FMCG for Management Consultants and

Business Analysts
A practical guide on how to analyze in Excel and improve business during
consulting projects

1
During your career in consulting, you will do projects for consumer
good producers. Their business model tends to be pretty complicated.2
We have 2 different business models when it comes to consumer goods

FMCG SMCG

3
In this course, I will only concentrate on FMCG, and I will show you what
you have to learn to master this business model

FMCG SMCG

4
FMCG are all branded goods that you consume frequently during the year.
In this category, we have food, cosmetics, and other similar products. 5
 Course Summary

Target Group What you will learn What you will get

▪ Business Analysts ▪ You will master analyzing FMCG ▪ Practical tips from our practice
▪ Management Consultants sales & marketing as well supply ▪ Ready-made models and
▪ Investment Directors chain templates
▪ Equity Analysts ▪ You will be able to find potential
▪ Entrepreneurs and startup improvement and savings in FMCG
founders ▪ You will understand the main
▪ Board Members issues in FMCG
▪ You will be able to build an FMCG
business model in Excel

6
 Examples of Sales and
Modeling FMCG Business Examples of Supply Chain
Marketing analyses in
Model in Excel analyses in FMCG
FMCG

7
Thanks to this course you will learn how
to analyze FMCG business in Excel and
how to draw the right conclusions

8
How the course
is organized

9
 Examples of Sales and
Modeling FMCG Business Examples of Supply Chain
Marketing analyses in
Model in Excel analyses in FMCG
FMCG

6 6

10
FMCG Business Model

11
FMCG Business Model
– Introduction

12
We can be talking about 2 different models here

Branded FMCG with a strong

Private Labels
brand awareness

Private
Label

13
Main Challenges
in FMCG

14
For branded FMCG products I propose to have a look at the following
aspects

Reach (Weighted and Your strategy across

Brand Awareness
numeric distributions) many channels

Managing customer
Managing prices across
experience across Product lifecycle
channels
channels

Spreading beyond the The efficiency of

Leveraging the brand
original target group marketing activities

Lifecycle of your target

Seasonality
groups

15
Introduction to modeling
FMCG in Excel

16
In the modeling phase, I will concentrate on branded FMCG products.
The model will be created for cosmetics

Branded FMCG with a strong

Private Labels
brand awareness

Private
Label

17
 In the next lectures, I will show you the main drivers of the FMCG model
Using those drivers we will create a business model in Excel

Cost of traffic
x

Rent
Ratio of visitors +
Total searches % conversion to searches
People
Average cost of 1
x visit
Development
# transactions

x Total revenue Total Costs

Average
revenue per
transaction
-
x

% Fee of the Average

Total margin
marketplace transaction value

18
Drivers of FMCG Model

19
 The FMCG business model is driven by some basic KPIs

# sold

Market share Market size

Unit Gross Margin x

- Average price
Cost of sales &
Gross Margin Head office
marketing
Unit production
cost

-
+ -

Fixed Cost /
Unit variable cost Net Margin Operational profit
Quantity produced
20
FMCG business model
– Modeling in Excel

21
 Let’s go through the basic assumptions of the model

FMCG product Sales Channels Marketing

▪ Cosmetics – 1 product ▪ Traditional small stores ▪ TV ads

▪ 1 production site ▪ Retail chain ▪ Market research
▪ Social Media
▪ Mailing
▪ Loyalty program
▪ Outdoor campaigns

22
Sales & Marketing in FMCG

23
Sales & Marketing in FMCG
– Introduction

24
This section consists of 3 parts

Overview of the sales and Main challenges in sales

Cases of business analyses
marketing in FMCG and marketing

25
Overview of Sales
in FMCG

26
FMCG are all branded goods that you consume frequently during the year.
In this category, we have food, cosmetics, and other similar products. 27
FMCG firms sell mainly through retailers. Some go into independent
distribution via their own websites and own stores

28
Overview of Marketing
in FMCG

29
 FMCG is pushing the customer through phases that turn a one-time
customer at the end into a loyal customer

Get the product in Convert the brand

Create brand Teach people how to
front of the potential aware people into Retain the customer
awareness use your products
customers customers

Up-sell and cross-sell

30
Therefore, marketing concentrates on 7 tasks

Make people aware of the brand

Expand the brand
and product

Manage price, price perception, and

Get the product in front of him
discounts

Create mechanisms that will

Find and conquer niches
sell/market on their own

Expand the product

31
 FMCG is probably the most advanced when it comes to marketing efforts and
uses practically every way to get its message across. Mainly uses paid methods

Bought Media Owned Media Earned Media

▪ TV, radio, and newspaper ads ▪ Your product and the package ▪ The products of your partners (powered by)
▪ Paid digital reach: AdWords, Facebook, Pinterest, ▪ Your site - your factory, office, stores ▪ Partners’ owned media when you do not have to
Instagram, YouTube, paid digital banners, etc. ▪ Your people pay to get in touch with end-consumers
▪ SEM ▪ Your web presence especially your website, fan ▪ Partner’s sales force and customer support
▪ Leaflets, inserts, etc. pages, or profiles on Facebook, TikTok, ▪ Guest blogging, guest presence on YouTube
▪ Outdoor advertisement Instagram, and YouTube channels channels, etc.
▪ Affiliate programs ▪ Newsletters, SMS, and customer base ▪ Word Of Mouth especially Virality
▪ Catalogues ▪ Mobile apps and the underlying customer ▪ Presence in aggregators of reviews (e.g.., Yelp)
▪ Advertisement on your partner’s media e.g., (contact) base ▪ Evangelists and
Retailer ▪ Own content and content marketing ▪ Organic SEO
▪ Sponsored content ▪ Referral Program ▪ Social Following platforms e.g., Quora
▪ Product placement ▪ Your own loyalty program ▪ Co-branding (Intel inside)
▪ Influencers (YouTubers, Instagrammers, ▪ Free users (in Freemium and Free trial) ▪ User Generated Content (posts by fans,
bloggers, celebrities) recommendations, photos, reviews, etc.)
▪ Motivation schemes for the sales force of your
Partner
▪ Brand Ambassadors
▪ Store-in-Stores (offline and online)
▪ Participation in a wider loyalty program
32
You can analyze the sales and marketing in FMCG using the AARRR
methodology – one of the sales funnel frameworks

Acquisition

Activation

Retention

Revenue

Referral

33
Main challenges in Sales and
Marketing in FMCG

34
There are a number of challenges in the Sales and Marketing of FMCG

Managing prices and Customer trends e.g.,

Picking the right
price perception across for Millennials,
distribution mix
channels Generation Z

Private Labels done by Growing importance of The growing importance

Retailers online of Marketplaces

Saturation point in Saturation point in

Digital Marketing
consumption penetration

The dwindling
Leveraging brands and
Loyalty programs importance of direct
expanding products
sales force

35
Introduction to case studies
for FMCG

36
In this section, I will show you examples of analyses that you will be
doing in sales and marketing in FMCG

Sales channel analysis How to expand the brand? Sales force efficiency

How to find the white How to analyze the

Direct-to-customer model
spaces uncovered by your motivation system of sales
vs current sales mix
brand force

37
Sales channels comparison

38
Let’s look at how FMCG firms get their products to the customers

Own shops

Retail chains

E-commerce

Marketplaces

Wholesalers

39
How to expand the brand
– Introduction?

40
Let’s have a look at a milk producer that
wants to expand its product range. 41
Let’s have a look at a milk producer that wants to expand its product
range

Leader in milk

2nd place in butter

25 products considered

42
There are things you should consider when selecting the right products
to be developed within the same brand

Is the product consistent with the Are there customers who already
current brand? think that you have the product?

Does it require the same What is the growth rate of the

distribution? market for the product?

Do you have strong players on the

market you enter?

What is the potential of the market?

43
How to expand the brand
– Case Solution

44
 After we have gone through research, we got the following results. This
suggests that we should start with yogurt and yellow cheese

Market size
In millions of USD

350
Yogurt

300

250
Milk Desserts
(i.e., Monte)
200
Yellow (Swoss)
cheese
150 Ice cream
Cottage cheese
100

50 Feta Cheddar

0
0 0,5 1 1,5 2 2,5 3
Attractiveness
(1-Low;3-High) 45
Sales force efficiency analysis
– Introduction

46
 Let’s have a look at the sales force efficiency in Poland of a cosmetics
producers

20 sales reps in Poland

A sales rep visits all

customers in his region

You want to improve the

efficiency

47
Before we go to Excel, let’s talk about what we have to know to judge
the efficiency

How can I improve the efficiency of the

What is the full cost per 1 sales rep?
sales reps?

What value creates a specific type of

What can I standardize and automate?
customer?

What can I outsource to cheaper

Is it worth visiting a customer?
providers?

How often should I visit specific types

of customers?

48
Sales force efficiency analysis
– Solution

49
 Let’s have a look at the sales force efficiency in Poland of a cosmetics
producers

20 sales reps in Poland

A sales rep visits all

customers in his region

You want to improve the

efficiency

50
When we look at the data, we can see that there are regions where we are
weak. In those regions, there is a big potential for improvement

Total net margin generated

In thousands of USD

30 124 31 210

20 195

Current Margin Maximization without outsourcing and Margin Maximization with outsourcing and reduction of
reduction of headcount headcount

51
Sales force efficiency analysis
– Practical tips

52
 There are 3 groups of solutions that will help you improve the efficiency of
your sales team

Focus on what creates value Improve the efficiency of daily work Outsource or Specialize

▪ Calculate the net margin per type of customer ▪ Rearrange the regions to minimize the traveling ▪ Outsource what you can to local suppliers e.g.,
▪ Check the return on a visit and decide how often ▪ Implement remote solutions to reduce the need merchandising
it should be made to travel ▪ Create support teams for the sales reps that can
▪ Concentrate on those customers for which the ▪ Create a standard of the visit to maximize the do part of their jobs in a cheaper manner and
net margin per visit is the highest impact higher quality at the same time
▪ For others, create more self-service solutions ▪ Go through the tasks that should be performed
during the visit and check whether they make
sense and create value
▪ Create standards and modules
▪ Create software to automate part of the process
▪ Plan the trips to maximize the usage of their time
▪ Standardize fleet, phone, software, and others
▪ Pick the optimal legal solution for cooperating
with sales reps to optimize the cost of labor

53
How to find the white spaces untouched
by your brand – Introduction

54
 Let’s have a look at a cosmetics producer and see where is the potential
for development

You are a market leader in

Poland

You have entered 5 years

ago Romania

You want to find white

spaces in Poland

55
 How to find the white spaces
untouched by your brand – Solution

56
 Let’s have a look at a cosmetics producer and see where is the potential
for development

You are a market leader in

Poland

You have entered 5 years

ago Romania

You want to find white

spaces in Poland

57
 When we look at the data, we can see that there are regions where we are
underperforming. In those regions, there is a big potential for improvement

The average level and a

target for regions with
smaller shares

Sales per person – Currently

In USD per capita
7,0
6,6

4,8

3,2
2,5
2,0 2,1
1,3 1,4 1,2
0,9 1,0 0,8 1,0
0,2 0,4

R1 R2 R3 R4 R5 R6 R7 R8 R9 R10 R11 R12 R13 R14 R15 R16

58
 Using the data in Excel we can estimate the potential increase in sales
by regions

The Potential to increase sales by regions

In thousands of USD

205
674 0 0 0 0 0
1 266
1 776
1 861
1 892
2 608
3 174

4 908
37 937

8 401

11 172

R1 R2 R3 R4 R5 R11 R13 R12 R16 R6 R14 R7 R8 R9 R10 R15 Total

59
 When we look at the data, we can see that there are regions where we
are really weak. In those regions, there is a big potential
The average level and a
target for regions with
smaller shares
Share in local markets – Currently
In %

58%
55%

40%
30%
27% 25%
21%
17%
10% 10% 12% 10%
6% 8%
1% 3%

R1 R2 R3 R4 R5 R6 R7 R8 R9 R10 R11 R12 R13 R14 R15 R16

60
 Using the data in Excel we can estimate the potential increase in sales
by regions

The potential to increase sales by regions

In thousands of USD

1 211 1 067 0 0 0 0 0 0 0
1 609 1 550

4 439
5 301

7 099

48 104
11 283

14 544

R1 R2 R3 R4 R5 R13 R11 R6 R16 R7 R8 R9 R10 R12 R14 R15 Total

61
 Direct-to-customer model vs
current sales mix – Introduction

62
 We are back to cosmetics. This time around we will analyze options to
get direct-to-customer

Currently, they use many

channels

They are considering direct-

to-customer models

Check e-commerce and own

stores

63
The Business Model of
Retailers in Excel

64
 The retail business model is driven by some basic KPIs
# of sq. m Others

# of Visitors % Conversion Fee per sq. m x Rent

+

x # of People
x People

# Transactions Average wages

x
Total store revenue % Gross Margin Total store costs
Average Value
Transaction

x -
+
Average Value Average Value
Gross Margin generated
Transaction of basic Transaction of Store EBITDA
by the store
purchase additional purchase 65
Introduction to e-commerce

66
In e-commerce, you will have 3 types of players depending on their
presence in offline and their approach to both channels

Pure players

Offline players with a separate

E-commerce online presence

Multichannel/Omnichannel
players

67
 Customers’ behaviors have a huge impact on the business model and on
what e-commerce should concentrate on
Description of the business model Examples
▪ Less than 40% of the buyers will buy this year ▪ E-commerce selling only 1 type of Slow-Moving
▪ Focus is on customer acquisition Consumer Goods (SMCG) bought infrequently e.g.,
Acquisition ▪ Loyalty programs are not good investments vacuum cleaners, scuba diving, furniture
mode ▪ 70% of e-commerce businesses are in this model ▪ E-commerce for 1-time in the life event: strollers,

▪ 40%-60% of the buyers will buy this year ▪ E-commerce that sells SMCG with relatively big
▪ You have a nice mix of new and returning customers frequency of purchase (1.0-2.5 times a year) e.g.,
▪ Focus is on customer acquisition, as well as increasing the value of shoes (Zappos)
Hybrid mode the customer (increased frequency and increased purchase per
visit)

▪ More than 60% of the buyers will buy this year ▪ Very strong brands with a high frequency of
▪ Focus is on increasing the value of the customer (increased purchase (e.g., Zara, Amazon)
frequency and increased purchase per visit) ▪ Marketplaces e.g., Udemy, Uber
Loyalty mode ▪ 10% of businesses are in this model

68
Source: Lean Analytics: Use Data to Build a Better Startup Faster; A. Croll, B. Yoskovitz
Examples e-commerce

69
Let’s look at some examples of well-known
e-commerce businesses
Products sold Online / Offline situation Mode
▪ Virtually everything esp. ▪ Pure online player ▪ Loyalty mode
books, toys, fashion

▪ Fashion ▪ Multichannel player ▪ Loyalty mode

▪ Tickets for events ▪ Pure online player ▪ Acquisition mode

▪ Groceries ▪ Multichannel player ▪ Hybrid mode

▪ Razors and cosmetics ▪ Pure online player ▪ Loyalty mode

for men

▪ Fashion ▪ Pure online player ▪ Hybrid mode

70
 E-commerce –
Flow of customers

71
 Let’s have a look at the flow of customers

Returning Paid Direct Search Viral

Bounced Visit
▪ Bounce rate

Not Interested Search

Cart

Abandoned Additions
▪ Abandonment rate
▪ Conversion rate
Conversion
▪ Returning rate ▪ Sharing rate
Unsatisfied
Logistics & Delays
▪ Ratings

Delivery
Turning the customer into a loyal one Virality

Open Rate Enrollment Sharing

Call to Action One-Time Buyer Unsocial Buyer

72
Source: Lean Analytics: Use Data to Build a Better Startup Faster; A. Croll, B. Yoskovitz
E-commerce
– KPIs

73
 There are some KPIs for the e-commerce model that you have to
follow…
Definition Why it is important?
▪ Percentage of visitors that buy products ▪ Shows you whether you have a good selection of
▪ Should be calculated by sources of traffic products, how good is the customer experience,
Conversion rates ▪ Use funnel analysis to get to the stage/factor that kills your and pricing.
conversion rate

▪ Average value of purchases done by a single customer during a ▪ Shows you how much a customer spends during
Average single transaction one visit to your site
shopping cart ▪ Should be calculated by groups of customers ▪ Look also at the number of items in the basket
▪ Compare the average transaction to the average
size / Average which should be if you were doing proper cross-
transaction selling and sales of complementary products
value (ATV)

▪ % of people who abandon their basket – stop the purchase ▪ Tells you that there is some sort of friction at the
although they had intent very end of the process – customers despite the
intent do not buy
▪ High abandonment rate can be caused by: too
Abandonment complicated a procedure of buying, hidden costs
rate that are shown at the last moment, shipping
costs, limited payment methods (you do not have
some method very popular in a given country),
etc.

74
 There are some KPIs for the e-commerce model that you have to follow…

Definition Why it is important?

▪ Average cost of acquiring a customer ▪ Tells you how much you have to spend to acquire a
Customer ▪ Should be calculated by methods of acquisition new customer
▪ Should be calculated by groups of customers ▪ Helps you estimate your CF burned with scaling of
Acquisition Cost the business
(CAC) ▪ Helps you optimize acquisition methods and select
the right source of traffic

▪ Number of purchases done by unique customer per year with you ▪ Helps you understand how important you are to the
Number of ▪ Compare it to the average ideal number of purchases customer; how much do you weigh in his/her basket
purchases per ▪ Should be calculated by groups of customers of purchases of this category
▪ Helps you estimate the potential to grow with your
visitor per year current customers

▪ Total margin generated by the customer from the start to the end ▪ Shows you how much your customer is worth from
Lifetime Value of of his relationship with you cradle to grave
▪ LTV=Average transaction*% Gross Margin* Number of ▪ Helps you make decisions on acquisition techniques
the Customer transactions during the relationship with the customer
(LTV) ▪ Analyze it by cohorts/segments

▪ % of traffic generated by your efforts to create a brand, ▪ Tells you how much traffic you are able to create
% traffic understand and connect with the customer (incl. the loyalty regardless of advertisements
generated by program), SEO, affiliate programs
▪ Measure it by methods/sources of traffic
non-ad methods 75
 There are some operational KPIs for the e-commerce model that you have to
follow…
Definition Why it is important?

▪ % of goods returned by customers due to not matching their ▪ Shows you how many customers were not pleased
expectation with the products and what is the operational
▪ Extremely important for pure players burden of the customer promise not met
Return rate

▪ Average additional sales generated for multichannel players by ▪ Multichannel players to stay competitive should
Average customers who ordered online but pick up the product at the generate additional sales during the visit of
additional sales store customers picking up the goods at the store.
for the click- ▪ Extremely important for multichannel players ▪ Small value shows future problems in competing
with pure players
and-collet

▪ % of click-and-collect orders in orders generated on the web ▪ Shows you how willing the customers are to visit
▪ Extremely important for multichannel players your offline shop to collect the product and thus to
% click-and- experience the brand promise represented by the
shop
collect orders
▪ Small value shows future problems in competing
with pure players

76
 Have a look at the typical values of KPIs for the e-commerce
Values which are ok Best practice values Comments
▪ Most sites will have 2-3% ▪ General sites – 10-15% ▪ For sites with strong blogs, you should exclude the
▪ For some very niche sales (Amazon, Tickets.com, eBay) traffic for the blog to get the right picture
this should be much higher ▪ Niche sites – up to 40 %
(>15-20%)
Conversion rates

▪ Depends very much on the ▪ In the multichannel, you ▪ Look at ways in which you can improve it: cross-
industry should see up to a 400% selling, complementary sales, playing with shipping
Average ▪ In the multichannel, you bigger ATV for online costs (with lower or subsidize above some threshold
transaction should see a 50% bigger ATV transactions than for offline people ten to buy more), up-selling,
for online transactions than transactions
for offline transactions

▪ < 50% ▪ 10-25% ▪ Analyze the Abandonment rate by reasons for

Abandonment abandonment and solve them as soon as possible
rate

▪ 10-25% ▪ 2-5% ▪ Depends heavily on the industry – the more

Return rate customizable, dependent on customer features
product is, the higher the return rate will be

77
E-commerce
– Main issues

78
 You should test and find the optimal solutions for the following key topics in
e-commerce
Description Goal
▪ Due to easiness with which you can establish an e-commerce ▪ Find ways to get free search traffic, entries from
business, it becomes vital to be able to attract cheaply (or for free) newsletters, and social media
Getting a lot of loads of traffic
cheap traffic ▪ This includes SEO, loyalty, content marketing, and others

▪ Pricing is very complicated in e-commerce due to the existence of ▪ You are looking for such a pricing policy that
aggregators and sites comparing offers. optimizes the total margin generated
▪ You have to be on comparable products competitive and earn on
the non-comparables and long tail items, obscuring comparables,
bundles
Pricing ▪ In a multichannel environment, you may have different prices for
the same product bought online and offline

▪ You have to gather as much information on your customers and ▪ Increase conversion,
Understanding create automated actions build into your website as well as your ▪ Increase AVT
your customer other assets (e.g., email list, blog, YouTube channel) ▪ Get more free traffic
and automate ▪ Increase purchasing frequency
marketing
79
 You should test and find the optimal solutions for the following key
topics in e-commerce
Description Goal
▪ Although it is easier than in a physical store to keep a wide range ▪ Depending on your concept and brand, you have
of products, you will be not able to satisfy customer needs only on to decide what is your target in terms of long-tail
Managing the the basis of your own stock products availability and how you meet it (own
long tail ▪ You have to integrate yourself with other suppliers to get access to stock or 3rd parties)
a wide range of stock ▪ Maximize gross margin
▪ Minimize stock-outs

▪ Your site – the way it is designed, and its features, may have a big ▪ Increase conversion,
impact on how you convert traffic into customers therefore you ▪ Increase ATV
Continuous have to optimize it through a series of A/B testing ▪ Get more free traffic
optimization of ▪ This also includes following the trends in the way customers ▪ Increase the purchasing frequency
purchase (e.g., the mobile trend)
your site

80
 Business model of
e-commerce in Excel

81
 Before we go to Excel, let’s talk about the logic we used to build the
e-commerce Excel model

# of
Visits Revenues
▪ Conversion rate transactions ▪ ATV

▪ % Gross
Margin

▪ Fixed Costs ▪ Cost of traffic

Operating Profit Net Margin ▪ Cost of logistics Gross Margin
▪ Transaction fees

82
 The e-commerce business model is driven by some basic KPIs
# of paid visits Others

# of Visit % Conversion Cost per 1000 visits x Cost of Acquiring Traffic

+
People in the Head
x # of delivered parcels office & Development
x
# Transactions Cost per 1 parcel Logistics costs

x
Selling, General &
Total revenues % Gross Margin
Average Value Administrative costs
Transaction

x -
+
Average Value Average Value
Gross Margin generated EBITDA from
Transaction of the Transaction of
by e-commerce e-commerce
basic purchase additional purchases 83
 How to analyze the motivation
system of sales forces – Introduction

84
Motivation plans for salespeople can be pretty complicated

Salary

Fixed part 60% Variable part 40%

Sales plan Qualitative

80% 20%
realization assessment

Region sales plan Country’s plan

80% 20%
realization realization

85
Person A has the following motivation system. What kind of problems it
may cause?

Salary

Fixed part 90% Variable part 10%

86
Person B has the following motivation system. What kind of problems it
may cause?

Salary

Fixed part 80% Variable part 20%

Sales Value Plan Qualitative

90% 10%
Execution assessment

▪ Sales reps can change the

price of the product and give
discounts

87
Person C has the following motivation system. What kind of problems it
may cause?

Salary

Fixed part 80% Variable part 20%

Sales Margin Qualitative

80% 20%
Execution assessment

▪ All costs covered by the sales

reps

88
 Person D has the following motivation system. What kind of problems it
may cause?

Salary

Fixed part =2x

n/a % of sales n/a
Average salary

89
 How to analyze the motivation
system of sales forces – Solution

90
 If Person A has the following motivation system, you can have the
following problems

Salary Problems that may occur

▪ Variable part is too small

▪ The sales rep will not be motivated to
drive the sales and put additional
Fixed part 90% Variable part 10%
effort

91
 If Person B has the following motivation system, you can have the
following problems

Salary Problems that may occur

▪ Majority of the variable part

depends on sales value which is not a
preferable solution as this does not
Fixed part 80% Variable part 20% drive the margin creation
▪ The sales rep has control over the
price and discounts so the sales rep
will be tempted to increase discounts
to get more sales. In this way, the
Sales Value Plan Qualitative sales rep will hurt the total margin
90% 10%
Execution assessment

▪ Sales reps can change the

price of the product and give
discounts

92
 If Person C has the following motivation system, you can have the
following problems

Salary Problems that may occur

▪ In this example, we have margins instead

of sales value which is a much better
solution
Fixed part 80% Variable part 20%
▪ However, all costs are covered by the
sales rep which may lead the sale rep to
try to minimize his expenditure rather
than maximize the margin for the
company
Sales margin Qualitative
80% 20%
realization assessment

▪ All costs covered by the sales

reps

93
 If Person D has the following motivation system, you can have the
following problems

Salary Problems that may occur

▪ The fixed part may be big enough for the

sales rep not to care too much about the
Fixed part =2x sales level
n/a % of sales n/a
Average salary ▪ The variable part is just a percentage of
sales. Due to this, there is a great
probability that the sales rep will not
care about the margin
▪ Moreover, there is no plan for
sales/margin so the sales rep will work
only as much as the sales rep needs to
cover the expenses

94
Juice producer – motivation system
of the sales force – Introduction

95
 We will now have a look at a company selling branded juice in Romania
that has 2 types of sales forces

They sell via wholesalers to

independent stores and
retail chains

Area Managers sell to

wholesalers

Sales reps sell to stores and

retail chains

96
We will now have a look at a company selling branded juice in Romania
that has 2 types of sales forces

97
The area managers have the following motivation system

Salary

Fixed part 60% Variable part 40%

Sales Value Plan

Sales Value Plan Qualitative
Execution – 70% 20% 10%
Execution – Stores assessment
Wholesale

▪ You have to have at least 80%

of plan realization to get any
bonus
98
The sales reps have the following motivation system

Salary

Fixed part 70% Variable part 30%

Sales Value Plan Qualitative

90% 10%
Execution – Stores assessment

▪ You have to have at least 80%

of plan realization to get any
bonus
99
Supply Chain Analyses in FMCG

100
Supply Chain Analyses in FMCG
– Introduction

101
In this section, we will look at 3 things

Overview of the FMCG Main Challenges in the

Cases of Business Analyses
Supply Chain Supply Chain

102
Overview of the Supply Chain
in FMCG

103
FMCG are all branded goods that you consume frequently during the year. In
this category, we have food, cosmetics, and other similar products. 104
The FMCG supply chain is pretty complicated on the outbound side (the
distribution to end customers)

105
Main Challenges in the
Supply Chain in FMCG

106
There are a number of challenges in the Supply Chain in FMCG

Dedicated
Many suppliers Many Channels of sales
transportation modes

Minimum Order Local versions of the

Shelf Life
Quantity product

Added value services

Multichannel Direct Distribution
and products

Distribution through
Customization
Marketplaces

107
Introduction to
cases for FMCG

108
In this section, I will show you examples of analyses that you will be
doing in retail for the supply chain

Chicken Producer – Chicken Producer – Chicken Producer –

Top-down approach Fuel usage Overtime analysis

Juice Producer – Optimal production batch 2-stage production

Simulation analysis – FMCG planning

109
Chicken Producer – the Top-down
approach – Introduction

110
In the next few lectures, we will be looking at a producer of chicken
meat. We will try to improve some aspects of his logistic system. 111
 The supply chain is pretty complicated to grasp from the cost point of view.
Therefore, it is advisable to use the top-down approach

Take a broad look at Perform detailed

Gather ideas
logistics costs analyses

Tools ▪ Excel ▪ Word ▪ Word / Excel

End product ▪ The issue tree ▪ List of PBC (documents to ▪ Formats and manual for
be Prepared By the Client) filling them in
Aim ▪ Structure your problem ▪ Put into words your ▪ Create formats in Excel to
▪ Specify analyses to be information needs gather data as raw as
performed possible

Time ▪ A week or two before the start ▪ After preparing the issue tree. If ▪ After preparing the issue tree
of the project. possible, at least a week before and a list of questions for the
▪ Should take up to 4-8 hours arriving at the client's premises. client. If possible, at least a week
before arriving at the client's
premises.

Source of ▪ Your own mind ▪ The issue tree ▪ The issue tree
information ▪ Internet ▪ Former projects
▪ Specialized literature
112
 As we have mentioned, you should start from the issue tree
Analysis to be
Area of analysis Suspected problems Possible reasons performed

Possible Reason 1 Analysis 1

Problem 1

Possible Reason 2 Analysis 2

Area 1

Possible Reason 3 Analysis 3

Problem 2

Possible Reason 4 Analysis 4

113
Elements of the issue tree are later used to define the analysis you have to
perform and the data you have to ask for

Analyses to be Data required for the Formats – tables for

Possible reasons performed analyses feeding in the data
List of data needed for the
Analysis 1
▪ Question / Data 1.1
Possible Reason 1 Analysis 1 ▪ Question/ Data 1.2

List of data needed for the

Analysis 2
Possible Reason 2 Analysis 2 ▪ Question / Data 2.1
▪ Question/ Data 2.2

List of data needed for the

Analysis 3
Possible Reason 3 Analysis 3 ▪ Question / Data 3.1
▪ Question/ Data 3.2
List of data needed for the
Analysis 4
Possible Reason 4 Analysis 4 ▪ Question / Data 4.1
▪ Question/ Data 4.2

114
There are some rules for formats that are worth following to speed up the
process of analysis later on

▪ Limit the choice of options for the people who will feed in the data you asked for
(validation list, specify formats in which data should be put, units of measures in which you
want to have the data)

▪ Shift as much as possible of data feeding processes to the client. However, remember that
the deadline is the deadline. So, if the client cannot, or does not want to do it, you have to
do it on your own

▪ See what is the IT system capable of delivering – sometimes raw data only possible to get
there, many useful yet not used by other departments reports can be found there

▪ If there they are late on feeding in the data – do it on your own

115
 For the chicken producer, we got the following issue tree.

Area of analysis Suspected problems Possible reasons Analysis to be performed

Analysis of designed routes, their length,
Badly designed routes
and the influence of possible changes

High costs of transport per ton of Analysis of fuel usage and kilometers
Too big fuel usage
goods covered by vehicles

No shipments on the way back Analysis of load carried on the way back

Badly designed method of packaging

Analysis of the correlation between types
which makes the product prone to
of packaging and percentage of damaged
damage
A big level of waste and breakage
Transport
in transport
Analysis of time spent on the way and
Speed not adjusted to the product
kilometers covered in that time

Badly organized work and schedule of Analysis of the level of overtime, daily
deliveries organization of drivers’ work
Low usage of resources
Limitation on the delivery time of finished Analysis of Clients’ preferences for
goods delivery time

116
There are 3 ways to present the general view of logistics costs
1 General view by product groups

Cost Position 1 Cost Position 2 Cost Position 4 … Cost Position m

Product Group 1

Product Group 2
…

Product Group n

2 General view by stages

Cost Position 1 Cost Position 2 Cost Position 4 … Cost Position m

Stage 1

Stage 2
…

Stage n

117
There are 3 ways to present the general view of logistics costs
3 General view by type of transport

Cost Position 1 Cost Position 2 Cost Position 4 … Cost Position m

Type 1

Type 2
…

Type n

118
Let’s look at 3 specific examples
1 General view by product groups – a producer of chicken meat
Fuel Wages External Services Waste Frozen capital
Concentrate

Life chicken
1-day chicken and
eggs

Finished goods

2 General view by stages and products – a retail chain of convenience stores with strong newspapers
Fuel Wages External Services Waste Frozen capital
FMCG – central

FMCG – local

Newspapers – central

Newspapers – local

3 General view by type of transport – a producer of alcohol

Fuel Wages External Services Waste Frozen capital

Transport by train

Transport by trucks
119
 Now, let’s imagine that you were to create such a general view of costs
for the chicken producer.

Introduction:
▪ Zivinar is a Serbian producer of chicken meat – both fresh and processed. It is a vertically integrated company that tries to
produce everything needed for its final products on its own. It has its own farms in which it breeds broilers, farms where
parents flock (old special hens) hatch eggs, and incubators where eggs mature. The food, for both parents flock and broilers,
is mixed by Zivinar in their mixing site.
▪ Since Zivinar wants to ensure excellence in everything it performs the distribution of all raw materials, semi-products, and
finished products on its own

Tasks:
▪ Create for every stage of distribution a separate sheet in which you could estimate the costs of distribution (Fuel cost, wages
of drivers, maintenance costs, costs of financing frozen capital in trucks and stocks)
▪ Create a summary for the whole distribution system

120
 Below you can find some info on how the production process for
chickens looks like

Source: http://www.scandistandard.com/Global/Scandi%20Standard/Externwebb/Production%20cycle.jpg 121

Chicken Producer – the Top-down
approach – Solution

122
 Below we have summary of estimations, we did in Excel

Annual costs of the whole logistic system by stages and type of cost
In thousand of EUR

98

119

203
574
12
38 63
17
172 159
67
5
1 0
3
8
Concentrates-for broilers Concentrates-for parents Eggs 1-day old eggs Life chickens Finished goods
flock

Petrol Drivers Maintenance Frozen Capital

123
Below is the summary of what you should have learned so far from this
case

▪ You can do a lot of things before appearing at the client’s premises (issue
tree, formats, list of PBC, etc.)
▪ You have to establish the starting point (costs of distribution groups
presented in a convenient summary) to manage PM expectations, priorities
analysis
▪ First, use your own brain. Afterward, you resort to ready-made solutions and
tools
▪ Appreciate your time – use the 80/20 approach

124
There are some rules for gathering of ideas that you should use during
projects

▪ Be friendly
▪ Talk not only with the managers but also with grassroots workers
▪ Talk with people from production, sales, and purchasing on logistics-related
topics
▪ Organize workshops including people from all walks of life
▪ Look at daily activities (loading, unloading, packaging, transport)
▪ Ask directly – “What would you improve…?”, “What potential for
improvements do you see…?”, “What would you need to lower the costs…?”
▪ Ask people to estimate their proposals
▪ Stick to deadlines

125
When it comes to detailed analyses there are some tips worth following

▪ Parameterize your analysis in such a way that all parameters are visible at
first glance and can be easily altered
▪ Include steering variables that enable easy changes to the whole structure
or scope of the analyses
▪ Stick to the 80/20 rule – do first the analyses which were identified by the
issue tree and the general view analysis as the most promising
▪ Base your analyses on raw data if possible and not on the Client’s analyses
▪ Make the analysis easy and nice looking so that it can be presented to the
Client

126
Chicken Producer – Fuel usage
– Case Introduction

127
 Now let’s move to the next case. We are now analyzing the fuel usage
for the chicken producer
Analyses to be
Area of analysis Suspected problems Possible reasons performed

High costs of transport per ton of Analysis of fuel usage and kilometers
Transport Too big fuel usage
goods covered by vehicles

Data needed:
▪ List of trucks with their registration number, model, capacity, year of production, brand, model, and type of goods which it
can carry
▪ Fuel usage and km covered by each and every truck for every month
▪ Benchmarks for fuel usage from other companies

128
 You will have to estimate the costs of fuel usage and potential savings

Introduction:
▪ You are still working for the Zivinar Company. You asked for the data. Transportation department and got
fuel consumption by vehicles from 4 months in 2005. Unfortunately, the only data you have got there is
the plate number of cars, kilometers covered over the month, and fuel usage. Luckily, before that, you
got a table in which apart from the plate number, capacity, brand, type, and year of production are
quoted.

▪ You asked your friend from a transportation company for benchmarks on fuel consumption.
Tasks:
▪ Consolidate the tables and estimate what would be the savings in 2005 if fuel usage would be no bigger
than the one suggested by the benchmarks
▪ Estimate the savings for 2006 having in mind that the average price of fuel went down by 13% but the
volume of sales increased by 25%
▪ Think about ways to check the estimated by your potential savings
▪ Prepare an implementation plan
129
 After the calculations, we got substantial savings

Fuel usage – actual vs benchmark for chosen cars

In liters per 100 km

30
Car 4
21

19
Car 3
18 ▪ On the basis of benchmarks
we have, by controlling the
usage of fuel, the company
21 could save from EUR 92 K
Car 2
18 up to EUR 183 K

20
Car 1
15

Actual usage Benchmark

130
Chicken Producer – Overtime
analysis – Case Introduction

131
 Let’s move to the 3rd case for the chicken producer where we will talk
about the problem with overtime costs

Analyses to be
Area of analysis Suspected problems Possible reasons performed

Badly organized work and schedule of Analysis of the level of overtime, daily
Transport Low usage of resources
deliveries organization of drivers’ work

Data needed:
▪ Transportation orders
▪ Daily report on execution of transportation orders by vehicles (list of places where a given truck has gone with specified
departure and arrival time)
▪ Standard time of loading, unloading, traveling from one location to another, waiting, etc.,

132
 Your task is to calculate the costs of overtime and see what could be
potential savings with better organization
Introduction:
▪ Your work for the Zivinar Company is nearing the end. For your last task, you were asked to analyze the high level of overtime and its
origins. You asked for data on the execution of transportation orders. Unfortunately, all the data you got was on the paper, additionally
in many cases incomplete. Therefore, you decided to feed into the computer some data. All you managed to do was to feed in data on
two cars for 3 different days.

▪ From the HR department, you got information on how wages are being calculated in 5 different locations.

▪ You also managed to measure how long it takes to do the loading and unloading in all locations where the two trucks have gone during
the 3 days in question. You also managed to estimate the typical waiting time at these facilities.

Tasks:
▪ Combine tables into 1 file
▪ Calculated losses due to bad organization of work for the 2 examples you have got
▪ Try to estimate the losses for the rest knowing that on average there are 25 trucks operating and transportation activities are done
every day
▪ Think how you would reduce overtime and what would be the influence on the assets needed
133
We want to check to what extent we can improve the usage of drivers
and trucks by eliminating inefficiencies

Average total time of the activity per driver per day

In hours

2,0

4,1

10,5

0,8

1,4

2,2

Loading Waiting at our sites Waiting at suppliers Driving Unloading Total

134
Chicken Producer – Overtime
analysis – Case Solution

135
Let’s have a look at the result of the analysis of the overtime
costs due to the inefficiency of the logistics processes. 136
Currently, on average, the driver spends 10.5 hours per day in the truck

Average total time of the activity per driver per day

In hours

2,0

4,1

10,5

0,8

1,4

2,2

Loading Waiting at our sites Waiting at suppliers Driving Unloading Total

137
Given the benchmarks, around 3.5 hour is lost due to inefficiencies

Average total time wasted per driver per day

In hours

0,8

0,0
0,6

3,5
1,1

1,0

Loading Waiting at our sites Waiting at suppliers Driving Unloading Total

138
 We will have to divide the time into regular hours and overtime to calculate the
potential savings per 1 day per 1 vehicle

Potential Savings per # of hours wasted – Cost of 1 hour – # of hours wasted – Cost of 1 hour –
day per 1 vehicle = regular time x regular time + overtime x overtime

EUR 3.4 per 1 vehicle

per 1 day = 2.55 x 0.75 + 0.98 x 1.05

139
 Once we have the calculations per day per 1 vehicle, we can calculate the
total savings for the whole year and the whole firm

Potential Savings per

Annual Savings = day per 1 vehicle x # of vehicles x # of days that we work

EUR 31.1 K = 3.4 x 25 x 365

140
 Juice Producer – Simulation of the
whole Logistics System – Introduction

141
Let’s imagine that you have to optimize the distribution
system of a juice producer located in Serbia. 142
 Let’s imagine that you have to optimize the distribution system of a
juice producer located in Serbia
Introduction:
▪ You were employed by a producer of a local brand of Cola to carry out an operational audit.
▪ The producer is located in Serbia where it has a significant market share. Currently, apart from the warehouse next to the production
facility in Subotica, it has two additional distribution centers in Novi Sad and Belgrade.
▪ Currently, the goods are collected from the distribution centers by shops

Tasks:
▪ Calculate the cost of the current system assuming that you have warehouses in all locations
▪ Assume that you use 24-tonne trucks for transportation

143
Let’s imagine that you have to optimize the distribution system of a
juice producer located in Serbia
Subotica

Novi Sad

Belgrade

Kragujevac

Prijepolje
Niš

144
Juice Producer – Simulation of the
whole Logistics System – Tips

145
Simulations are pretty difficult. Therefore, we will try to provide you
with certain tips that will help you understand what we do in Excel. 146
The future is pretty difficult to figure out. You can use scenario analysis,
or you check ALL the potential options and see which is optimal. 147
Imagine for a second that you have a small bakery trying to decide what is the optimal
number of cakes that you should bake. You want to use simulations to find out. 148
For the producer of cakes that at the same time can bake from 1 to 10 cakes
using the simulation to find the optimal production batch would entail
calculating the costs for all options

149
There are plenty of things you can do thanks to simulations

Test the boundaries of the

Find optimal solutions
system

Carry out sensitivity analysis Find weak spots

Plan & Forecast

150
In our case study, we will consider different options. To do the
simulation we should first estimate how many options there are. 151
Imagine that you are working for an FMCG firm that has 3 warehouses and is
wondering whether or not to cut down the number of warehouses. How many
different options you would have to examine?

152
In order to solve it, think about the supply chain system as if it was a system
consisting of 3 independent parts, and 3 warehouses.

W1 W2 W3

153
Every warehouse can be a part of the system or can be excluded from it. In
other words, we have for every warehouse 2 options: closed or open
Open

Closed
W1 W2 W3

154
This means that to calculate the number of all options we multiply the number
of options for every warehouse. Since we have 2 options per warehouse, we
get 8. Open

Closed
W1 W2 W3

2 x 2 x 2 = 8

155
You may decide to exclude the option where there are no warehouses (all are
closed). In this case, we would have 7 options we have to consider
Open

Closed
W1 W2 W3

2 x 2 x 2 = 8

-1

=
7

156
The last thing we want to do is to have an automatic generator of
options. We know we have 8 different options we can consider. 157
First, we will put 1 if the warehouse is open and 0 if it is closed

= Open = 1

= Closed = 0

158
We have 3 potential locations for warehouses.

Subotica Novi Sad Beograd

159
The following sequence of 1 and 0 would mean that Subotica is opened,
Novi Sad is closed, and Beograd is open

Subotica Novi Sad Beograd

1 0 1

160
If on the other hand, we had the following sequence, Subotica and Novi
Sad would be opened and Beograd would be closed

Subotica Novi Sad Beograd

1 1 0

161
As you may remember we have 8 different options for 3 warehouses. For 3
warehouses you could list them for 10 it would be very difficult
Subotica Novi Sad Beograd

1 0 0

0 1 0

1 1 0

0 0 1

1 0 0

0 1 1

1 1 1

0 0 0

162
The number of options can be calculated using the following formula.
This means that for 10 warehouses there are 1 024 options.

# of warehouses # of options = 𝟐# 𝒐𝒇 𝒘𝒂𝒓𝒆𝒉𝒐𝒖𝒔𝒆𝒔

3 8 = 𝟐𝟑

5 32 = 𝟐𝟓

10 1 024 = 𝟐𝟏𝟎

163
To speed up the generation of options we will treat the sequence of 1 and 0
that corresponds to specific options as a binary number

Subotica Novi Sad Beograd

1 1 0

164
Binary numbers can be converted into well-known decimal numbers. You
have to multiply the 0 or 1 by the right power of 2 (depending on the
position)

1 0 0

𝟐𝟐 𝟐𝟏 𝟐𝟎

𝟒 𝟐 𝟏

165
Let’s convert 1 0 0 in the binary system into the decimal system. As you can
see it is 4 in the decimal system.

1 0 0

X X X

𝟒 𝟐 𝟏

= = =

4 0 0 = 4

166
So, every option can be converted into the decimal system

Subotica Novi Sad Beograd

1 0 0 = 4

0 1 0 = 2

1 1 0 = 6

0 0 1 = 1

1 0 0 = 5

0 1 1 = 3

1 1 1 = 7

0 0 0 = 0 or 8

167
In Excel, we will do the opposite thing. We will convert decimal numbers into
binary numbers. Every binary number will be a different, unique option.

Number in decimal
Binary Number A unique option
system from 1 to 8

Warehouse only in
4 100
Subotica

Warehouse only in Novi

2 010
sad

Warehouses in all 3
7 111
locations
168
We do that to make a scalable solution. For 3 warehouses we could easily list
all options manually. For 10 warehouses it would not be possible

# of warehouses # of options = 𝟐# 𝒐𝒇 𝒘𝒂𝒓𝒆𝒉𝒐𝒖𝒔𝒆𝒔

3 8 = 𝟐𝟑

5 32 = 𝟐𝟓

10 1 024 = 𝟐𝟏𝟎

169
Juice Producer Case Study
– Steering variables

170
Since we want to use a simulation, we will have to make our calculations
dynamic. For that, we can use the so-called steering variables. 171
Steering variables act like a switch that can easily allow us to include or
exclude certain parts of the model, depending on the situation. 172
Let’s see how we would calculate the costs of warehousing for the whole
system assuming that we have 3 warehouses.

Costs of the Costs of the Costs of the

Cost of warehousing = Warehouse in Subotica + Warehouse in Novi Sad + Warehouse in Beograd

173
 Unfortunately, for every option, we would have to have a different formula

Warehouse only in Costs of the Costs of the Costs of the

Subotica Cost of warehousing = Warehouse in Subotica + Warehouse in Novi Sad + Warehouse in Beograd

Warehouse in Novi Sad Costs of the Costs of the

& Beograd Cost of warehousing = Warehouse in Novi Sad + Warehouse in Beograd

Warehouse only in Costs of the

Beograd Cost of warehousing = Warehouse in Beograd

Warehouse in Subotica Costs of the Costs of the

& Novi Sad Cost of warehousing = Warehouse in Subotica + Warehouse in Novi Sad

Warehouse only in Costs of the

Subotica Cost of warehousing = Warehouse in Subotica

174
Not to have every time a different formula we will use 3 steering variables

Steering ▪ Will be equal to 1 if the warehouse in

Variable for = S = Subotica is open
Subotica ▪ Will be equal to 0 if the warehouse in
Subotica is closed down

Steering Variable ▪ Will be equal to 1 if the warehouse in Novi

for Novi Sad = N = Sad is open
▪ Will be equal to 0 if the warehouse in Novi
Sad is closed down

Steering Variable ▪ Will be equal to 1 if the warehouse in

for Beograd = B = Beograd is open
▪ Will be equal to 0 if the warehouse in
Beograd is closed down

175
 Thanks to this we can create one general formula that automatically will
adjust to the situation

Costs of the Costs of the Costs of the

Cost of warehousing = Warehouse in Subotica x S + Warehouse in Novi Sad x N + Warehouse in Beograd
x B

176
Juice Producer Case Study
– the Number of trips

177
As you have probably noticed we calculate the number of trips to specific
locations in a simplified way. Let’s see what is the logic behind it. 178
Every truck has 2 limitations when it comes to how much cargo it can
take

Truck’s limits

Weight limits Cargo size limits

▪ 24 tons of cargo ▪ 24 pallets

179
The number of trips you have to do will be based on the bigger number
of trips

Truck’s limits

Weight limits Cargo size limits

# of trips based on # of trips based on

the weight the size

# of trips = Maximal of
both

180
Let’s see how we calculate the number of trips based on 2 criteria

Cargo Transported in tons

# of trips based on the weight =

The maximal cargo you can put
in the truck in tons

Cargo Transported in pallets

# of trips based on the size =

The maximal # of pallets you
can put in the truck

181
 In the case of juice, the weight of 1 pallet is around 0.6 tons and that is
why the # of trips based on the size will be also the maximal one

Cargo Transported in tons 1 440

# of trips based on the
weight = = = 60
The maximal cargo you can
24
put in the truck in tons

Cargo Transported in
2 400
pallets
# of trips based on the size = = = 100
The maximal # of pallets
24
you can put in the truck

182
That’s why we actually only calculate the number of trips based on the
size (number of pallets)
Truck’s limits

Weight limits Cargo size limits

# of trips based on
the size

# of trips = # of trips
based on the size

183
Juice Producer – Simulation of the
whole Logistics System – Solution

184
 In the end thanks to the simulation, we get the optimal solution. It
seems that regional warehouses don’t make economic sense

Total costs of the distribution system of finished products

In thousands of USD

3 015
2 788
2 657
2 431

1 838
1 611
1 480
1 254

Warehouse only in Warehouse only in Warehouse in Warehouse only in Warehouse in Warehouse in Novi Warehouse in all No warehouses
Subotica Novi Sad Subotica and Novi Belgrade Subotica and Sad and Belgrade locations
Sad Belgrade

185
Optimal Production
Batch

186
On a typical production line, there are many products produced. One
instance of producing the same product is called a production batch.187
Production batch is measured in quantity units and can be of different
size

8 000 2 000 3 000 1 000 2 000 2 000

188
Quite often when you compare optimal with actual production batches
you see that a lot of money could be saved
Optimal production
batch
Average production
TPA 8s TPA 21 batch
845 hl 1 732 hl 618 hl 1 375 hl

TPA 8a TPA 8b
701 hl 1 300 hl 860 hl 1 300 hl

189
 In most cases, for every product, you should set a minimal and a safety stock
level and calculate the optimal batch. Let’s see how the stock changes

Stocks of Maximum stock

one SKU level
Q – Optimal
production batch

S - Safety stock
level

LT – Lead time for Time

production cycle

190
 Let’s have a look at the definitions of the main terms used when looking for
an optimal batch

Definition
▪ A stock level that if it’s reached, the work order should be sent to Production Department
and production should be started
Safety stock level

▪ Stock level achieved when Safety stock level is increased by optimal production batch
Maximum stock
▪ Maximum Stock Level = Safety stock Level + Optimal Production Batch
level

▪ A batch size optimized to minimize costs of production and warehousing costs

Optimal
production batch

▪ Time needed for goods production, quality control check-up, and transport to the
Lead time for warehouse or distribution centers
production cycle

191
 Below are the most typically used formula for optimal production batch
(EOQ – Economic Order Quantity)
Fixed costs Variable costs

Expected
Cost of readjusting a demand 1
Total costs of production = * + 2 * Optimal * Cost of frozen
production line Optimal batch capital
batch
Minimizing

2 * Expected demand * Cost of readjusting production line

Optimal production batch =
Cost of frozen capital

▪ Expected demand – average weekly sales in pieces

▪ Cost of readjusting a production line – Costs of employees working during starting up production cycle, costs of media used, and
waste of juice
▪ Cost of frozen capital – unit costs of raw materials used for the production of goods 192
 Planning for
2-stage production

193
Sometimes forecasting gets a bit complicated if you have to look at
bundles
Bundle 1 Bundle 2 Bundle 3 Bundle 4 Bundle 5

194
 For bundles, you have to translate them into products and account for
optimal production batches

Translate it into Calculate optimal

Forecast bundles
products batches

Produce & Prepare production Prepare assemble

assemble plan plan

195
Cheese Production
– Case Introduction

196
Let’s imagine that you are working for a cheese producer. Your task is to
find the optimal production batch. Use for this the simulation method. 197
 Imagine that you want to estimate the production batch for your
company

One of the biggest cheese producers in

Poland

Production of long-ripening cheese

Cooperation with over 1 000 local

suppliers

198