case study - forecasting d

CASE 1 "the Small Engine Doctor is the name of a business developed by Thomas Brown. who is a mail carrier for the US. Postal Service. He had been a tinkerer since childhood, always taking discarded household gadgets apart in order to understand "what made them tick." As Tom grew up and became a typical suburbanite, he acquired numerous items of lawn and garden equipment. When Tom found out about a course in small engine repair offered at a local com- munity college. he jumped at the opportunity. Tom started small engine repair by dismantling his own equipment, overhauling it, and then reassembling it. Soon after completing the course in engine repair, he began to repair lawn mowers. rototitlers, snowblow- ersand other lawn and garden equipment for friends and neighbors. In the process, he acquired Various equipment manuals and special tools. It was not long before Tom decided to turn his hobby into a part-time bitsinem. He placed an adver- tisement in a suburban shopping circular under the name of the Small Engine Doctor. Over the last two years, the buainess has grown enough to provide a nice supplement to his regular salary. Although the growth was welcomed, as the business is about to enter its third year of operation there are a number of concemsThe business is operated out ofTonr's home. The basement is partitioned into a family room, a workshop, and an office. Griginally, the office area was used to handle the advertising. order processing, and bookkeeping. All engine repair Was done in the workshop. Tom's policy has been to stock only a lim- ited number of parts. ordering replacement parts as they are needed.'l'his seemed to be the only practical way of dealing with the large variety of parts involved in repairing engines made by the dozen or so mantis facturers of laurn and garden equipment. Spare parts have proved to be the most aggra- vating problem in running the business. Tom started his business by buying parts from equipment dealers. This practice had several disadvantages First, he had to pay retail for the parts. Second, most of the time THE SMALL ENGINE DOCTOR1 5 the dealer had to back-order one or more parts for any given repair job. Parts ordered from the manu- facturer had lead times of anywhere from 30 to 120 days. As a result, Tom changed his policy and began to order parts directly from the factory. He found that shipping and handling charges ate into his prof- its, even though the part price was only 60% of retail. However, the two most important problems created by the replacement parts Were lost sales and storage space.Tom attracted customers because of his qual- ity service and reasonable repair charges. which were possible because of his low oVerhead. Unfortunately, many potential customers Would go to equipment dealers rather than wait several months for repair. The most pressing problem was storage space. 1While a piece of equipment was Waiting for spare parts, it had to be stored on the premises It did not take long for both his workshop and his oneacar garage to cycrflow with equipment while he was waiting for spare parts. In the second year of operation, Tom actually had to suspend advertising as a tactic to limit customers due to lack of storage space. Tom has considered stocking intrentory for his third year of operation This practice will reduce pur- chasing costs by making it possible to obtain quantity discounts and more favorable shipping terms. He also hopes that it will provide much better turnaround time for the customers. improving both cash flow and salesThe risks in this strategy are uncontrolled inven- tory carrying costs and part obsolescence. Before committing himself to stocking spare partsTom wants to have a reliable forecast for busi- ness activity in the forthcoming year. He is condent enough in his knowledge of product mix to use an aggregate forecast of customer repair orders as a basis for selectively ordering spare parts. The fore- cast is complicated by seasonal demand patterns and a trend toward increasing sales. Tom plans to develop a sales forecast for the third year of operation. A sales history for the rst two years is given in Table 6. Mmh 10 29 April is 32 Small Engine Doctor Sale-s History August September 14 I? lClictoliler 13 November ASSIGNMENT 1. Plot the data on a twoyear time horizon from 2005 through 2&16. Connect the data points to make a time series plot Develop a trendline equation using linear regression and plot the results. Estimate the seasonal adjustment factors for each month by dividing the average demand for corresponding months by the average of the corresponding trend-line forecasts. Plot the tted values and forecasts for 2007 given by Trend X Seasonal. Smooth the time series using Holt's linear expo- nential smoothing with three sets of smoothing 5. constants: [r1 = .1, B = .1},(u = .25, B = .25}, and [a = .5. B = .5). Plot the three sets oi smoothed values on the time series graph. Generate forecasts through the end of the third year [or each of the trendadjusted exponential smoothing possibilities oonsidered. Calculate the MAD values for the two models that visually appear to give the best fits {the most accurate ouestepahead forecasts). [fyouhadto limit yourchoioe tooneofthe models in Qimtionsaud 4.identifytlie model you would use for your business planning in 200?. and dis cuss why you selected that model over the others