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Goodwill factor Backlog

Factor “Backlog” is 1 out of 8 factors that GMC simulator uses to calculate the company's goodwill value. Below are presented parameters from decision and management report that are most correlated with goodwill factor “Backlog” when calculating the company's goodwill value.

Parameters include direct and inverse correlation:

  1. The number of outstanding orders: from -0.54 to -0.68

  2. Sales office: -0.60

 

The most accurate indicator of the goodwill factor “Backlog” is not the quantity, but the cost of backlog orders (lost revenue). Also, we found a strong correlation between factor “Backlog” and cost of stock products. In fact, cost of backlog orders and cost of stock products are the same metric for GMC simulator, which is measured both in positive (cost of stock products) and negative direction (cost of backlog orders).

Evaluation of the current cost of backlog orders and stock products inventory will be done with new metric, which we calculate according to the formula:

(Plan for shipment of products in the current period + Products in stock in the previous period - Orders in the current period - Backlog orders in the previous period) * Price in the current period

If the result number is negative, then company will have backlog orders. If the result is positive, then there will be products in stock.

 

Cost of backlog orders

Diagram below shows the dependence of the goodwill factor “Backlog” on the cost of backlog orders for 14C1 scenario in 1 period. Cost of stock products is 0 for all products. With the cost of backlog orders = 0 and cost of stock products = 0, goodwill factor “Backlog” will be equal to 1.

 

Cost of stock products

Diagram below shows the dependence of the goodwill factor “Backlog” on the cost of stock products for 14C1 scenario in 1 period. Backlog orders is 0 for all products.

To calculate the goodlog factor “Backlog”, you will need to add influence of each of these components (cost of backlog orders and stock products). Impact of the cost of backlog orders is about 4 times higher than the cost of stock products.

 

Hints:

  1. Goodwill factor “Backlog” can vary between 0.946 - 1.078.

  2. Value of the goodwill factor “Backlog” does not depend on value in previous period or on decisions of competitors in the group.

  3. Optimal strategy is to prevent backlog orders in the last period, on the contrary, you should create a small stock of products, which will allow you to increase goodwill.