S I M U L A T I O N M A R K E T I N G M G T.

S I M U L A T I O N M A R K E T I N G M G T.

S I M U L A T I O N M A R K E T I N G M G T. Most Basic Principle Guiding Your Decisions-- will it: Increase Demand for Product Decrease Cost of Making & Marketing Product

S I M U L A T I O N M A R K E T I N G M G T. Made all the Right Decisions --product design, pricing, positioning, promotion, distribution… credit terms… production line capacity, automation, hiring training, TQM & PI…

You’ll be left w/less revenue than anticipated PLUS production & inventory carrying costs that must be paid.. IF Your Competitors produce a better product &/or You produce too much of your “great” product Then

You’re left w/less revenue than anticipated and did not plan & allocate enough cash to cover your production & inventory carrying costs.... IF Then Big Al arrives -- pays your bills, and leaves you with a loan & a stiff interest payment

Maintain Adequate working capital & cash reserves In order to: Have realistic/ accurate sales forecasts Avoid “Big AL” & a Liquidity Crisis- Need to:

1.Quick N’ Dirty 2. Consumer Pref’s 3. Best vs. Worst Case Projections

2 Q’s: 1.What will the average product sell in the segment next round? 2.To what degree is your product above or below average- on consumers'’ buying criteria? Estimate Your EARNED SHARE:

EARNED Share - Sales Forecast Look-up next round Industry Demand … Estimate # products that will be in segment. Divide total industry demand by the number of products= FAIR SHARE Your product’s EARNED demand can be ½ to 2X the average product’s demand… Compare your product with competing products. Factors include design, awareness, accessibility, and planned mid-year revisions. Examine industry capacities & capacities of the “best” products. Can products meet the demand they generate?

1.Quick N’ Dirty 2. Consumer Pref’s 3. Best vs. Worst Case Projections

Forecast off Customer Survey Scores

Total=223 R#1 Dec Survey score % of 223Predicted sales R#2 Actual Sales R#2 Baker 43 19%1827 units 1758 units Able 40 18% Fast 36 16% Eat 36 16% Cake 42 19% Daze 26 12%

R#1 Survey score R#2 12

For Example-in Traditional segment everyone begins w/ 13% market share Opening rounds crucial- can establish competitive advantage (that can be sustained for many years- even thru-out entire sim.) Initial round demand can vary +/ - 25% Later rounds best case/worst case vary ~~~~ 10-15%

After 1 st Year/Round- Can see demand spread R#1R#1 R#3R#3R#2R#2

CA SE

Worst Case: BIG INVENTORY - Little Ca$h Best Case : Lots of CA$H - Little Inventory

Enter WORSE case- in “your sales forecast” on marketing spreadsheet Enter BEST case- in “production schedule” on production spreadsheet Spread show up as inventory on proforma BALANCE SHEET

$0.00 In WORSE CASE: You have lots of Inventory & little or no Cash. In WORSE CASE: You have lots of Inventory & little or no Cash. need to drive cash position to the black…

If you are cash poor, issue Stock /Bonds - or consider a short term loan If you are cash rich, pay dividends and/or buy back stock. If you are cash poor, issue Stock /Bonds - or consider a short term loan If you are cash rich, pay dividends and/or buy back stock. To adjust your cash position --

Important Considerations re: BEST-WORST Scenario Analyses By adjusting your CASH POSITION according to your WORST CASE estimate– will avoid … BiG AL By adjusting your CASH POSITION according to your WORST CASE estimate– will avoid … BiG AL

Important Considerations re: BEST-WORST Scenario Analyses By adjusting production according to BEST CASE estimate– will minimize loss of profit due to Stock-outs Fixed costs (marketing, R&D, interest or depreciation) already covered Thus, any additional sales would only incur variable ( production ) costs By adjusting production according to BEST CASE estimate– will minimize loss of profit due to Stock-outs Fixed costs (marketing, R&D, interest or depreciation) already covered Thus, any additional sales would only incur variable ( production ) costs

For example: 1. If annual sales $120M, = $10M/mo. 2. If a months material & labor costs = $7M, you missed contributing $3M to Net Margin. 3. You’r taxed at ~35%, so your opportunity cost is ~$2M in profit.

Worst Case: BIG INVENTORY / no cash – risk seeing Big Al Best case: Lots of CASH / no Inventory -you risk stockout How Big is your Slinky?

Determining A Reasonable Spread Want to avoid generating an ultra Conservative Worst case scenario …matched w/ an ultra Optimistic Best case scenario Should be able to sell excess inventory in ~betw. 6 & 16 weeks w/ 8 <9 =

Take your total inventory costs $23,900M Take your total inventory costs $23,900M How to measure your slinky slack--

& Divide by total variable costs of inventory sold: $23,900M/$131,119M =.18 52weeks *.18 = 9 Risk ~9weeks of Inventory to avoid stockout & Divide by total variable costs of inventory sold: $23,900M/$131,119M =.18 52weeks *.18 = 9 Risk ~9weeks of Inventory to avoid stockout

Additional Tools/Techniques for Managing & Assessing Your Performance: 1. Marketing- Evaluation Checklist 2. Round Analysis 3. Analyst Report

S I M U L A T I O N M A N A G E M E N T Round analysis -exampleexample

S I M U L A T I O N M A N A G E M E N T Simulation Scoring System