CHAPTER

FORECASTING

Healthy Smoke is an infant company that is yet to fulfill its first order from the suppliers.
The company has been making decisions regarding demand, sales, capital budgeting and
investment without knowing about the future. Clearly, managers have tried to be as
accurate as possible in making estimates about the future organizational direction. It is
forecasting that has helped managers in making good estimates. Managers at Healthy
Smoke are pretty sure that the forecasting will bring stipulated threshold to the company
within one year of time period.

Scholars define forecasting as an art and science of predicting future events. For an infant
company like Healthy Smoke, forecasting plays even more crucial role because
forecasting acts as foundation for all other operations-related activities. For instance,
forecasting provides undisputed guidelines for Scheduling, HR Planning, Capacity
Planning, Supply Chain Management, and Market Planning.

Forecasting during Introduction phase of product life-cycle tends to be more intuitive.

The companies use historical trends of similar companies in the industry to draw analogy
and to predict ones own future. Healthy Smoke has undertaken similar forecasting
methodology. The company conducted initial market survey using a questionnaire. The
findings of the market survey were screened out through Delphi Technique.

Forecasting Time Horizons

Healthy Smoke has made forecasts based upon three time horizons: short range, medium
range, and long range. The forecasts based upon these time horizons have been presented
in Table 1.
 Short-range Medium-range Long-range
Forecasts Forecasts Forecasts
Time Horizon Less than 3 months 3 months to 1 years 3 years or more
Forecasts Purchase Planning Sales Planning Site Addition
Job Scheduling Production Planning Research and
Workforce Planning Budgeting Development
Job Assignment Revision of
Production Level Operating plans.
Management

The company has invested significant time and resource in short range planning. Several
mathematical models like BEP Analysis and Linear Regression Analysis have been
deployed in combination with qualitative model like Delphi Technique.

Demand Forecasts

Nepal has 24.1% of the adult male and 11.1% of adult female population smoking
cigarette. (Trading Economics, 2017). Around a quarter of population is indulged in
smoking in the country. Kathmandu, which is the market segment for First Phase
Commercialization of Healthy Smoke, has a population of around 10,00,000. This
population represents 3.42 percent of total population of Nepal. The

From the market survey conducted among existing suppliers of China-based e-cigarettes,
Healthy Smoke found out that around 0.671 percent of population in age group 21-29
purchased e-cigarettes. Similarly, around 0.59 percent in the age group 30-39, 0.28
percent in the age group 40-49, and 0.11 percent in the age group of 50 and over
purchased e-cigarette. Hence, adding these findings gives a total of 1.65 percent, which
can be used to forecast demand of e-cigarette.
Regression Model for Annual Demand

Healthy Smoke has used Linear Regression model to test the significance of total sales of e-
liquids and e-cigarettes with different variables. From the findings of regression model, annual
demands for both e-cigarettes and e-liquids have been calculated.

The dependent variables are Total Sales of e-cigarettes and e-liquid over the year. Meanwhile, the
independent variables are:

1) For e-Cigarette

a) Sales of e-Cigarette adjusted into Time Series values according to various months
b) Deviation of sales of e-cigaretteamong various age groups that is the estimated deviation
from the sample data
c) Adjusted value of various reasons for buying E-cigarettes

2) For E-Liquid

a) Sales of E-liquid adjusted into Time Series values according to various months
b) Deviation of salesof e-liquid among various age groups that is the estimated deviation
from the sample data
c) Deviation of salesof e-liquid among preferences that is the estimated deviation from the
sample data
d) Adjusted value of various reasons for buying E-cigarettes

Furthermore, Healthy Smoke also inquired about the reasons why people purchased e-cigarettes
using lickert scale for the following reasons:

Stop Smoking Cigarettes

Start Smoking Cigarettes
Sense of being cheaper than Cigarettes
Continue Smoking but through healthier alternative
Rehab induced

For E-Cigarette

The regression equation has been obtained from the test statistics as below:
 = . + . + . + .

Where,

a = Average difference in sales of E-Cigarette expected between sellers considering

various months

b = Expected Deviation of Sales of E-Cigarettes between various age groups

c = Sum of the averages of the Reasons for buying E-Cigarettes

For E-Liquid

The regression equation has been obtained from the test statistics as below:

= . + . + . + . + .

Where,

a = Averagedifference in sales of E-liquid expected between sellers considering

various months

b = Expected Deviation of Sales of E-Liquid between various age groups

c = Expected Deviation of Sales of E-Liquid between various age groups

d = Sum of the averages of the Reasons for buying E-Cigarettes

Calculation of Annual Demand

The annual demand for Healthy Smoke e-ciagrettes has been shown in Table 2.

Total Population 29,244,845

Population of Kathmandu City 10,03,000
Population of KTM (in %) 10,00,000
= 0.342 3.42%
29,244,845
Total percent of smokers 24.1 %
Percent of smokers in KTM 0.82 % of total
Total number of smokers in KTM 0.82
29,244,845 = 241,042
100
Total sales percent in sample study 1.65 %
Expected Demand for the company 1.65
241,042 = 3,978 4,000
100

So, now we calculate the number of distributors necessary to sell this amount of product. This
will be aided by individual demand from each distributor from above model.

Distributors Demand Annual Demand No. of Distributors

E-Cigarettes 117 approx* 4000 35 approx
E-Liquid 400 approx* 52000 35 approx*(cycled
around approx 4 times
a year)

* Please refer to the appendix for the calculations

Based upon sales report of the suppliers, the demand for Healthy Smokes e-cigarettes is
estimated to be 4000 units per year. With branding and customization of e-liquid taste, Healthy
Smoke is affirmative that it will achieve its sales forecast based upon the demand forecast.

Sales Forecast

Healthy Smoke has forecasted sales for the upcoming year of its operations. The sales units for
the month of September is based upon actual order received from the suppliers. The company
extensively approached e-cigarette suppliers in Kathmandu with its product proposal and
promotional strategies. The extensive distribution has helped Healhty Smoke ship 400 units of e-
cigarettes for the month of September.

The e-liquid sales has been forecasted based upon the use of Aerosol. A 50 ml bottle of e-liquid
will suffice 15 day vape requirements, suggesting 2 bottles of e-liquid for each e-cigarette in each
month. However, the company intends to promote itself rigorously through giveaways.
Customers will get one e-liquid inside of e-cigarette package and one bundled with the product as
free giveaway.

Healthy Smoke forecasts thatsome suppliers may discontinue their purcahase and some may be
discontinued by the company itself. Instead of going extensive, Healthy Smoke has plans to be
selective, selling 200 units in the month of October. Similarly, after November, the company
expects sales to be steady given that the company-supplier relation builds up and strengthens to
bring about mutually beneficial sales campgain.

Healthy Smoke has also given due consideration to seasonal peaks when demand may rise and
sales may accentuate. During New Year, people tend to make resolutions. Heavy smokers maay
resolve to quit smoking. For them, e-cigarette can be a great substitute because it allows
customers to gradually decrease nicotine consumption until they have rested upon flavor as the
vape. The concept of resolution is more likely to be associated with English New Year. So,
Healthy Smoke has assigned higher proportion of seasonal consideration units to the month.
Similar allocation has been done for Nepali New Year (March/ April 2018). September is marked
as the month of the biggest festival for Hindus- Dashain followed by Tihar. People tend to make
purchases during festivals as well. So, experts at Healthy Smoke have also allocated sales units
for this period.

Sales
Annual Sales : 4000 units Annual Sales :52,000 units
Forecast
Weighted Actual
e- Seasonal e- Actual
Month Moving Sales Giveaways
cigarette Fluctuations liquid Sales
Average Forecast
Sept 2017 400 - - 400 800 800 0
Oct 2017 200 - - 200 1200 400 800
Nov 2017 300 283 - 300 1800 600 1200
Dec 2017 283 275 - 283 2366 566 1800
Jan 2018 275 275 110 385 3136 770 2366
Feb 2018 282 277 - 282 3700 564 3136
March
280 278 50 330 4360 660 3700
2018
April 2018 280 279 80 360 5079 719 4360
May 2018 280 280 - 280 5639 560 5079
June 2018 280 281 - 280 6199 560 5639
July 2018 280 282 - 280 6759 560 6199
Aug 2017 280 283 - 280 7319 560 6759
Sept 2017 280 284 60 340 7999 680 7319
Total 3700 300 4000 56357 8000 48358

For e-liquid, even if the annual sales amount to 52,000, actual sales will account for only 48,358
units as 8000 units have been bundled with the main product as free giveaways. The company
will not earn from the sales of these 8000 units. However, the company believes these 8000 units
to be very crucial for future growth of the company.
Financial Forecast

Healthy Smoke has invested heavily in setting up the company. The company has invested upon
machinery, furniture and fixtures, human resource, utilities, insurances, and the like in order to
smoothly operation the business. Every investment has financial implication, adding upon the
price that customers have to pay for the product. Hence, the financial forecasts are directed
towards several costs associated with the company. The cost information will be helpful in
determining selling price of the products, BEP sales, capacity planning, HR planning, etc.

Company Setup Cost

Cost Components Cost (Rs)

Registration as Private Ltd. Company 16,000
Licensing cost 10,000
Certification and testing 90,000
Website Building Cost 35,000
Liquid Container (4 containers) 60,000
Clean Room Cost 150,000
Flavor Filling Machine 800,000
Total 1,161,000

Healthy Smoke is registered as a Private Limited company under The Company Registrars
Office, Tripureswor, Kathmandu. The company has also incurred licensing cost for taking
permission from the Health Ministry to produce tobacco based product.

Property, Plant, and Equipments

Particulars Units Unit Cost (RS) Total Cost (Rs)

Table for managers - - 30,000
Chairs 4 8000 32000
Assembly Table 1 25000 25000
Security Guard Room Set Up - - 10,000
Relaxation Room Chairs 5 2000 10,000
CEO's Room Set up - - 68,000
Computer 5 30000 150,000
CCTV 8 8,800 70,400
Cabinet 4 25000 100,000
Trolley 4 5,000 20,000
Miscellaneous - - 40,000
 Total 555,400

Utilities

Particulars Unit Unit Cost (Rs) Total Cost (Rs)

Fans 3 3000 9000
Coffee Machine 1 15000 15000
Refrigerator 1 25000 25000
Oven 1 10000 10000
Depreciation Basis 59,000
Miscellaneous - 10,000 10,000
Stationary 1000 12 12000
Attendance Machine 1 5000 5000
Internet 1 year - 12000

Total 98000

Insurance Costs

Insurance Insurance Annual

Insurance Cost Policy Period Cost
General Liability Insurance 20,00,000 10 years 200,000
product liability insurance 50,00,0000 15 years 333,333
Fire Insurance 20,00,000 15 years 133,333
Total Insurance cost 666,666

Accumulated Depreciation

Particulars Cost (Rs)

Depreciation on Property, Plant, and Equipment @ 10% 55,540
Depreciation on Utilities @ 10% 5,900
Depreciation on e-Liquid Filling Equipment @ 20% 160,000
Depreciation of Clean room@ 20% 30,000
Depreciation of Containers @ 20 percent 12,000
Total 263,440

Maintenance Forecast
Particulars Cost (Rs)
Preventive Maintenance 40,000
Breakdown Maintenance 60,000
Total 100,000

Salary Forecast

Number of Per Head Salary Total Salary

Particulars Persons (Rs) Cost (Rs)
Managing Director 1 45,000 45,000
Assemblers 6 15,000 90,000
It Manager 1 20,000 20,000
Finance Manager 1 20,000 20,000
Helping staff 4 10,000 40,000
HR manager 1 20,000 20,000
Supervisor 1 20,000 20,000
Gatekeeper 1 8,300 8,300
Total Cost 16 263,300

Cost of Production

E-cigarette

S. Component Cost
N. Parts Specification Quantity (Rs)
1 Battery Li-ion 4.2 Volt, 1100 mAH, 105 ohm 1 80
2 Clearomizer Ploycarbonate plastic/Pyrex Glass 1 152
3 Microprocessor 1 29
Input DC 5V with 800mah, Output DC 4.2V
4 USB Charger with 650mah 1 173
5 LED light 20 V power, 16 mA Current, 5mm size 1 6
6 Nickel Coils NI-200, Nickel wire 0.4 ohm ressistance 1 13
Total 453

E-liquid

Particulars Cost Composition Composition

 per (in ml) Cost (Rs)
liter
(rs)
Propylene Glycol 208 4 0.832
Vegetable Glycerol 392 25 9.8
Nicotine 220 16 3.52
Flavor 158 5 0.79
Low Density Polyethylene Drip-Tip - -
Bottle 6
Total 50 21

Total cost of production of e-cigarette packet

Particulars Cost (Rs)

Cost of e-cigarette component parts 453
Cost of e-liquid component materials 21
Packaging Cost 23
Total 497

Operating Cost

Per unit Per Month

Particulars Units Cost (Rs) Cost (Rs) Cost (Rs)
Transportation Vehicle - - - 350,000
Marketing Expense - - - 360,000
Interest - - - 131116.69
Storage Cost 35,000 420,000
Rental Cost 90,000 1,080,000
Total 2,341,116.69