Thursday, October 2, 2014

Production

Production section is where you setup your manufacturing for the year. There are a lot of useful things to know in this section that can help you cut down on the cost.

To calculate an estimate of how much you might sell next year, the formula is:
(Customer Survey # of the product / Total Customer Survey # of the segment) * (This year's total sale * [1+(Segment's Growth Rate)]

Lets take Traditional segment as an example. Lets calculate how many product will be sold in this segment the following year. Let say this year, a total of 12,000 product was bought from every team. Traditional has a 9.2% growth rate. You want to do 12,000 * (1+0.092) = 13,104. 13,104 Traditional products will be bought the following year. Say you have a customer survey of 24 with a total of 156 in the whole segment. You own 24/156 = 15.4% of the segment's sale. 15.4% * 13,104 = 2018. The estimate is that you will sell 2018 of Traditional for the following year if your customer survey does not change. I usually like to add 200 or minus 200 depending on how I adjust the product. Sometimes, it's best to have leftover inventory than sold out and miss some potential sale opportunities. Likewise, it's best to not have too much leftover inventory because you will have to pay inventory storage expenses.

Now you understand how to calculate your next year's production, you can do a diligent Unit Sales Forecast (this is done in Marketing section). The system default is NEVER correct. Don't go with that number.

Inventory On Hand is how much you have leftover from previous year. Production Schedule is how much you forecast to sell minus what you already have on hand. Again, I would add or minus about 200 just in case I sell more or sell less depending on how I adjust the product, when the product is coming out of R&D, etc. Take note of the Production after adjustment. This is the true number of production you will make for the year because of other factors (I forgot what it was but it has something to do with employees).

Lets jump into the Physical Plant. 1st Shift Capacity is how much you can produce that year. If you look under the section Margin, there's a 2nd Shift Capacity. That means you can produce twice the amount of your capacity but you do not want to overload the 2nd Shift capacity to 100%. An ideal place to adjust this is to get them to produce at a 50% to 80% so 1st and 2nd added together is 150%~180%. So why like this? If you purchase too much capacity, there are expenses incurred every year that are costly. You want to utilize the 2nd shift as much as possible but overload it. I think it's hard to explain. For example, you think you're going to sell 2018 for the following year. You have 418 in inventory, so you want to produce 1600 (more after adjustment). You want your capacity to be at around 850~900. You want to slowly increase your capacity depending on how you do and how much you think you will need next year. You want to adjust your capacity for next year so 2nd shift would achieve 50% to 80% for the optimal result.

Automation is also an important concept. What is automation? This is using machine to produce your product so you can cut down your labor cost of having to hire employees. So why not just max this out? Because when it comes to updating the product in R&D, if you make a major update on the product, you will also have to update your machines to make the upgrade product which will result in longer duration to get the product out into the market. What is the ideal setup for this section then? For products that requires a lot of update such as High End, Performance, and Size, you want to keep these around 2~4. It might cost more to produce the product, but you can release the product faster. For moderate updated products like Traditional, you want it around 5~6. It cost a little bit less to produce, and you should have enough time to improve the product and get it out on time. For products like Low end where you don't really need to update it ever, you can set it to 8~10. You don't need that many human labor to produce the low end products. Your machines will learn how to make the low end product and it will just make the same thing year after year. Beware though that buying up the automation is extremely costly. You might just be able to improve about 1 to 2 points per round depending on how much money you have to allocate.

A/P lag, you want to keep it at 30 days. This means you will pay your accounts payable within 30 days. The more time you need, the less they the debtor will trust you. The less time you need, the more money you can allocate but you have to pay it off earlier. More or less might not be favorable for you so unless you're doing really well, I would keep it at 30 days.

I think that covers all of Production. What are the main points to take away here? Produce what you predict to sell next year +-200. Utilize your 2nd shift effectively by getting it to around 50% to 80% to cut down on capacity cost. Automate the hell out of those that don't need big updates and use labor to produce those that requires big updates all over.

Question? Comments? Suggestions? Leave them in the comment section!

33 comments:

  1. Well thanks to this guide I lost my competition and ended up in debt.

    ReplyDelete
    Replies
    1. Lmao seriously?! I'm starting to work on it

      Delete
    2. This guide is just that, a guide. You still have to make accurate predictions and work with your teammates. I appreciate this guide and used it within the limits of my group. Thank you

      Delete
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  3. I called the capsim line and the guy started talking about cookies and didn't even listen to the fact I was in my own industry vs not in a team.

    This isn't had. I'm stuck in production. Specifically, how do you know how much capacity to buy for each product? And when I increase my capacity as I've read, my turnover increased (vs other teams that just used needed complement). I grew by 10%

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