I want to give you a little more information about how we do forecasting
and what we would like to know, to help guide you on this paper:
Once a month, the Management Team meets to review our monthly financial report and the quarterly results once every three months. After we look at the financial picture in terms of costs and budgets, we look at sales, mostly in terms of volume. We compare the monthly volumes to our latest forecast that we generated in the previous monthly meeting. Then we try to generate the next month’s sales forecast and update the quarterly forecast and the annual forecast. Of course this gets easier each month as we approach the end of the year. As you know, we have about 1500 individual products in inventory, which we have aggregated into 11 product lines. We are looking at the numbers based on product lines, not individual products. We consider adding new products that our current suppliers are discussing with us and want us to distribute.
In November, when we have two months in the year left, we begin to forecast the annual sales for the next year, again based on product lines. We discuss our strategy for each product line, expanding or contracting each one. We discuss other potential product lines from suppliers we don’t currently carry. We look at new products that are coming on the market from both current suppliers and other suppliers. We generate a trial forecast for next year.
In December we revisit the trial annual forecast that we created in November. We finalize any new information, make final decisions on existing and new products, and finalize the annual forecast. Then we create the quarterly forecasts for each quarter. And finally we create the monthly forecasts for each of the first three months of the year. All this is done using spreadsheet technology.
One area which we want to add to the forecasting
process is determining inflation factors on a quarterly basis. Most of our suppliers will pass along inflation of their costs on a quarterly basis. If we could forecast this inflation with some degree of accuracy, we could better utilize our inventory capacity and optimize profits. At the moment, we simply guess at inflation factors. We would like to know if there is a way to forecast these.
The Management Team is all for your efforts to investigate EBBD’s forecasting
situation. We want you to thoroughly analyze what we are doing, what other forecasting
methods and techniques are available, and make a recommendation on how we should proceed. We are particularly interested in how to improve our short term forecasting
on an annual, quarterly, and monthly basis. We also would like to know how we could do longer term forecasting
, say over two or three years. And we want to know how we can generate quarterly inflation forecasts.
The report should provide an initial section on the background of the situation, discussion of your analysis of various forecasting
methods, and then a recommendation with a justification as to why you are making the recommendation.
NOTE: EBBD is a distibutor, it buys and sells, it does not produce. What is the focus of forecasing for this type of business?
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Mishkin, F.S., 2007, Monetary policy strategy, MIT Press
Royer, S., 2005, Strategic management and online selling: creating competitive advantage with intangible web goods, Routledge