StratSimMarketing
Forecasting and
Production Planning
Manufacturing Decisions
Recall there are two levels of manufacturing
decisions:
Vehicle Production = Target production for a particular vehicle.
• Flexible production (+/- 10%) if shortage or > 120 days inventory.
• Retooling charges if production increases over previous
production.
• Watch inventory levels. If vehicle is upgraded, inventory will be
written off at 15% loss.
Capacity = Overall vehicle production for all product lines
combined.
• May produce above capacity (with over-capacity charge).
• You have total flexibility to divide capacity among vehicles, but
consider retooling charges.
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Setting Production Levels
So, how does one set production levels for
a vehicle?
Default decision is same as last period. Problems with that?
• Doesn’t take into account inventory (stock on hand).
• Doesn’t take into account unmet demand (shortages).
• Doesn’t take into account upgrades:
 Impact of change in specs on sales.
 Inventory sold off with any upgrade.
• Doesn’t take into account changes in marketing mix decisions
(changes to price, advertising, or promotion).
• Doesn’t take into account growth (or decline) in market demand.
• Doesn’t take into account competitor moves.
• But, no retooling costs for increases in production.
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Setting Production Levels
If the goal is to have zero units without
shortages:
• Set Production Level = Demand – Current Inventory
Example: If demand is 200 units, and you currently have 50 units
in stock, set production at 150 to have zero units in inventory at the
end of the period:
 Production level = 200 – 50 = 150
• Why is zero good? Cash not used to build inventory. No risk of
obsolescence (15% write-off cost if upgraded).
• Why is zero bad? If demand is greater than you expect, you may
have shortages.
• Remember about 10% flex production.
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Setting Production Levels
Example:
If we expect demand to
be 800 units for Alec,
700 units for Alfa, and
our goal is zero
inventory, how many of
each should we
produce?
Answer:
707 for Alec (800-93)
700 for Alfa (700-0)
(0 b/c of upgrade)
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Forecasting Demand
So, the logistics of calculating appropriate production
levels is fairly simple . . . know your existing inventory levels, set a
target ending inventory (possibly zero), take into consideration
upgrade write-offs, and estimate demand . . .
Estimating Demand is the hard part!
• Many moving parts: changes to marketing mix, potential changes
in the product, changes in the environment, changes made by the
competition.
• It is the dynamic aspect of forecasting that makes it so difficult.
• One approach is to use statistical methods to calculate next year’s
demand, but here we will focus on more fundamental analysis.
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Forecasting Demand
Unit Sales – (Market Size x Share)
(Demand)
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Economy
Industry Dynamics
Underlying Growth
"Quality"
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Relative $Ad
Price
Distribution
Firm Preference
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Forecasting Demand (Market Size)
First, you may want to better understand
where your current vehicles sell:
(Tools = Vehicle Sales by Customer $, select Vehicle = share).
Use the Vehicle Sales by Customer Research.
Units sold to Customer (e.g.
2F purchased 355K Alfas).
Share of consumer
customer (e.g. Alfa has
40.9% share of 2F.
Overall market share.
Overall total unit sales.
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Forecasting Demand (Market Size)
Consumer Customers Report: Provides total unit
sales by customer and forecasts units sales for next year.
Next, you may want to use the Consumer Customer report to see
next year’s forecast for your most important target markets /
customers.
This value already takes
into account economic
forecasts.
Forecast for next year’s unit
sales by customer.
A good starting point for demand.
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Forecasting Demand (Market Size)
For completely new target markets / customers, look at
the New Customers report, but remember this estimate of demand
is much less precise and has more risk associated with it.
Potential demand forecast
if new customer emerges.
Sample New Customers Report
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Forecasting Demand (Market Share)
To estimate the potential impact of changes in
advertising, promotion or price, you can use the Test Market and this
can be used to improve your forecast.
Note: This study presumes no changes in product or competition.
"Baseline" is the base case for this vehicle and
reflects last period’s marketing mix decisions.
Test is the marketing mix from
your test market inputs.
Projected impact in test market of new
set of marketing mix decisions on awareness,
market share and net contribution.
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Forecasting Demand (Market Share)
To estimate the potential market share for a new product
launch or major upgrade, use the Concept Test. But remember this
presumes no change in the competitive products and does not take
into consideration firm-wide preferences or dealers.
Summary of concept test information
(Note: price = MSRP = retail price)
Focus group style feedback on
concept based on existing
competition.
Likely to buy = percent of people in
chosen customer profile who indicate
they would purchase
(all things being equal).
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Forecasting Demand (Market Share)
Final thoughts on forecasting vehicle
demand:
• Remember to check the Industry News for information on whether
firms are launching new class vehicles that might significantly
impact your market share.
• You may also want to track competitive spending and pricing
patterns and the impact their decisions have had on your market
share in the past.
• Know and compare the value / cost of a lost sale versus holding a
vehicle in inventory.
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Setting Capacity Levels
So, how does one decide the overall
manufacturing capacity for your firm?
Basically, capacity is just what you need for the total production
planning for all of your product lines. Just remember that…
Decision is to increase or decrease capacity (50% of current max).
It takes a year to build capacity (see next slide).
Cash is used to build capacity – cost is depreciated over 10 years.
Capacity can also be decreased. Having unused capacity is just an
additional fixed cost to bear each year.
• You may produce over your capacity. Financially it doesn’t make sense
to do this long-term, but sometimes paying a little extra for a spike in
demand or to cover risk is better than taking on the fixed costs.
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Timeline: Capacity
Increase
Capacity
Round
1
Round
2
Cash used to build,
but new capacity
not available
Round
3
Round
4
Round
5
Round
6
Up to 10
Capacity
available
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Production & Capacity: Pro-forma
Use the Pro-forma Analysis toward the end
of your decision-making process to:
Estimate ending inventory (check production levels with your
forecasts and decisions).
View projected Income Statement and Balance Sheet for
impacts of retooling and capacity additions.
BEWARE! The Pro-forma results are based on YOUR
unit sales estimates.
• Actual results (after advance) will vary.
• Default sales estimate = last period’s sales.
• Costs / Expenditures based on your decisions.
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Pro-forma: Example 1
Checking Production
Team D decided to do a minor upgrade to Detonka but forgot that old
inventory is disposed.
Pro-forma "Inventory Forecast" can help catch this kind of oversight.
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Pro-forma: Example 1
impact of upgrade on
Detonka forecast.
Don't they expect a
change in sales
based on the upgrade?
What else did they potentially forget?
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