Question

What are some potential forecasting errors that could be discovered by Playtime Inc? Which specific forecasting techniques would you recommend to alleviate any errors from taking place? why? See case below

Playtime, Inc. / Supply Chain Management 10e

Playtime, Inc. manufactures toys for children under the age of 12 and has been in business for 50 years. While Playtime does not hold a major share of the toy market, it has experienced significant growth over the last five years because of its collaboration with major movie studios to introduce action figures to coincide with new movie releases. Playtime is a publicly held company.

Playtime’s executive council consists of vice presidents of marketing (includes sales), operations (manufacturing), supply chain (procurement, inventory, warehousing, and transportation), and finance. This group is ultimately responsible for approving the forecast for the upcoming year.

The forecast is developed using last year’s sales as historical data. This forecast is then given to the supply chain and operations groups to determine if capacity is sufficient to accommodate the new volumes. If capacity is sufficient, the forecast is then moved to finance where it is analyzed to determine if volumes are sufficient to satisfy the needs of the investors.

Jim Thomas, manager of supply chain, and Gail Jones, manager of operations, had a meeting to discuss the first version of the forecast. “I know we use last year’s sales to project for next year, but this forecast has me worried,” said Jim. “One of our major movie studio partners is coming out with a blockbuster movie next year and we have no idea what the impact of that might be on our distribution capacity.” Gail agreed, saying “I know. We have the capacity right now based on this forecast, but if volumes surge we are in trouble from a manufacturing perspective.” Jim and Gail also know that if the projected volume does not satisfy the needs of inventors, finance will send the forecast back to marketing to increase volumes until financial goals will be met.

This forecast process has resulted in a disconnect among the supply chain, operations, and marketing functions within Playtime. The managers in these functions typically end up developing their own forecasts based on what they think demand will really be, regardless of what finance presents to the investors. Over the last several years, this has presented some problems for the operations and supply chain areas because of manufacturing capacity issues (toys are very seasonal) and inventory issues. Although Playtime has been able to handle these issues, Jim and Gail are very concerned about next year because of the uncertainty the new movie release will have on the demand for their toys.

Answer 1

1. Below are some potential forecasting errors that could be discovered by Playtime Inc:

a. Playtime Inc's upcoming year forecast is developed using last year’s sales as historical data. This is not the right approach since ideally atleast last five year's sales data need to be taken into account to develop upcoming year's forecast. This gives more accurate forecast.

b. Playtime Inc. has not accounted for additional or cushion distribution capacity which might occur due to any blockbuster movie release by studio partner. The organization must account for that since it would lead to revenue loss for them if additional capacity is not accounted for.

c. Lack of communication between different teams which impacts the overall forecast and leads to formation of incorrect forecast. Hence the different teams must get together and formulate forecast in resonance with each other.

2. I would recommend the use of quantitative forecasting techniques such as Time Series method. This is because such forecasting technique takes into account historical pattern of data and forecast is based on the historical happenings. Time series method takes into account seasonal variation, trend study, cyclical pattern and irregularities. Hence it is a comprehensive quantitative forecasting technique which can be used in the long term to set up upcoming year forecast and drive the organization further.