FORECASTING AND SIMULATION TIPS

To estimate or calculate in advance

Estimate future trends by examining and analyzing available information.

A predictionprediction, as of coming events or conditions.

Forecast Definition

Why Forecast Sales?

The sales forecast should be input to: Finance

Projected revenue for following year Production

Sales Forecast – Inventory = approximate Production schedule

R&D Competitive assessment of your product

Let’s look at an example:

Chester Corporation Two products

Cake Cruton

Just completed the year 2010 and must forecast for next year 2011

Perceptual Map December 31, 2010

18

16

14

12

10

8

6

4

2

02 4 6 8 10 12 14 16 18 20

Performance

Able

Baker

Bear

Cake

Cruton

Daze

Daffy

Ducky

Eat

Eek

Fast

Fetish

Cake

Cruton

Production Analysis December - 31, 2010

Production Information

NamePrimary

SegmentUnits Sold

Units in Inventory

Revision Date

Age Dec.31

MTBFPfmn Coord

Size Coord

PriceMaterial

CostLabor Cost

Contr Marg.

2nd Shift or Over

Time

Auto- mation

Next Round

Capacity Next

Round

Able Low 1,505 0 22-Jan-10 3.2 15500 6.5 13.0 $28.00 $10.20 $7.73 33% 0% 5.0 1,250Apple 0 0 13-Mar-11 0.0 0 0.0 0.0 $0.00 $0.00 $0.00 0% 0% 1.0 500 Baker Low 977 0 19-May-10 3.0 18000 6.8 13.2 $32.00 $11.02 $9.36 36% 5% 5.0 1,000Bear High 564 0 20-Mar-09 2.3 17000 7.7 11.5 $43.00 $0.00 $0.00 30% 0% 1.0 1Baby 0 0 29-Jun-11 0.0 0 0.0 0.0 $0.00 $0.00 $0.00 0% 0% 1.0 450 Cake Low 990 0 4-May-08 4.0 18500 6.5 13.0 $31.75 $11.10 $9.67 25% 0% 3.8 1,000Cruton High 989 0 17-Jul-10 1.1 21000 10.0 10.0 $44.00 $18.35 $14.20 28% 89% 2.0 700 Daze Low 1,188 0 3-Mar-10 2.9 20000 6.9 13.2 $33.00 $11.73 $10.10 33% 33% 4.0 900Daffy Low 1,033 0 8-Mar-08 2.8 18000 5.8 14.7 $31.00 $8.55 $8.35 43% 20% 5.0 750Ducky High 103 0 25-Oct-10 0.2 17001 10.2 9.8 $43.00 $17.55 $15.96 22% 100% 1.0 700 Eat Low 1,244 0 11-Apr-10 2.1 19000 7.1 13.3 $31.00 $11.54 $10.31 27% 0% 4.0 1,105Eek High 931 0 18-Jun-10 1.3 21000 10.0 10.1 $42.42 $18.25 $12.24 26% 0% 1.5 800 Fast Low 1,089 0 12-Apr-10 2.1 20000 6.8 13.0 $33.00 $11.83 $9.41 35% 10% 5.0 1,100Fetish Low 972 0 22-Feb-09 1.9 18000 6.0 14.0 $31.50 $9.42 $10.92 33% 14% 3.0 900

How many Low Tech Products are there ?How many High Tech Products are there?

94

Statistics

Total Industry Unit Demand 7,379Actual Industry Unit Sales 7,243Segment % of Total Industry 62.2%Growth Rate 10.0%

Customer Buying CriteriaExpectations Importance

1. Price $15.00 - 35.00 41%2. Age Ideal Age = 3.0 29%3. Reliability MTBF 14000-20000 21%4. Positioning Pfmn 6.8 Size13.2 9%

Low Tech Market Segment Analysis

Round 4 – December 31, 2010

Top Products in Low Tech Segment

Cake’s specs for 2011 2011 Customer Expectations

Performance 7.0 7.3

Size 12.7 12.7

Price $31.00 $15.00 - $35.00

MBTF 18500 14 – 20,000

Age at 12/31 2.9 3.0

NameMarket Share

Units Sold to Seg

Revision Date

Stock Out

Pfmn Coord

Size Coord

List Price MTBFAge

Dec.31Promo Budget

Sales Budget

Customer Awareness

December Customer

SurveyAble 17% 1,207 22-Jan-10 YES 6.5 13.0 $28.00 15500 3.2 $1,400 $1,800 100% 31Daffy 14% 1,019 8-Mar-08 YES 5.8 14.7 $31.00 18000 2.8 $1,500 $1,500 97% 31Daze 13% 932 3-Mar-10 YES 6.9 13.2 $33.00 20000 2.9 $1,400 $1,400 100% 40Cake 11% 805 4-May-08 YES 6.5 13.0 $31.75 18500 4.0 $1,400 $1,950 100% 29Eat 11% 797 11-Apr-10 YES 7.1 13.3 $31.00 19000 2.1 $1,400 $1,400 94% 27Fetish 11% 795 22-Feb-09 YES 6.0 14.0 $31.50 18000 1.9 $2,000 $1,750 90% 25Baker 11% 790 19-May-10 YES 6.8 13.2 $32.00 18000 3.0 $1,500 $1,500 100% 32Fast 11% 779 12-Apr-10 YES 6.8 13.0 $33.00 20000 2.1 $1,400 $1,900 100% 35Bear 2% 117 20-Mar-09 YES 7.7 11.5 $43.00 17000 2.3 $900 $900 76% 3Eek 0% 1 18-Jun-10 YES 10.0 10.1 $42.42 21000 1.3 $1,750 $1,750 100% 0

Revision Date: April 24, 2011

Assessment – Above Average

Low Tech Sales in High Tech Segment

NameMarket Share

Units Sold to Seg

Revision Date

Stock Out

Pfmn Coord

Size Coord

List Price MTBFAge

Dec.31Promo Budget

Sales Budget

Customer Awareness

December Customer

SurveyCruton 23% 988 17-Jul-10 YES 10.0 10.0 $44.00 21000 1.1 $1,900 $1,650 100% 43Eek 21% 929 18-Jun-10 YES 10.0 10.1 $42.42 21000 1.3 $1,750 $1,750 100% 42Eat 10% 447 11-Apr-10 YES 7.1 13.3 $31.00 19000 2.1 $1,400 $1,400 94% 13Bear 10% 447 20-Mar-09 YES 7.7 11.5 $43.00 17000 2.3 $900 $900 76% 7Fast 7% 310 12-Apr-10 YES 6.8 13.0 $33.00 20000 2.1 $1,400 $1,900 100% 13Able 7% 298 22-Jan-10 YES 6.5 13.0 $28.00 15500 3.2 $1,400 $1,800 100% 5Daze 6% 256 3-Mar-10 YES 6.9 13.2 $33.00 20000 2.9 $1,400 $1,400 100% 9Baker 4% 187 19-May-10 YES 6.8 13.2 $32.00 18000 3.0 $1,500 $1,500 100% 7Cake 4% 185 4-May-08 YES 6.5 13.0 $31.75 18500 4.0 $1,400 $1,950 100% 6Fetish 4% 177 22-Feb-09 YES 6.0 14.0 $31.50 18000 1.9 $2,000 $1,750 90% 0Ducky 2% 103 25-Oct-10 YES 10.2 9.8 $43.00 17001 0.2 $2,750 $2,500 74% 33Daffy 0% 14 8-Mar-08 YES 5.8 14.7 $31.00 18000 2.8 $1,500 $1,500 97% 0

Basic Forecasting for Cake

Last year's sales can be a good starting point for this year's forecasts. Cake

• Low Tech 805 * 10% = 80.5• High Tech 185 * 20% = 37.0• Forecast increment 117.5

• Total Forecast 1107.5

Assumptions:• No new products• No major competitive changes• Sales were not impacted by stock-outs

Forecasting Demand for Cake

2011 Total Low Tech Unit Demand

Number of Products Average Product

Expected Sales Cake Assessment Low Tech Forecast High Tech Forecast

Total Forecast

7,379 * 1.1 = 8117

8.58117 / 8.5 = 955

Above Average955 * 1.10 = 1,050

225

1,275

High Tech Market Segment Analysis

Customer Buying CriteriaExpectations Importance

1. Positioning Pfmn10.2 Size 9.8 33%2. Age Ideal Age = 0.0 29%3. Price $25.00 - 45.00 25%4. Reliability MTBF 17000-23000 13%

Statistics

Total Industry Unit Demand 4,479Actual Industry Unit Sales 4,340Segment % of Total Industry 37.8%Growth Rate 20.0%

Round 4 – December 31, 2010

Top Products in High Tech Segment

Cruton’s specs for 2011 2011 Customer Expectations

Performance 10.5 10.9

Size 9.3 9.1

Price $45.00 $25.00 - $45.00

MBTF 21000 17 – 23,000

Age at 12/31 1.4 0

NameMarket Share

Units Sold to Seg

Revision Date

Stock Out

Pfmn Coord

Size Coord

List Price MTBFAge

Dec.31Promo Budget

Sales Budget

Customer Awareness

December Customer

SurveyCruton 23% 988 17-Jul-10 YES 10.0 10.0 $44.00 21000 1.1 $1,900 $1,650 100% 43Eek 21% 929 18-Jun-10 YES 10.0 10.1 $42.42 21000 1.3 $1,750 $1,750 100% 42Eat 10% 447 11-Apr-10 YES 7.1 13.3 $31.00 19000 2.1 $1,400 $1,400 94% 13Bear 10% 447 20-Mar-09 YES 7.7 11.5 $43.00 17000 2.3 $900 $900 76% 7Fast 7% 310 12-Apr-10 YES 6.8 13.0 $33.00 20000 2.1 $1,400 $1,900 100% 13Able 7% 298 22-Jan-10 YES 6.5 13.0 $28.00 15500 3.2 $1,400 $1,800 100% 5Daze 6% 256 3-Mar-10 YES 6.9 13.2 $33.00 20000 2.9 $1,400 $1,400 100% 9Baker 4% 187 19-May-10 YES 6.8 13.2 $32.00 18000 3.0 $1,500 $1,500 100% 7Cake 4% 185 4-May-08 YES 6.5 13.0 $31.75 18500 4.0 $1,400 $1,950 100% 6Fetish 4% 177 22-Feb-09 YES 6.0 14.0 $31.50 18000 1.9 $2,000 $1,750 90% 0Ducky 2% 103 25-Oct-10 YES 10.2 9.8 $43.00 17001 0.2 $2,750 $2,500 74% 33Daffy 0% 14 8-Mar-08 YES 5.8 14.7 $31.00 18000 2.8 $1,500 $1,500 97% 0

Revision Date: May 29, 2011

Assessment – Very Good

Forecasting Demand for Cruton

2011 Total High Tech Unit Demand

Number of Products Average Product

Expected Sales Cruton Assessment High Tech Forecast Low Tech Forecast

Total Forecast

4,479 * 1.2 = 5,375

55375 / 5 = 1,075

Very Good1,075 * 1.20 = 1,290

0

1,290

Simulation Tips

MANAGING CONTRIBUTION MARGINS Unit cost

the cost to make one sensor(car, computer, cup of coffee, etc.)

Material cost … plus … the cost of the “stuff” you use to make your

sensor smaller, faster, more reliable = higher cost

Labor cost the cost to assemble your product

Low tech• Position

size= 13.2 performance= 6.8

• MTBF = 20,000

High tech• Position

size= 10.2 performance= 9.8

• MTBF = 23,000

• Bigger size• Slower performance• Lower reliability

Lower material cost

• Smaller size• Faster performance• Higher reliability

Higher material cost

MATERIAL COST

POSITIONING IMPACT ON MATERIAL COSTS

02468

101214161820

Size

0 2 4 6 8 10 12 14 16 18 20

Performance

Positioning affects material cost. The higher the technology, the higher the material costs… therefore, for Low Tech sensors, less aggressive positioning will reduce costs

LABOR COSTS

Everything is based on How Many sensors you want to make (now and in the future)

Capacity how many sensors you can make - one shift at regular hours how “big” your factory is

Overtime workers work extra hours at a higher wage

Automation mix between machines and human labor

Machinery: Automation

Level of robotics: from 1 – 10

Automation level of 1Labor cost of $11.20 per unit

Machinery: Automation

Level of robotics: from 1 – 10

Automation level of 1- $11.20 per unit

Automation level of 2Labor cost is 10% ($1.12) lower… $10.08

Machinery: Automation

Level of robotics: from 1 – 10

Automation level of 1 $11.20 per unit

Automation level of 2 $10.08 per unit

Automation level of 3 $8.96 per unit

Labor Cost Per Unit

1….. $11.20 2…. ($1.12) $10.08 3…. ($1.12) $ 8.96 4…. ($1.12) $ 7.84 5…. ($1.12) $ 6.72 6…. ($1.12) $ 5.60 7…. ($1.12) $ 4.48 8…. ($1.12) $ 3.36 9…. ($1.12) $ 2.24 10. ($1.12) $ 1.12

If you invest into bring automation to Level 5, what will your labor cost per unit be?

Evaluating ProductsCustomer Buying Criteria - 2008

Low Tech High Tech

Price $15 – 35 $25 – 45

Age 3.0 0.0

Reliability 14000-20000

17000– 23000

Positioning

6.3 / 13.7 9.5 / 10.5

Name SegUnits Sold

Unit Inv

Revision Date

Age Dec.

31MTBF Pfm Size Price

Able 1,094 378 May-08 2.1 19000 6.8 13.2Apple Jun-08 0.6 22000 10.5 9.5Ants High 413 191 Mar-08 0.7 22000 10 9.7 $45.00 Baker High 760 62 Aug-08 1.5 21500 10 10.7 $35.49Best Low 725 0 May-08 2.2 16500 7 13.2 $33.99Bold High 221 76 Jul-08 0.5 22000 11 9.8 $44.99 Cake Low 1,292 195 Aug-08 2.1 20000 7.8 11.3 $32.25Candy Low 542 11 Oct-08 1.5 14000 6.8 13.0 $30.25Corn High 508 46 Aug-08 0.9 21345 9.7 9.3 $43.25

Production and Inventory

You have a great low tech product You think you can produce and sell about

2,400 units What does that mean for inventory

management? Don’t stock out (at least 1 unit left) Not more than 60 days of inventory

What is the most you can sell and the least you can sell and still meet your inventory goals?

jan feb mar april may june july aug sept oct nov dec

200 200 200 200 200 200 200 200 200 200 200 200

Produce 2,400 in a year…

The Timing …

60 days= 1/6 year=(2400/6) =400 units

INVENTORY GOALS…If you produce 2,400 units; You want at least 1 unit left (sales = 2,399 & units inventory = 1) You want no more than 400 units left (sales= 2,000 & units inventory = 400)

New Product Introduction

You have a new product coming out Sept. 1st … and it’s perfect: ideal size (11.2), performance (8.8),

MTBF (23,000), age (0 years) Factory with production capacity of 900 You think you can sell 33% of market

Market size = 2,160 * 1.2 = 2,592 2,592 * 33% = 863…

so you decide to produce 900.

Can you sell 863? Why or why not?Can you make 900? Why or why not?

jan feb mar april may june july aug sept oct nov dec

75 75 75 75 75 75 75 75 75 75 75 75

Produce 900 in a year…

Timing …

75 75 75 75 75 75 75 75 75 75 75 75

jan feb mar april may june july aug sept oct nov dec

75 75 75 75 75 75 75 75 75 75 75 75

Produce 900 in a year…

Timing …

September 1st ... • Sales begin • Production begins

Produce 900 in a year… If you had a whole year But you only have 1/3 year for…

Sales and Production Sales forecast = 300 Production schedule = 300

(600 would be 100% overtime)

j f m a m j j a s o n d

Timing …

j f m a m j j a s o n d

2006 2007

Run the company you have Product revisions-

that happen quickly Set price, production,

promo &salesCreate the company you want to manage in the future

Add new products Add capacity, increase automation, build new factory

Use your Forecast to create a “best” case and “Worst” case scenarios• Create your “best case” and in Production build to that level of sales• Create your “worst case” and Finance to that level of sales• Check your projected performance “pro-formas”

“old” able “new” ablenew automationnew productnew factory

Business Plan & Process

Strategy Mission R&D Marketing Production Finance

Specific (tactical)- what are you going to do when are you going to do it how (specifically) will it get done

Low Tech Tactics: Product strategy

keep it in the fine cut circle ONLY revise to manage the age (ideal = 3) if the age over the year is 2-3 or 3-4 that’s best MTBF close to 20,000 revise to keep acceptable revise ONLY to manage age

Marketing build awareness & accessibility aggressively NOT lowest price; highest price & meet sales

Production automate aggressively and early OT is OK add capacity as needed

High Tech Tactics:

Product strategy revise every year to keep on ideal spot revise every year to manage AGE (ideal = 0) add new products as you wish MTBF close to 23,000

Marketing build awareness & accessibility aggressively Market is not price sensitive

Production automation- low…speeds R&D times add capacity as needed

Tactics

Operate your current companyMake decisions for the product you have now…(short term repositioning, price, promotion, sales, Sales Forecast and Production Schedule)

Make investments in the company you want to be in the future(new products- repositioning greater than a year, increased capacity or automation)

Finance current operation and future growth