Widget sales forecast

The plan calls for a sales price of 100 with an attractive gross margin before distribution costs of 40. Distribution costs add 10 per unit to the cost. It is likely that the supply chain manager is measured on whether the costs of distribution meet the 10 expectation. The first year sales forecast calls for 100,000 units, producing expected revenues of 10 million. However, this is an innovative product, so actual demand is uncertain. Demand, in the case of the widget, may in fact be significantly more or less than the forecast of 100,000 units. 

The forecast of 100,000 units is accurate. 100,000 units are sold and the product result matches the plan. The supply chain and product managers are heroes. The result is shown in Table 6.3. Sales falter only 70,000 units are sold. The widget maker must dump 30,000 units of inventory in a bulk sale at a 50 percent discount. The product manager is reprimanded the supply chain manager is okay because distribution costs for full-priced units are within the 10 budget. The result is shown in Table 6.4. The cost of the inflexible supply chain, the market mediation cost, is 300,000. This is calculated as the 10 loss per unit for the 30,000 units sold at discount. 

An example illustrates the point. A salesman writes a large order for widgets in the field. This order happens to exceed the forecast sales of widgets for the period. In a sequential process, the sales department notifies the inventory planners. They check on-hand and on-order balances and, in turn, notify purchasing to accelerate orders of widget materials. 

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