Forecasting and Simulation tips

1. Forecasting and Simulation tips

2. Forecast Definition To estimate or calculate in advance Estimate future trends by examining and analyzing available information. A prediction, as of coming events or conditions.

3. 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

4. Let’s look at an example: • Chester Corporation • Two products • Cake • Cruton • Just completed the year 2010 and must forecast for next year 2011

5. Perceptual Map December 31, 2010 • Cake • Cruton

6. Production Analysis December - 31, 2010 How many Low Tech Products are there ? How many High Tech Products are there? 9 4

7. Low Tech Market Segment Analysis Round 4 – December 31, 2010

8. Top Products in Low Tech Segment Assessment – Above Average Revision Date: April 24, 2011

9. Low Tech Sales in High Tech Segment

10. BasicForecasting 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

11. 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 8.5 8117 / 8.5 = 955 Above Average 955 * 1.10 = 1,050 225 1,275

12. High Tech Market Segment Analysis Round 4 – December 31, 2010

13. Top Products in High Tech Segment Assessment – Very Good Revision Date: May 29, 2011

14. 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 5 5375 / 5 = 1,075 Very Good 1,075 * 1.20 = 1,290 0 1,290

15. Simulation Tips

16. 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

17. Material Cost • 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

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

19. 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

20. Machinery: Automation Level of robotics: from 1 – 10 Automation level of 1 Labor cost of $11.20 per unit

21. Machinery: Automation Level of robotics: from 1 – 10 Automation level of 1- $11.20 per unit Automation level of 2 Labor cost is 10% ($1.12) lower… $10.08

22. 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

23. 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?

24. Age Units Unit Revision Name Seg Dec. MTBF Pfm Size Price Sold Inv Date 31 Able 1,094 378 May-08 2.1 19000 6.8 13.2 Apple Jun-08 0.6 22000 10.5 9.5 Ants 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 $35.49 Best Low 725 0 May-08 2.2 16500 7 13.2 $33.99 Bold 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 $32.25 Candy Low 542 11 Oct-08 1.5 14000 6.8 13.0 $30.25 Corn High 508 46 Aug-08 0.9 21345 9.7 9.3 $43.25 Evaluating Products

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?

26. 200 200 200 200 200 200 200 200 200 200 200 200 60 days= 1/6 year= (2400/6) = 400 units The Timing … jan feb mar april may june july aug sept oct nov dec Produce 2,400 in a year… • 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)

27. 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?

28. 75 75 75 75 75 75 75 75 75 75 75 75 75 75 75 75 75 75 75 75 75 75 75 75 Timing … jan feb mar april may june july aug sept oct nov dec Produce 900 in a year…

29. 75 75 75 75 75 75 75 75 75 75 75 75 Timing … jan feb mar april may june july aug sept oct nov dec Produce 900 in a year… • Produce 900 in a year… • If you had a whole year • But you only have 1/3 year for… • Sales and Production • September 1st ... • Sales begin • Production begins • Sales forecast = 300 • Production schedule = 300 • (600 would be 100% overtime)

30. j j f f m m a a m m j j j j a a s s o o n n d d Timing … 2006 2007 “old” able “new” able new automation new product • Run the company you have • Product revisions-that happen quickly • Set price, production, promo &sales • Create 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” new factory

31. 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

32. 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

33. 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

34. 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