Jan Northcutt, owner of Northcutt Bikes, started business in1995. She notices the quality of bikes she purchased for sale inher bike shop declining while the prices went up. She also found itmore difficult to obtain the features she wanted on ordered bikeswithout waiting for months. Her frustration turned to adetermination to build her own bikes to her particular customerspecifications.

She began by buying all the necessary parts (frames, seats,tires, etc.) and assembling them in a rented garage using twohelpers. As the word spread about her shop’s responsiveness tooptions, delivery, and quality, however, the individual customerbase grew to include other bike shops in the area. As her businessgrew and demanded more of her attention, she soon found itnecessary to sell the bike shop itself and concentrate on theproduction of bikes from a fairly large leased factory space.

As the business continued to grow, she backward integrated moreand more processes into her operation, so that now she purchasesless than 50% of the component value of the manufactured bikes.This not only improves her control of production quality but alsohelps her control the costs of production and makes the finalproduct more cost attractive to her customers.

The Current Situation

Jan considers herself a hands-on manager and has typically usedher intuition and her knowledge of the market to anticipateproduction needs. Since one of her founding principles was rapidand reliable delivery to customer specification, she felt sheneeded to begin production of the basic parts for each particularstyle of bike well in advance of demand. In that way she could havethe basic frame, wheels, and standard accessories started inproduction prior to the recognition of actual demand, leaving onlythe optional add-ons to assemble once the order came in. Herturnaround time for an order of less than half the industry averageis considered a major strategic advantage, and she feels it isvital for her to maintain or even improve on response time if sheis to maintain her successful operation.

As the customer base have grown, however, the number ofcustomers Jan knows personally has shrunk significantly as apercentage of the total customer base for Northcutt Bikes, and manyof these new customers are expecting or even demanding very shortresponse times, as that is what attracted them to Northcutt Bikesin the first place. This condition, in addition to the volatilityof overall demand, has put a strain on capacity planning. She findsthat at times there is a lot of idle time (adding significantly tocosts), whereas at other times the demand exceeds capacity andhurts customer response time. The production facility has thereforeturned to trying to project demand for certain models, and actuallybuilding a finished goods inventory of those models. This has notproven to be too satisfactory, as it has actually hurt costs andsome response times. Reasons include the following:

- The finished goods inventory is often not the “right”inventory, meaning shortages for some goods and excessive inventoryof others. This condition both hurts responsiveness and increasesinventory costs.

- Often, to help maintain responsiveness, inventory is withdrawnfrom finished goods and reworked, adding to product cost.

- Reworking inventory uses valuable capacity for other customerorders, again resulting in poorer response times and/or increasedcosts due to expediting. Existing production orders and reworkorders are both competing for vital equipment and resources duringtimes of high demand, and scheduling has become a nightmare.

The inventory problem has grown to the point that additionalstorage space is needed, and that is a cost that Jan would like toavoid if possible.

Another problem that Jan faces is the volatility of demand forbikes. Since she is worried about unproductive idle time and yetdoes not wish to lay off her workers during times of low demand,she has allowed them to continue to work steadily and buildfinished goods. This makes the problem of building the “right”finished goods even more important, especially given the tightavailability of storage space.

Past Demand

The following shows the monthly demand for one major productline: the standard 26-inch 10-speed street bike. Although it isonly one of Jan’s products, it is representative of most of themajor product lines currently being produced by Northcutt Bikes. IfJan can find a way to sue this data to more constructivelyunderstand her demand, she feels she can probably use the samemethodologies to project demand for other major product families.Such knowledge can allow her, she feels, to plan more effectivelyand continue to be responsive while still controlling costs.

Actual Demand
Month	2011	2012	2013	2014
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

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

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

3. Which method from question 2 is “better”? How do you knowthat?