A Business Planning Example

We'll illustrate the process of building a simulation model step by step, using a simple business planning example. Imagine you are the marketing manager for a firm that is planning to introduce a new product. You need to estimate the first year profit from this product, which will depend on:

• Sales in units
• Price per unit sold
• Unit manufacturing cost
• Fixed costs and overhead

Profit will be calculated as Profit = Sales * (Price - Unit cost) - Fixed costs. Fixed costs are known to be $120,000. But the other factors all involve some uncertainty. Sales in units can cover quite a range, and the selling price per unit will depend on competitor actions. Unit manufacturing costs will also vary depending on vendor prices and production experience. We will build the simulation model step-by-step but if you want to follow along you can open the completed model by browsing to C:\Program Files\Frontline Systems\Solver SDK Platform\Examples\RASON and opening the file UGForecast.json if using the Desktop IDE or select the UGForecast.json example model on the Editor page at www.RASON.com.

Uncertain Variables: Sales and Price

Based on your market research, you believe that there are equal chances that the market demand will be Slow, OK, or Hot for this product:

• In the Slow market demand scenario, you expect to sell 50,000 units at an average price of $11.00 per unit.
• In the OK market scenario, you expect to sell 75,000 units, but you'll likely realize a lower average selling price of $10.00 per unit.
• In the Hot market scenario, you expect to sell 100,000 units, but this will bring in competitors who will drive down the average selling price to $8.00 per unit.

Since the scenarios are equally likely, your average volume is 75,000 units and your average price per unit is $9.67. But think: How likely is this average case? (Will it ever actually occur?)

Uncertain Variables: Unit Cost

Your firm's production manager advises you that unit costs may be anywhere from $4.50 to $8.50, with a most likely cost of $6.50. The most likely cost is also the average cost.

Uncertain Function: Net Profit

Net Profit is calculated as Profit = Sales * (Price - Unit cost) -Fixed costs. Sales, Price and Unit costs are all uncertain variables, so Net Profit is an uncertain function.