1. Develop and justify a forecasting method that fulfills the company\'s specifi
ID: 2747902 • Letter: 1
Question
1. Develop and justify a forecasting method that fulfills the company's specifications.
Case Study
Merriwell Bag Company
Merriwell Bag Company is a small, family owned corporation located in Seattle, Washington. The stock of the company is equally divided among five members of the Merriwell family (husband, wife, and three sons), but the acknowledged leader is the founder and patriarch, Ed Merriwell. Ed Merriwell formed the company 20 years ago when he resigned as a mill supervisor for a large paper manufacturer. Ironically, the same manufacturer formed a container division five years ago and is presently one of Merriwell’s competitors.
Company Strategy
The family attributes the success of Merriwell Bag Company to the fact that it has found a market niche and has no “serious” competition. Merriwell supplies stock bags to many small chain stores scattered over a wide geographical area. It ships the bags directly to small regional warehouses or drop ships directly to the individual stores. The family reasons that the large bag manufacturers cannot profitably provide service to accounts on that small of a scale. In fact, Ed Merriwell formed the business with one second-hand bagging machine to provide bags for a small discount store chain and a regional chain of drug stores. These two organizations have grown tremendously over the years, and Ed Merriwell proudly points out that the Bag Company has grown with them. Today, these two original clients are Merriwell’s largest customers.
The Merriwell family does not want its business to be too heavily reliant on any one customer. Hence, they have a policy that no single customer can account for over than 15% sales. In fact, Merriwell Bag Company encourages its major customers to establish alternative sources of bag supply for insurance against stock outs because of paper shortages, freight line difficulties, local trucking/warehousing strikes, and production problems that may locally affect Merriwell’s ability to supply bags.
Merriwell does not aggressively pursue new bag customers, yet it has over 500 customers. The smallest customers order five bales per year (smallest order processed and shipped), and the largest order 15,000 bales per year. The number of bags per bale varies according to the weight of paper used and the size of the bag. Merriwell manufactures only pinch-bottom general merchandise bags, ranging in size from small 2½” X 10” pencil bags to large 20” X 2”X 30” bags used for larger items sold in discount stores. They make no flat bottom (grocery) bags or bags that require sophisticated printing (specialty bags). Bag labels are restricted to 20 percent face coverage and one ink color placed on one side only. Hence, Merriwell’s central strategy is built around low unit cost production due to standardization, which allows a selling price that is competitive with the large bag manufacturers. At the same time, Merriwell provides the
shipping and inventory services that are on too small of a scale for most of the large manufacturers. The Merriwell family takes great pride in “ taking care of ” a customer who has an emergency need for additional bags or who would like Merriwell to warehouse a bag order for a given time because of storage problems at the customer warehouse.
Forecasting Demand
Providing this personal service requires tight inventory control and production scheduling at Merriwell’s bag plant. A highly accurate demand forecast allows Merriwell to service the special customer requests by use of Merriwell’s own warehouse facilities and routing schedules of the company’s truck line. Heretofore, Ed Merriwell could manage the demand forecasting and production scheduling by “ feel ”. Because of the ever-growing number of accounts and changes in personnel in customer purchasing departments, the accuracy of Merriwell’s forecasting has been rapidly declining. The percentage of short-shipped accounts for particular types of bags is increasing alarmingly. Conversely, the warehouse is becoming overstocked with other types of bags. As a result, a severe demurrage penalty on three boxcars of incoming rolls of paper was recently paid because the paper warehouse was partially used to store finished bags that spilled over from the finished bag warehouse. This caused a delay in unloading the boxcars until space could be created in the raw material warehouse.
Demand forecasting has historically been difficult due to the seasonal nature of the product. There is always a surge in demand for bags prior to a holiday season. The exact timing of the surge in demand for particular types of bags depends upon customer stocking policies and the dates that holiday promotional activities begin.
The Merriwell family needs a forecasting method that would take this seasonal factor into consideration. Moreover, they want a method that exhibits stability, because their market is relatively stable with a large number of repeat customers. Finally, they want a forecasting method that anticipates the growth patterns of their respective customers. A forecasting method with these specifications would greatly enhance the company’s ability to service its market profitably. It is believed that if such a method could be applied to forecasting aggregate demand, the same method could be used to gain additional accuracy by forecasting demand of its larger customers. By having an accurate forecast of aggregate demand and demand of larger customers, the requirements of the smaller customers could be processed within the existing warehousing and shipping flexibility.
To develop such a method, the Merriwell family compiled the following aggregate demand data:
Sales (In no. Of Bales)
2008
2009
2010
2011
2012
January
2,000
3,000
2,000
2,000
5,000
February
3,000
4,000
5,000
4,000
2,000
March
3,000
3,000
5,000
4,000
3,000
April
3,000
5,000
3,000
2,000
2,000
May
4,000
5,000
4,000
5,000
6,000
June
6,000
8,000
7,000
6,000
6,000
July
6,000
4,000
7,000
10,000
8,000
August
6,000
8,000
10,000
14,000
10,000
September
10,000
12,000
15,000
16,000
20,000
October
12,000
12,000
15,000
16,000
20,000
November
14,000
16,000
18,000
20,000
22,000
December
8,000
10,000
8,000
12,000
8,000
TOTAL
77,000
90,000
99,000
111,000
112,000
Sales (In no. Of Bales)
2008
2009
2010
2011
2012
January
2,000
3,000
2,000
2,000
5,000
February
3,000
4,000
5,000
4,000
2,000
March
3,000
3,000
5,000
4,000
3,000
April
3,000
5,000
3,000
2,000
2,000
May
4,000
5,000
4,000
5,000
6,000
June
6,000
8,000
7,000
6,000
6,000
July
6,000
4,000
7,000
10,000
8,000
August
6,000
8,000
10,000
14,000
10,000
September
10,000
12,000
15,000
16,000
20,000
October
12,000
12,000
15,000
16,000
20,000
November
14,000
16,000
18,000
20,000
22,000
December
8,000
10,000
8,000
12,000
8,000
TOTAL
77,000
90,000
99,000
111,000
112,000
Explanation / Answer
Merriwell Bag Company would benefit from using the time-series forecasting method. Time-series uses the detailed history of past sales patterns over time to forecast or predict the company’s future demand. “One of the basic assumptions of all time-series methods is that demand can be decomposed into components such as average level, trend, seasonality, cycle and random error” (Schroeder, et al., 2013, p. 257). Based on the information delivered by Merriwell Bag Company, the three year weighted moving average takes into account the seasonality and trend for the short run and gives more insight on high quickly the trend is going. This will allow the company to response quickly to any changes in demand. Therefore they can better utilize their supply chain.
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