Sales Forecasting & Production Planning

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Sales Forecasting

&

Production Planning

Presented by

Dr. K. Lai

For the business game, you need to enter your

decision numbers onto a Decision Form:

Excel spreadsheet templates are available:

Several templates will be provided: Historical Data Worksheet

Sales Forecast Worksheet Shipment Orders Worksheet Production Schedule Worksheet

An Excel file containing these templates can be downloaded online at:

http://www.calstatela.edu/faculty/klai/CL497.htm Additional lecture notes, along with some flow charts, can

also be downloaded from there.

Use your own data from both industry and

company reports:

After opening the BPG program, you can view all the reports available as electronic files on the USB Decision drive:

Report J(see p.210of the Player’s Manualfor a sample) Historical Data for Years 1 and 2 – GDP, CPI, product sales, and product prices.

Report D (see p.215of the Player’s Manualfor a sample) Company’s Current Operating Information – Output, inventory, and product sales

Report F(see pp.217-8of the Player’s Manualfor a sample) Recent Industry Information – Real GDP, exchange rates, product sales, and product prices.

Do not use any data from the trial run. The game will be reset with new data after the trial run.

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To view company and industry data:

A top

-

down approach will be used for sales

forecasting:

Industry Level

The method starts with sales forecasting at the industry level for each market area:

M1(Merica 1)

M2(Merica 2)

M3(Merica 3)

M4(Nystok, Pandau, or Sereno) Company Level

From industry sales forecasts, company sales forecasts for the corresponding market areas can then be obtained as:

Company Sales Forecast

= Industry Sales Forecast ×Expected Market Share

In forecasting sales, we need to account for

seasonal effects:

See Section 1.Aof the Lecture Noteson Forecasting. Seasonal Indices(p.105 of thePlayer’s Manual)

Q1 (Winter) 0.92

Q2 (Spring) 1.01

Q3 (Summer) 0.91

Q4 (Fall) 1.16

Use a regression model to forecast industry

sales:

See Section 1.Bof the Lecture Noteson Forecasting. Dependent variable (Y)

SA Sales: Seasonally Adjusted Industry Sales Independent variables – Predictors (X)

Real GDP: Real Gross Domestic Product Avg Price: Industry Average Price Time: Time Trend Index

Note: Real GDPis an often used indicator for the general demand and business conditions. The Timevariable can capture demand changes generated by demographic trends.

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Try a few different forecasting equations and

identify the best one:

Model #1:

SA Sales= β0+ β1 ×Real GDP+ β2 ×Avg Price Model #2:

SA Sales= β0+ β1 ×Time Model #3:

SA Sales= β0+ β1 ×Time + β2 ×Real GDP Model #4:

SA Sales= β0+ β1 ×Time+ β2 ×Real GDP+ β3 ×Avg Price

All these forecasting equations are to be estimated using Excelon the Sales Forecast Worksheet.

Step

-

by

-

step forecasting exercise:

When using the Excel template for forecasting, you should read Sections 2.A to 2.Eof the Lecture Noteson Forecasting for step-by-step instructions.

We will go through all the steps when looking at the template later:

1) To start, prepare initial data on regression variables using available historical data (see Section 2.A).

2) After setting up the data, estimate the forecasting regression equation using Excel (see Section 2.B).

3) Try different models and select the model that fits the data best (see Section 2.C).

4) Enter additional assumptions and your market share projection (see Section 2.D).

5) Repeat the forecasting exercise – steps 2 to 4 – after adding new data every quarter (see Section 2.E).

After obtaining company sales forecasts, we

next determine how much to produce:

Read Additional Noteson Production Planning(download it

from http://www.calstatela.edu/faculty/klai/CL497.htm). For our production analysis, we will use the following two

Excel templates together (read Sections 2.Bof theLecture Noteson Production Planning for step-by-step instructions):

Shipment Orders Worksheet

This is used to estimate the need of each market area in terms of shipments of new product units to these market areas in coming quarters.

Production Schedule Worksheet

This is used to determine the production schedule needed to satisfy forecasted product demand and inventory needs for each market area over the next few quarters.

To determine a production target, we need to

think about inventory management:

How much inventory to hold in each market area?

Carrying too little inventory may lead to costly stockouts: Stockouts can result in not only a loss of present sales but also a loss of some future sales. Some dissatisfied customers may not come back.

Carrying too much inventory can be costly too:

Warehouse storage cost;

Financing cost for tying up working capital;

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Choose an inventory ratio that balances

between over

-

and under

-

stocking costs.

Choose an inventory-to-sales ratiofor each market area (when

using the Shipment Orders Worksheet):

Under normal situations, a ratio from 25% to 45%should be sufficient for the game.

An example: Suppose the ratio is chosen to be 25%. If the sales demand is forecasted to be 100,000 units, then

Desired Inventory = 100,000 ×25% = 25,000 units. The choice of inventory-to-sales ratios will affect how many product units to be shipped to different market areas.

How should production be scheduled?

Should production capacity be expanded?

See Chapters 7 & 8of the BPG Player’s Manual (read also

Section 3of theLecture Noteson Production Planning): Normal operations: 40 hours per line each week Schedule overtime:Up to 8 hours per line

Add second work shifts(Take 1 quarter to complete) Create new production lines(Take 1 quarter) Reactivate some idle lines(Take 1 quarter) Add more space to a plant(Take 2 quarters) Build a new plant(Take 3 quarters)

Overall: Keys to successful production

management

A number of factors are crucial for a company’s success in production management:

Reasonably accurate sales forecasts;

Excellent inventory controlto cope with demand and production uncertainties;

Proper allocation of product shipmentsto regional sales offices and thereby to customers;

Efficient production schedulingto meet current and future production targets;

Timely production capacity adjustment(including plant expansion or construction) to meet future product demand.

Company Sales Forecasts by Market Area Desired Inventory Ratio

Estimated Shipment Orders to Sales Offices by Market Area

Planned Production Target

Production Scheduling: Lines, Overtime, and Second Shifts

Production Capacity Expansion: New Lines or Plants?

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