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Excel spreadsheet templates are available:

Sales Forecasting
& ™ Several templates will be provided:
Historical Data Worksheet
Production Planning Sales Forecast Worksheet
Shipment Orders Worksheet
Production Schedule Worksheet

™ An Excel file containing these templates can be downloaded


online at:
Presented by http://www.calstatela.edu/faculty/klai/CL497.htm

Dr. K. Lai
™ Additional lecture notes, along with some flow charts, can
also be downloaded from there.

For the business game, you need to enter your Use your own data from both industry and
decision numbers onto a Decision Form: 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.210 of the Player’s Manual for a sample)
Historical Data for Years 1 and 2 – GDP, CPI, product sales, and
product prices.
Report D (see p.215 of the Player’s Manual for a sample)
Company’s Current Operating Information – Output, inventory, and
product sales
Report F (see pp.217-8 of the Player’s Manual for 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.
In forecasting sales, we need to account for
To view company and industry data:
seasonal effects:

™ See Section 1.A of the Lecture Notes on Forecasting.

™ Seasonal Indices (p.105 of the Player’s Manual)


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

A top-
top-down approach will be used for sales Use a regression model to forecast industry
forecasting: sales:

™ Industry Level ™ See Section 1.B of the Lecture Notes on Forecasting.


The method starts with sales forecasting at the industry level for
each market area:
™ Dependent variable (Y)
M1 (Merica 1)
M2 (Merica 2) SA Sales: Seasonally Adjusted Industry Sales
M3 (Merica 3)
M4 (Nystok, Pandau, or Sereno) ™ Independent variables – Predictors (X)
Real GDP: Real Gross Domestic Product
™ Company Level Avg Price: Industry Average Price
From industry sales forecasts, company sales forecasts for the Time: Time Trend Index
corresponding market areas can then be obtained as:
Company Sales Forecast Note: Real GDP is an often used indicator for the general demand
= Industry Sales Forecast × Expected Market Share and business conditions. The Time variable can capture demand
changes generated by demographic trends.
Try a few different forecasting equations and After obtaining company sales forecasts, we
identify the best one: next determine how much to produce:

™ Model #1: ™ Read Additional Notes on Production Planning (download it


SA Sales = β0 + β1 × Real GDP + β2 × Avg Price from http://www.calstatela.edu/faculty/klai/CL497.htm).

™ Model #2: ™ For our production analysis, we will use the following two
SA Sales = β0 + β1 × Time
Excel templates together (read Sections 2.B of the Lecture
Notes on Production Planning for step-by-step instructions):
™ Model #3: Shipment Orders Worksheet
SA Sales = β0 + β1 × Time + β2 × Real GDP
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
™ Model #4: quarters.
SA Sales = β0 + β1 × Time + β2 × Real GDP + β3 × Avg Price Production Schedule Worksheet
This is used to determine the production schedule needed to satisfy
All these forecasting equations are to be estimated using Excel on forecasted product demand and inventory needs for each market
the Sales Forecast Worksheet. area over the next few quarters.

To determine a production target, we need to


Step-
Step-by-
by-step forecasting exercise:
think about inventory management:

™ When using the Excel template for forecasting, you should ™ How much inventory to hold in each market area?
read Sections 2.A to 2.E of the Lecture Notes on Forecasting Carrying too little inventory may lead to costly stockouts:
for step-by-step instructions.
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
™ We will go through all the steps when looking at the template back.
later: Carrying too much inventory can be costly too:
1) To start, prepare initial data on regression variables using available
™ Warehouse storage cost;
historical data (see Section 2.A).
™ Financing cost for tying up working capital;
2) After setting up the data, estimate the forecasting regression
equation using Excel (see Section 2.B). ™ Product obsolescence.

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).
Choose an inventory ratio that balances Overall: Keys to successful production
between over-
over- and under-
under-stocking costs. management

™ Choose an inventory-to-sales ratio for each market area (when ™ A number of factors are crucial for a company’s success in
using the Shipment Orders Worksheet): production management:
Under normal situations, a ratio from 25% to 45% should be Reasonably accurate sales forecasts;
sufficient for the game. Excellent inventory control to cope with demand and
An example: Suppose the ratio is chosen to be 25%. If the sales production uncertainties;
demand is forecasted to be 100,000 units, then Proper allocation of product shipments to regional sales offices
Desired Inventory = 100,000 × 25% = 25,000 units. and thereby to customers;
The choice of inventory-to-sales ratios will affect how many Efficient production scheduling to meet current and future
product units to be shipped to different market areas. production targets;
Timely production capacity adjustment (including plant
expansion or construction) to meet future product demand.

How should production be scheduled?


Should production capacity be expanded? Company Sales Forecasts by Market Area Desired Inventory Ratio

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


Section 3 of the Lecture Notes on Production Planning): Estimated Shipment Orders to Sales Offices by Market Area
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)
Planned Production Target
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)
Production Scheduling: Production Capacity Expansion:
Lines, Overtime, and Second Shifts New Lines or Plants?

Production Cost Analysis Capital Budgeting Analysis


Hope you will enjoy the
Business Policy Game!

We will next look at


how to use our Excel templates.