In addition to your name,write down your

section number & instructor’s name on the scantron sheet.

Business Game QuizBusiness Game Quiz

Sales ForecastingSales Forecasting & &

Production Planning Production Planning

An Outline of the AnalysisAn Outline of the Analysis

Excel Spreadsheet Templates:Excel Spreadsheet Templates:

Several templates will be provided:

Initial Data Worksheet

Sales Forecast Worksheet

Sales Order Worksheet

Production Schedule Worksheet As indicated in Section 6 of the Lecture Notes, an

Excel file containing these templates can be downloaded online at:

http://www.calstatela.edu/faculty/klai/CL497.htm

Data will come from both industry and Data will come from both industry and company reports:company reports:

After opening the BPG program, you can view all the reports available on the company decision disk:

Report J (see p.210 of the Player’s Manual for a sample)

Consolidated Historical Data for Years 1 and 2

Report D (see p.215 of the Player’s Manual for a sample)

Operating Information – Output, inventory, and sales

Report F (see p.217-8 of the Player’s Manual for a sample)

Industry Report – Real GDP, sales, product prices, and exchange rates.

A top-down approach will be used for sales A top-down approach will be used for sales forecasting:forecasting:

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) From the industry sales forecast, the sales forecast for

the company in each market can be obtained as:

Company Sales Forecast

= Industry Sales Forecast × Expected Market Share

Account for seasonal effects and obtain Account for seasonal effects and obtain seasonally adjusted sales data:seasonally adjusted sales data:

See Section 1.A of the Lecture Notes. Seasonal Indices (p.105 of the Player’s Manual)

Q1 (Winter) 0.92Q2 (Spring) 1.01Q3 (Summer) 0.91Q4 (Fall) 1.16

To remove the seasonality from industry sales data:Seasonally Adjusted Industry Sales= Actual Industry Sales ÷ Seasonal Index

Regression Forecasting Model

Seasonally Adjusted Industry Sales Forecasts

Seasonal Factors

Industry Sales Forecasts by Market Area

Company Sales Forecasts by Market Area

Real GDP, Average Price, and Time Trend

Cyclical and Trend ComponentsCyclical and Trend Components Seasonal ComponentSeasonal Component

Use a regression model to forecast industry Use a regression model to forecast industry sales:sales:

See Section 1.B of the Lecture Notes. Dependent variable (YSA)

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

Try a few different forecasting equations and Try a few different forecasting equations and identify the best one:identify the best one:

Model #1:

SA Sales = 0 + 1Real GDP + 2Avg Price

Model #2:

SA Sales = 0 + 1Time

Model #3:

SA Sales = 0 + 1Time + 2Real GDP

Model #4:

SA Sales = 0 + 1Time + 2Real GDP + 3Avg Price

All these forecasting equations can be estimated using Excel (as set up on the Sales Forecast Worksheet).

Step-by-step forecasting exercise:Step-by-step forecasting exercise:

Read Sections 2.A to 2.E of the Lecture Notes for more details:

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, After obtaining company sales forecasts, determine how much to produce:determine how much to produce:

Read Sections 3.A, 3.B, and 3.C of the Lecture Notes.

The Sales Order Worksheet and the Production Schedule Worksheet can be used to perform production analysis in Excel.

Why do firms hold inventories?

To guard against demand uncertainty.

To guard against production uncertainty.

Choose an inventory policy that balances Choose an inventory policy that balances between over- and under-stocking costs:between over- and under-stocking costs:

Select your desired inventory-to-sales ratio.Under normal situations, a ratio from 20% to 40% may be used 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.

Carrying too little inventory may lead to costly stockouts.Stockouts are very costly because they result in not only a loss of present sales but also a loss of some future sales.

Carrying too much inventory can be costly too.Warehouse Storage CostFinancing Cost: It tied up working capital.

How should production be scheduled?How should production be scheduled?Should production capacity be expanded?Should production capacity be expanded?

See Chapters 7 & 8 of the BPG Player’s Manual. Read also Section 4 of the Lecture Notes. Normal operation: 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)

Company Sales Forecasts by Market Area Desired Inventory Ratio

Estimated Sales Office Orders by Market Area

Planned Production Target

Production Scheduling: Lines, Overtime, and Second Shifts

Production Capacity Expansion: New Lines or Plants?

Production Cost Analysis Capital Budgeting Analysis

Prepare sales forecasts, production plans, and Prepare sales forecasts, production plans, and cost estimates for the Two-Year Plan:cost estimates for the Two-Year Plan:

Read the course outline for specific requirements. When you are ready to prepare the Two-Year Plan,

read the Appendix of the Lecture Notes.

Hope you will enjoy the Hope you will enjoy the Business Policy Game!Business Policy Game!