Forecasting and Simulation tips

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.

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 Cake Cruton Perceptual Map December 31, 2010

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

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 Price $31.00 $15.00 - $35.00 MBTF 18500 14 – 20,000 Age at 12/31 2.9 3.0 Assessment – Above Average Revision Date: April 24, 2011

Low Tech Sales in High Tech Segment

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

High Tech Market Segment Analysis 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 Assessment – Very Good Revision Date: May 29, 2011

Forecasting Demand for Cruton 2011 Total High Tech Unit Demand Number of Products Average Product Expected Sales Cake 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

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

Material Cost Low tech High tech Bigger size Slower performance 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

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

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 1 Labor 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 2 Labor 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 If you invest into bring automation to Level 5, what will your labor cost per unit be? 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

Customer 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 Evaluating Products Name Seg Units Sold Unit Inv Revision Date Age Dec. 31 MTBF Pfm Size Price 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 10 9.7 $45.00 Baker 760 62 Aug-08 1.5 21500 10.7 $35.49 Best Low 725 2.2 16500 7 $33.99 Bold 221 76 Jul-08 0.5 11 9.8 $44.99 Cake 1,292 195 20000 7.8 11.3 $32.25 Candy 542 Oct-08 14000 13.0 $30.25 Corn 508 46 0.9 21345 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?

The Timing … jan feb mar april may june july aug sept oct nov dec Produce 2,400 in a year… 60 days= 1/6 year= (2400/6) = 400 units 200 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 – 1 September You have a new product coming out 1-Sept. 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?

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

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

Timing … 2015 2016 j f m a s o n d j f m a s o n d “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 Create your “worst case scenario” and finance your vision Check your projected performance “pro-formas” new 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 Marketing Production 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 Marketing Production 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 company Make 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