Question 6, please.

NORTHCUTT BIKES: THE FORECASTING PROBLEM

Jan Northcutt, owner of Northcutt Bikes, started business in 1995 when she noticed

the quality of bikes she purchased for sale in her bike shop declining while the prices

went up. She also found it more difficult to obtain the features she wanted on ordered

bikes without waiting for months. Her frustration turned to a determination to build

her own bikes to her particular customer specification.

She began by buying all the necessary parts (frames, seats, tires, etc.) and

assembling them in a rented garage using two helpers. As the word spread about

her shops responsiveness to options, delivery, and quality, however, the individual

customer base grew to include other bike shops in the area. As her business grew

and demanded more of her attention, she soon found it necessary to sell the bike

shop itself and concentrate on the production of bikes from a fairly large leased

factory space.

As the business continued to grow, she backward integrated more and more

processes into her operation, so that now she purchases less than 50% of the component

value of the manufactured bikes. This not only improves her control of production

quality but also helps her control the costs of production and makes the final

product more cost attractive to her customers.

The Current Situation

Jan considers herself a hands-on manager and has typically used her intuition and her

knowledge of the market to anticipate production needs. Since one of her founding

principles was rapid and reliable delivery to customer specification, she felt she

needed to begin production of the basic parts for each particular style of bike well in

advance of demand. In that way she could have the basic frame, wheels, and standard

accessories started in production prior to the recognition of actual demand, leaving

only the optional add-ons to assemble once the order came in. Her turnaround time

for an order of less than half the industry average is considered a major strategic

advantage, and she feels it is vital for her to maintain or even improve on response

time if she is to maintain her successful operation.

As the customer base has grown, however, the number of customers Jan

knows personally has shrunk significantly as a percentage of the total customer

base for Northcutt Bikes, and many of these new customers are expecting or even

demanding very short response times, as that is what attracted them to Northcutt

Bikes in the first place. This condition, in addition to the volatility of overall

demand, has put a strain on capacity planning. She finds that at times there is a lot

of idle time (adding significantly to costs), whereas at other times the demand

exceeds capacity and hurts customer response time. The production facility has

therefore turned to trying to project demand for certain models and actually building

a finished goods inventory of those models. This has not proven to be toosatisfactory, as it has actually hurt costs and some response times. Reasons include

the following: The finished goods inventory is often not the right inventory, meaning shortages for some goods and excessive inventory of others. This condition both hurts responsiveness and increases inventory costs. Often to help maintain responsiveness, inventory is withdrawn from finished goods and reworked, adding to product cost. Reworking inventory uses valuable capacity for other customer orders, again resulting in poorer response times and/or increased costs due to expediting. Existing production orders and rework orders are both competing for vital equipment and resources during times of high demand, and scheduling has become a nightmare. The inventory problem has grown to the point that additional storage space is needed, and that is a cost that Jan would like to avoid if possible. Another problem Jan faces is the volatility of demand for bikes. Since she is worried about unproductive idle time and yet does not wish to lay off her workers during times of low demand, she has allowed them to continue to work steadily and build finished goods. This makes the problem of building the right finished goods even more important, especially given the tight availability of storage space.

Past Demand

The following shows the monthly demand for one major product line: the standard 26-inch 10-speed street bike. Although it is only one of Jans products, it is representative of most of the major product lines currently being produced by Northcutt Bikes. If Jan can find a way to use this data to more constructively understand her demand, she feels she can probably use the same methodologies to project demand for other major product families. Such knowledge can allow her, she feels, to plan more effectively and continue to be responsive while still controlling costs.

ACTUAL DEMAND

Month 2008 2009 2010 2011

January 437 712 613 701

February 605 732 984 1291

March 722 829 812 1162

April 893 992 1218 1088

May 901 1148 1187 1497

June 1311 1552 1430 1781

July 1055 927 1392 1843

August 975 1284 1481 839

September 822 1118 940 1273

October 893 737 994 912

November 599 983 807 996

December 608 872 527 792

Questions for the Case Study

1. Plot the data and describe what you see. What does it mean and how would you use the information from the plot to help you develop a forecast?

2. Use at least two different methodologies to develop as accurate a forecast for the demand as possible. Use each of those methods to project the next four months demand.

3. Which method from question 2 is better? How do you know that?

4. How, if at all, could we use Jans knowledge of the market to improve the forecast? Would it be better to forecast in quarterly increments instead of monthly? Why or why not?

5. Are there other possible approaches that might improve Jans operation and situation? What would they be and how could they help?

6. Has Jans operation grown too large for her to control well? Why or why not?

What would you suggest she do? What additional information would you suggest she look for to help her situation?