Problem Set : Information and Forecasting

1. Mike McNeely, logistics manager for the Illumination Light Company, has considered replacing the firm's manual customer order management system with electronic ordering, an EDI application. He estimates the current system, including labor, costs $2.50/order for transmission and processing when annual order volume is under 25,000. Should the order volume equal or exceed 25,000 in any given year, Mr. McNeely will have to hire an additional customer service representative to assist order reception in the manual process. This would raise the variable cost to $3.00/order. He has also estimated the rate of errors in order placement and transfer to be 12/1000 orders.

EDI would cost $100,000 upfront to implement and variable costs are determined to be $.50/order regardless of volume. EDI could acquire and maintain order information with an error rate of 3/1000 orders. An EDI specialist would be required to maintain the system at all times as well. Her salary is $38,000 in the first year and increases 3 percent each year thereafter.

Order errors cost $5.00 per occurrence on average to correct in the manual system. EDI errors cost $8.00 on average to correct since the specialist inspects the system for flaws on most occasions.

a. If the firm expects order volume over the next 5 years to be 20,000, 22,000, 25,000, 30,000, and 36,000 annually, would EDI pay for itself within the first 5 years?

b. What Effects Aside From Cost Might Mr. Mcneely Consider When Implementing Edi?

2. Mr. McNeely currently batches orders for processing under the manual order management system. The orders are batched for daily processing. If Mr. McNeely opts to implement EDI, might this affect his current means of order processing? If so, how?

3. Quality Marketing Technologies, Inc., has hired you as a sales representative. You have been asked to call on Quikee Stop, a small convenience store chain with five locations in your region. What benefits of UQPC and bar coding applications might you illustrate to encourage Quikee Stop to utilize these technologies to track sales at its retail outlets?

4. Comfortwear Hosiery, Inc., produces men's socks at its manufacturing facility in Topeka, Kansas. The socks are stored in a warehouse near the factory prior to distribution to DC locations in Los Angeles, Memphis, and Dayton. The warehouse uses a top-down forecasting approach when determining the expected quantities demanded at each DC.

The aggregate monthly forecast for June is 12,000 pairs of socks. Historically, the Los Angeles DC has demanded 25 percent of the warehouse's stock. Memphis and Dayton have demanded 30 percent and 35 percent, respectively. The remaining 10 percent is shipped directly from the warehouse.

a. Based on the aggregate forecast, how many pairs of socks should you expect each DC to demand in June?

b. Suppose the aggregate forecast for July results in a 6 percent increase over June's forecast. How many pairs of socks would each DC anticipate in July?

5. Ms. Kathleen Boyd, director of logistics for the Scenic Calendar Company, wishes to evaluate two methods of time series forecasting. She has collected quarterly calendar sales data from the years 2003 and 2004.

2003                        2004
Qtr. Actual Sales      Qtr. Actual Sales
1 1200                     1 1300
2 800                       2 800
3 200                       3 250
4 1000                     4 1200

a. Use the moving averages technique to find forecasted sales for the third quarter of 2004 based on actual sales from the previous 3 quarters.
b. Use simple exponential smoothing to forecast each quarter's sales in 2004, given that Ms. Boyd qualitatively forecasted 900 calendars for quarter 4, 2003. Ms. Boyd has assigned an alpha factor of .1 for time series sensitivity.
c. Repeat the simple exponential smoothing problem above (part 5b) with Ms. Boyd employing an alpha factor of .2.
d. How well do the moving averages and simple exponential smoothing techniques seem to work in Ms. Boyd's situation? In what ways do the techniques appear to fail?

6. Michael Gregory, logistics manager of Muscle Man Fitness Equipment, has determined that his current forecast system for national sales has historically shown a 20 percent error rate. Due to this level of error, Muscle Man's DC managers maintain inventory at their locations costing the company, on average, $3,000 per month.

By improving his forecast methodology and shortening forecast horizons, Mr. Gregory anticipates cutting the error level down to 12 percent. With improved forecasting, Muscle Man's DC managers have indicated that they feel comfortable with lower inventory levels. Mr. Gregory anticipates monthly inventory carrying cost reductions of 40 percent.

a. If the forecast system improvement will cost $1,000 more per month than the old system, should Mr. Gregory implement the change?
b. Why might Muscle Man's customers encourage the firm to improve its forecasting capabilities?