which products or product groups it will produce, and what positions in which markets are to be achieved (see the post “Strategy and functional concepts“). This applies not only to physical products, but also to services.
Operationally, the sales quantity and revenue objectives to be achieved for each planned year are derived from the strategy and defined for each year. Based on these targets, the quantities to be produced or purchased are to be determined for each item to be sold. This planning can take place at various levels of granularity, for example, by assortment, by product group or by individual item number. It is worthwhile to plan at the level of the single item number as this allows production to better adapt its capacities to the expected demand. However, this detailed planning per item often involves a huge amount of work that the sales staff cannot accomplish. In such cases, statistical distributions based on the experience from previous years come into play.
To improve the planning quality “the markets” should be subdivided into finer sections since demand depends on the market structures, the market potential available in them, and on the stage of development of the submarket itself. It is customary to break down the sales markets geographically by country and, within this, by sales region. Sales channels are also becoming increasingly relevant, for example, direct sales, sales through dealers or agents, and online sales. Sales intermediaries like architects, medical doctors, engineers, nutritionists and increasingly influencers on social media more and more also have an influence on the purchasing decision of an end customer. This development is becoming an important impact with consequences for market cultivation as well.
To plan sales quantities and planned gross revenue by item today means to link three dimensions: Strategy, sub-markets, product structures. Shown as an example:
Even in small companies, this multi-dimensionality leads to extensive tables. In the example of Ringbook Ltd., four sales region managers, each responsible for their area, are to determine the planned sales for 42 individual items. This already results in 4 x 42 = 168 entries, which can then be totalized according to product groups and assortments. This does not yet take the market dimension into account. Each of the 50 customers can buy the 42 items, what would result in 2,600 possible planning entries. As the sales staff cannot look after his customers while planning, less sales are the consequence during the planning period. Sales management of Ringbook Ltd. requires that each area manager plan the sales quantity per product group for the year to be planned. This requires seven entries (yellow = input fields). As an initial basis for setting his sales targets, the planner reviews the previous year’s sales (12 last complete months).
By using billing data , the previous year’s shares of the individual items per product group can be calculated. The resulting percentages are multiplied by the planned sales quantity of the product group. The result is the calculated planned sales quantity by item and sales area:
For the sales representatives, this planning is part of fixing their next year’s objectives with their sales manager. The representatives must therefore also have the opportunity to adjust the calculated planned quantities to be sold for each item autonomously. This is because it is possible that a product that was not sold in the area in the previous year will be in demand in the future. New customers may be added, existing customers may give up their business or be taken over by other companies. Therefore, the sales representatives can still change the planned quantities of the single items in their final presentation. The procedure is shown in full detail in the simulation model of the book Management Control with Integrated Planning.
If all sales region plans are combined, the result is the sales quantity plan for the entire company. The top sales manager is responsible for achieving this. The detailed sales plan forms the basis for net revenue planning and for determining the planned production quantities.