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Chapter 1 ● Forecasting, the Why and the How
Outline Solutions
Mini-case 1.1: Inventory Planning
Purpose
Horizon
Information
Value
Evaluation
Develop an overall system that would generate automatic information on
ordering, leaving management to “manage by exception” and consider only
these items that do not seem to be operating in accordance with historical
patterns.
How long will current stocks need to last? We know the lead-times (time to
delivery on an order placed today) are 2-4 weeks, so the forecasts need to
extend to cover the lead-times.
We may assume that records of sales for each SKU are available on a weekly
basis (would daily help in this case?). The inventory system would typically use
a stock level that included a safety stock over and above the predicted level of
sales over the lead-time.
The value of the overall system could be very high (e.g. Walmart’s supply chain
management system). However, the inventory consists of a large number of
small value components so highly detailed forecasting for individual
components is not warranted. We would probably use extrapolative (single
series) methods and develop a framework based upon a sample of series. Items
that are more valuable and/or exhibit volatile patterns of demand would be
sampled more heavily.
Record actual and forecast sales and then examine stock-outs and excess
inventory. Management would focus on those products that showed unusual
patterns.
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Ord/Fildes Principles of Business Forecasting 1e Chapter 1 Solutions
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Minicase 1.2: Long-term Growth
Purpose
Horizon
Information
Value
Evaluation
To provide a flexible framework for the assessment of company growth that
allows for different “what-if” possibilities, such as changes in demand for the
medical equipment or new uses for the chip.
The management will be interested in the company’s longer-term prospects
over the next 5 and possibly up to 10 years.
Interest will focus upon broad areas of operation. You would need to consider
the likely market trends for existing uses, including possible actions by
competitors. On the technological side, you would need to evaluate the
possibilities of further breakthroughs that might reduce the current market.
Next you would want to evaluate the prospects for new markets, particularly
those products that currently use a less sophisticated chip. Finally, you would
need to take into account overall aspects of economic activity; such information
could be obtained from an external econometric forecasting model and/or
“what-if” considerations.
The value will be very high if the company uses the resulting forecasts to plan
for the years ahead. Hence a “what-if” component is critical to the forecasts;
single numbers will be of marginal value.
Provided the company is not a start-up, the model may be tested against its
historical performance. If the company is very new, it may be necessary to
build a model of similar companies in the industry and evaluate the model
against their performance. One problem with this approach is “survival bias” as
only the successful companies are still around.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Ord/Fildes Principles of Business Forecasting 1e Chapter 1 Solutions
3
Minicase 1.3: Sales Forecasting
Purpose
Horizon
Information
Value
Evaluation
To develop an overall distribution system that takes into account different
demand channels. The same database is to be used to target potential customers
The management will be interested in sales prospects over the next 12 months,
although they must also take into account the company’s longer-term prospects.
The company should have available sales at the SKU level, cross-classified by
type of purchase. Any changes in the terms of deferred payment schemes also
need to be available. The company may seek to develop disaggregated
forecasting models that take into account all the SKU X Purchase options or
they may work at a more aggregated level and assume that choice of purchasing
option does not vary across SKUs. Either way, for inventory and production
planning, the aggregated figures will be needed.
A fully integrated system promises to offer considerable economies, as is well
recognize (e.g. the systems developed by SAP and Oracle). At the same time,
such systems are only as good as the forecasts going into them.
Provided the company is not a start-up, the forecasting system may be tested
against its historical performance, using both direct assessments of forecasting
performance and overall financial measures.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Ord/Fildes Principles of Business Forecasting 1e Chapter 1 Solutions
4
Minicase 1.4: Adjusting for Inflation
Real Sales
200.00
180.00
160.00
140.00
120.00
100.00
80.00
1
51
101
151
201
251
Real Sales_SA
200.00
Sales_SA
180.00
160.00
140.00
120.00
100.00
80.00
1
51
101
151
201
© Cengage Learning 2013
Shapes generally preserved, but slope much flatter when inflation is removed.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.