In addition to your name,
write down your
section number & instructor’s name
on the scantron sheet.
Business Game Quiz
Sales Forecasting
&
Production Planning
An Outline of the Analysis
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
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
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
seasonally adjusted sales data:
 See Section 1.A of the Lecture Notes.
 Seasonal Indices (p.105 of the Player’s Manual)
Q1 (Winter)
Q2 (Spring)
Q3 (Summer)
Q4 (Fall)
0.92
1.01
0.91
1.16
 To remove the seasonality from industry sales data:
Seasonally Adjusted Industry Sales
= Actual Industry Sales ÷ Seasonal Index
Cyclical and Trend Components
Seasonal Component
Real GDP, Average Price, and Time Trend
Seasonal Factors
Regression Forecasting Model
Seasonally Adjusted Industry Sales Forecasts
Industry Sales Forecasts by Market Area
Company Sales Forecasts by Market Area
Use a regression model to forecast industry
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
identify the best one:
 Model #1:
SA Sales = 0 + 1Real GDP + 2Avg Price
 Model #2:
SA Sales = 0 + 1Time
 Model #3:
SA Sales = 0 + 1Time + 2Real GDP
 Model #4:
SA Sales = 0 + 1Time + 2Real GDP + 3Avg Price
All these forecasting equations can be estimated using
Excel (as set up on the Sales Forecast Worksheet).
Step-by-step forecasting exercise:
 Read Sections 2.A to 2.E of the Lecture Notes for
more details:
1)
2)
3)
4)
5)
To start, prepare initial data on regression variables
using available historical data (see section 2.A).
After setting up the data, estimate the forecasting
regression equation using Excel (see section 2.B).
Try different models and select the model that fits the
data best (see section 2.C).
Enter additional assumptions and your market share
projection (see section 2.D).
Repeat the forecasting exercise – steps 2 to 4 – after
adding new data every quarter (see section 2.E).
After obtaining company sales forecasts,
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
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 Cost
Financing Cost: It tied up working capital.
How should production be scheduled?
Should production capacity be expanded?

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
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
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
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
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
Business Policy Game!