FORECASTING

Demand Forecast The three principles of all forecasting techniques: Forecasting is always wrong The longer the forecast horizon the worst is the forecast Aggregate forecasts are more accurate

SnowTime Sporting Goods Fashion items have short life cycles, high variety of competitors SnowTime Sporting Goods New designs are completed One production opportunity Based on past sales, knowledge of the industry, and economic conditions, the marketing department has a probabilistic forecast

SnowTime Costs Production cost per unit (C) Selling price per unit (S) Salvage value per unit (V) Fixed production cost (F) Q is production quantity, D demand Profit = Revenue - Variable Cost - Fixed Cost + Salvage

SnowTime Best Solution Find order quantity that maximizes weighted average profit. Question: Will this quantity be less than, equal to, or greater than average demand?

Supply Contracts Wholesale Price =$80 Selling Price=$125 Manufacturer Manufacturer DC Retail DC Stores Fixed Production Cost =$100,000 Variable Production Cost=$35 Wholesale Price =$80 Selling Price=$125 Salvage Value=$20 Notice that in the previous strategy, the retailer takes all the risk and the manufacturer takes zero risk. This is way the retailer has to be very conservative with the amount he orders. If the retailer can transfer some of the risk to the manufacturer, the retailer may be willing to increase his order quantity and thus increase both his profit and the manufacturer profit