Kenbrock Timber Finishes Pty Ltd manufactures a range of Cabot's timber treatments. The firm thinks of itself as being one of the smaller national Australian brands, and claims 25% of the total national paint market in Australia.
Being in the wood-finishing business, the company reckons its main rivals market paint, wallpaper and other decorative material. It counts on four major competitors, among whom are Dulux and Bristol, both of whom sell Kenbrock's products in their own stores and are important Kenbrock customers. Besides distributing nationally throughout all the states, Kenbrock obtains export orders, mainly from Thailand, which account for roughly 3% to 4% of its total sales volume.
In pursuance of its strategy of full market penetration, the company manufactures more than 250 individual products with different features, colours and sizes. In the past, the company experienced difficulties with its approach to forecasting. Even though the company possessed such a large product range that was distributed nationally, it continued to use a simple, naive 12-month moving average on each product to forecast and schedule production requirements.
However, from the analysis of past sales data, a seasonal pattern corresponded closely to the weather conditions observed in each state. As a result of using a simple moving average method, the company's forecasting system failed to incorporate the seasonal pattern into its forecasting process, which produced misleading forecast results. It was taken for granted that the rolling average was valid, but in the real world some product ranges varied between 25% and 30% either side of the average with the seasonal variations.
As the problem existed it led to a combination of increased inventory cost (caused by a build-up of stock) and failure to meet customer demand at peak times. Such a situation impeded the company's market competitiveness. Source: Waddell and Sohal22
Question
1. Suggest how the firm might have resolved its forecasting difficulties.