Business Forecasting 9th Edition by John Hanke, Dean Wichern

Exercise 5

THE SMALL ENGINE DOCTOR
The Small Engine Doctor is the name of a business developed by Thomas Brown, who is a mail carrier for the U.S. Postal Service. He had been a tinkerer since childhood, always taking discarded household gadgets apart in order to understand "what made them tick." As Tom grew up and became a typical suburbanite, he acquired numerous items of lawn and garden equipment. When Tom found out about a course in small engine repair offered at a local community college, he jumped at the opportunity. Tom started small engine repair by dismantling his own equipment, overhauling it, and then reassembling it. Soon after completing the course in engine repair, he began to repair lawn mowers, rototillers, snowblowers, and other lawn and garden equipment for friends and neighbors. In the process, he acquired various equipment manuals and special tools.
It was not long before Tom decided to turn his hobby into a part-time business. He placed an advertisement in a suburban shopping circular under the name of the Small Engine Doctor. Over the last two years, the business has grown enough to provide a nice supplement to his regular salary. Although the growth was welcomed, as the business is about to enter its third year of operation there are a number of concerns. The business is operated out of Tom's home. The basement is partitioned into a family room, a workshop, and an office. Originally, the office area was used to handle the advertising, order processing, and bookkeeping. All engine repair was done in the workshop. Tom's policy has been to stock only a limited number of parts, ordering replacement parts as they are needed. This seemed to be the only practical way of dealing with the large variety of parts involved in repairing engines made by the dozen or so manufacturers of lawn and garden equipment.
Spare parts have proved to be the most aggravating problem in running the business. Tom started his business by buying parts from equipment dealers. This practice had several disadvantages. First, he had to pay retail for the parts. Second, most of the time the dealer had to back-order one or more parts for any given repair job. Parts ordered from the manufacturer had lead times of anywhere from 30 to 120 days. As a result, Tom changed his policy and began to order parts directly from the factory. He found that shipping and handling charges ate into his profits, even though the part price was only 60% of retail. However, the two most important problems created by the replacement parts were lost sales and storage space. Tom attracted customers because of his quality service and reasonable repair charges, which were possible because of his low overhead. Unfortunately, many potential customers would go to equipment dealers rather than wait several months for repair. The most pressing problem was storage space. While a piece of equipment was waiting for spare parts, it had to be stored on the premises. It did not take long for both his workshop and his one-car garage to overflow with equipment while he was waiting for spare parts. In the second year of operation, Tom actually had to suspend advertising as a tactic to limit customers due to lack of storage space.
Tom has considered stocking inventory for his third year of operation. This practice will reduce purchasing costs by making it possible to obtain quantity discounts and more favorable shipping terms. He also hopes that it will provide much better turnaround time for the customers, improving both cash flow and sales. The risks in this strategy are uncontrolled inventory carrying costs and part obsolescence.
Before committing himself to stocking spare parts, Tom wants to have a reliable forecast for business activity in the forthcoming year. He is confident enough in his knowledge of product mix to use an aggregate forecast of customer repair orders as a basis for selectively ordering spare parts. The forecast is complicated by seasonal demand patterns and a trend toward increasing sales.
Tom plans to develop a sales forecast for the third year of operation. A sales history for the first two years is given in Table 5-6.
TABLE 5-6 Small Engine Doctor Sales History

Calculate the MAD values for the two models that visually appear to give the best fits (the most accurate one-step-ahead forecasts).