Automated Analytics Modeling and Simulation Software

Cyril Bourke

CEO Setanta Systems

Introduction

The purpose of this presentation is to demonstrate the benefits of using the modelling and simulation solution. Whilst this solution can model and simulate a multiplicity of business scenario types, this presentation uses a conversation between the divisional president and controller during a routine forecast review to demonstrate its application to rolling forecasting.

Modelling and Simulation Solution Applied to Rolling Forecasting > The rolling forecast is a model that monetizes what is expected to occur over a future period of time. Not too surprising, it is not much different to other scenarios or hypothesizes that this solution may be applied to. At the end of the forecast review are a number of slides that present some of the other applications this solution supports. > Personal experience as SVP Finance, having to review forecast updates from global operations, highlighted the need to automate the review and analysis process and not least the rolling forecast preparation. The benefits of such a tool would have been considerable, consistency in how forecasts are prepared, ease of integration of newly acquired companies, ease of review at local and corporate level, focusing attention to key business drivers and planned events that impact on performance etc. > The objective is simple, solution that automatically analyses the data so as to unravel the dynamics that go to make the bottom line forecasted and the reason for the change since last forecasted. Provide management with actionable information.

Scenario to Demonstrate Forecast Review > Divisional Controller having prepared the rolling forecast using modeling and simulation software presents the forecast summary for review with the Divisional President. > The summary compares the change from the last to the current version of the forecast. > The next few slides will demonstrate how, with the aid of the modeling and simulation software, a controller would be enabled to explain the reasons for the change in an intuitive way and from a fact based perspective. This is made possible by building the forecast using the modeling and Simulation software and exporting the data to the analytics module where the data is automatically analyzed and presented as the next few slides. >Although what follows represents a significant leap compared to what can be accomplished by other offerings, it is only touching on the overall capability of what this solution can deliver.

Forecast Review The initial reaction from the president is “how could this be correct”, 10% increase in revenue of $ 162k Profit has increased by $ 473k Inventory decreased by $1,268k A reasonable response to the forecast, but having run the analytical report prior to the meeting the controller was able to proceed to explain the numbers - Confident with the accuracy of forecast - With total knowledge of business drivers - And without having to spent many hours unraveling and monetization of key business drivers to explain why these numbers are accurate or the reason for the change. This is made possible by the controller’s understanding of the business drivers that influence change from last forecast and in modeling the forecast to reflect these. The analysis is automated so that controller can spend time discussing strategic matters once the analysis has been swiftly and adequately addressed

In response to the President’s question, the Controller pulls up the above screen that details in the same P&L format the three key business drivers impacting on the change from the last forecast. Change Inventory Profit $000s $000s Lot for Lot (445) 0 Change from re-order based on fixed to lot for lot re-order Policy. Yield Improvement (887) 383 Resulting from volume of product processed per lot. Revenue Increase 65 90 10% incl. the benefit of yield improvement and lot for lot on this inc. Total (1,268) 473

Forecast Review

Forecast Review Lot for Lot Impact The Controller mentioned that the impact before and after yield improvement resulting from lot policy change warranted two business drivers to explain benefits. The President’s attention is drawn to the inventory reduction resulting from the change in lot size and re-order policy . The Controller explains that by changing lot size policy that supply and demand is balanced, resulting in the following, - Order frequency is increased. - Demand and Supply is balanced to achieve just in time delivery. - Insignificant change in cost resulting from increase in activity resulting from reorder frequency and lot size handling. - By achieving JIT, material does not need to be stored in the warehouse and can be delivered to production after receipt. Therefore, temporary excess inventory is removed from the pipeline. - Because of the increase in re-order frequency, the amount of inventory in the pipeline at any time is reduced in proportion to the change in lot size. - Reduced exposure in variability in demand and supply forecast. Curious as to why there was a reduction in cost, even though not material, this seemed to be counter intuitive . It was agreed if time permitted that the Controller could explain this later.

Forecast Review Yield Improvement Because the Controller had elected to treat “Lot for Lot” and resulting “Yield” improvement as separate business drivers when preparing the forecast, the President could focus on the benefits resulting from yield improvement on both cost and inventory. Immediately the President’s attention is drawn to the ResImbalance cost of $253k that reduced the gain from the yield improvement by nearly 40%. The Controller explains that resource imbalance is the cost of resources not utilized, so although the yield improvement resulted in some benefits that fell to the bottom line, not all costs behave in that way. Without resource imbalance as a separate line item, the benefit from the yield improvement would have been reported as $383k and might have been considered good, however attention would not have been drawn to resource imbalance. The Controller explained that the reduction in activity resulting from the yield improvement had the benefit of freeing up capacity, however, because this could not be put to use during the forecast period the benefit did not fall to the bottom line. This represents an opportunity to take on additional business at little more than material cost. Inventory is reduced significantly due to the combination of inventory re-order policy change and yield improvement. The Controller continued the explanation by drilling down from this report to show the President at root cause level where and how this benefit occurred by process and improvement in profit at product level.

Forecast Review Revenue Increase Because Revenue was treated as a separate business driver the benefit from this can be better understood. The Controller informs the President that benefits derived from the re-order policy change and yield improvement are included in these numbers to the extent that these can be assigned to the incremental revenue. The Controller further adds that because there is no change in product mix that the change is driven exclusively by volume and the additional benefits as mentioned earlier. The President notes that not all of the capacity freed up by the yield improvement was entirely a wasted opportunity. The additional capacity required from the 10% increase in revenue was made available at no incremental cost from the capacity freed up by the yield improvement. Therefore , the profit margin derived from the increase in revenue was $56k higher because of the capacity freed up. The Controller explained that although the amount of material in the pipeline increased by $64k that this was significantly lower than what would have been required if the yield improvements had not resulted from the change in lot size.

Forecast Review Revisit Lot for Lot Change The President curious to know why the increase in re-order frequency didn’t just drive cost up, the Controller explains by drilling down from the “Support” line item for the Lot for Lot business driven. The drilldown reveals that by going to just in time receipts the saving in “Cycle-Counting” more than offset procurement, accounts payable. Vendor quality engineering didn’t change because engineers are required to make site visits on a periodic not activity driven basis.

Forecast Review The conversation between the President and Controller demonstrates that before the forecast was prepared that the Controller > Needed to understand the events, business dynamics and drivers that would influence the outcome for the forecast. > Decide on how the forecast should be structured in order that the financial impact of those events, business dynamics and drivers that needed to be brought to the attention of the President could automatically extracted using this solution. Finally, The purpose of the following slides is to share with you other modelling and simulation needs to which this solution can be applied. As stated at the start of this presentation, a forecast is just one of many reasons for creating a business model.

How this might be applied > Single scenario modeling and simulation, such as, establishing a new distribution network, building a new manufacturing facility or opening a new data center. Or as a tool for building the annual budget or rolling forecast. > Multiple scenario modeling and simulation, such as to evaluate the change from the current to future state or between competing options. >Or as a tool for automatically analyzing change from one scenario to another. Some examples of this are > Lean and Six Sigma initiatives > Supply chain strategies > Manufacturing strategy

Examples > Operational > Make or Buy decisions > Evaluation of new technology (process cycle time, quality) > Evaluation of changes to manufacturing methodology (Lean) > Outsourcing versus insourcing decisions > Green site development (building new facility in different region) > Supply Chain > Evaluation of sourcing strategy > Evaluation of lot sizing methodology > Evaluation of Supply chain strategy (Postponement strategy) > Evaluate reverse logistics strategy (third party service providers) > Product Development > Design for Six Sigma > Design for manufacturability > Design for Target Costing

Examples > Marketing > Evaluate new marketing strategies (retail versus internet) > Quality > Cost of Quality ( extract from forecast) > Evaluation of Continuous process improvement initiatives (Kaizen) > Financial and Analytics > Annual Budget > Rolling Forecasting > Investment Appraisal > Evaluation of process transformation (shared services) > Regional Cost comparison (cost of doing business) > Profitability Analysis (region, country, product family, product)