1. Business Simulation Seminar Planning Forecasting Demand and Capacity

2. Planning  Critical management role  Takes time  Need to: Understand current situation Determine where you want to go Decide the best way to get there

3. What Does a Business Forecast?  The market Overall size Segments  Sales  Costs Material, labor, breakage, theft, etc.  Headcount Hires and losses  Cash needs  Pretty much everything

4. Demand Planning  Forecast projected demand  Need to consider: Market size Market growth Changing market needs Your competitive position Your competitors’ positions  What might this look like for: Macy’s Apple Nike

5. Methods of Forecasting  Graphical

6. Mathematical  Linear regression

7. Mathematical Forecasting  Linear regression – potential problem

8. Mathematical Forecasting  Econometric Create complex models based upon a number of inputs E.g. sales may be a function of GDP, new home sales, existing home sales, and unemployment  Other models Simple alpha – based upon prior period data Limited only by creativity

9. Delphi Method  Get variety of subject matter experts together  Each describes environment from their perspective  Each member makes own forecast  Share the forecasts  Discuss  Repeat votes and sharing until consensus is reached

10. Practical Forecasting Sales Forecast Example Sales = market size * market share market size = market size last period * (1 + growth rate) market share = market share last period adjusted for product improvements and changes in marketing

11. Exercise  The total market is $100m. You currently have a 20% market share.  The market is growing 10%.  You believe you will have a better product next year than your competitors.  What is your forecast for next year?

12. Exercise  The total market is $400m and you have a 10% market share.  The market is expected to grow 25% next year.  You believe your products are not going to do as well as the competition next year.  What is your forecast?

13. Exercise How many cars will you sell next year? Market size = 10,000 cars per year Market growth = 2% Your market share = 25% You are coming out with a new line of hybrids You will spend more on advertising and improve your showroom

14. Capacity Planning  Need to plan ahead Capacity typically doesn’t come instantly – NEED TO PLAN AHEAD, otherwise will have a product but no production! Adding capacity costs money  Must coordinate with R&D When are new products coming out? Are we dropping products?  Must coordinate with Marketing What demand do they forecast?  If you do not make enough, your customers will go elsewhere.  If you make too much, you will lose money.

15. Margin Analysis  Must always keep an eye on the financials  What are our planned profit margins? How do we calculate this?  ROS  Contribution margin What numbers can we control? How?  Should we automate? (a cost)  Should we train our people? (a cost)  What might this look like for: GM, Apple, Nike?

16. Planning and the Simulation  After making your decisions Review your forecasted financials What is the ROS? What will be your contribution margin?  Do you need financing?

17. Forecasting Exercise  Each person should pick a different product for their company  How many units do you forecast for the product in the next round? How did you get the forecast?