Toffee Inc.: Demand Planning for Chocolate Bars

1. Develop the Exponential Smoothing forecasts using the following smoothing constants: A) ???? = 0.25, B) ???? = 0.50, and C) ???? = 0.75.

2. Assume that demand data demonstrates both trend and seasonality. Using a multiplicative model, forecast demand for Seven Star from 2006 through 2009.

3. Using an appropriate forecast accuracy measure, determine which of the above methods in Question 1 and Question 2 produces more accurate forecasts. Explain your choice of the forecast accuracy measure used.

 4. Compute the bias and tracking signals for the best method decided in Question 3. Explain the status of performance of this method.

In January 2009, Vishal Ramani, the inventory manager of sales and distribution for Toffee Inc., a confectionery company, had just concluded a meeting with all relevant personnel. The meeting had not been entirely positive. The words of the production manager still echoed in his ears: “If the ingredient inventory that was purchased and managed by the firm is not re-examined and re-worked to the firm’s advantage then [soon] the final products based on these ingredients will cease to yield the kind of profits that the firm expects.”

Ramani’s task was to prepare a comprehensive forecasting and inventory management plan with a view to minimize the cost of managing the supply chain by judicious use of resources, better forecasting, and improvement in the ingredient inventory purchasing and management systems. Most importantly, he had to decide how much and when to order the ingredients involved in one of the company’s most popular products, the “Seven Star” chocolate bar.

Toffee Inc. was a confectionery company working out of the Maharashtra Industrial Development Corporation (MIDC), Amgaon, Maharashtra. The company began its operations in 1990, and was fairly well known in the region. Since 2006, Toffee Inc. had been making thousands of confectionery products, and the core competitiveness of its operations lay in its adaptability to customers’ tastes and preferences.

The company had come a long way from its inception. Hansmukhlal Jadhwani (the owner and sole proprietor of the firm) established Toffee Inc. with his two younger brothers. Jadhwani started small, beginning his career as a wholesale trading agent for confectionery and other bakery items. The business was successful and soon Jadhwani turned from trading to small-time production of toffees and candies. As the business started to take off, it expanded the existing manufacturing unit into a modern confectionery processing unit with allied products like chocolates, gums, candies, bars, etc.

Toffee Inc. had six depots, approximately 50 authorized dealers and a sales force of around 85 people. Its sales and distribution network, operated from Nagpur, had a direct or indirect reach to almost all the towns and cities in the states of Maharashtra, Madhya Pradesh, Chhattisgarh, Orissa and West Bengal. The firm was working on a management information system for garnering all data and information generated and reported by the sales force in different parts of the country.

Toffee Inc. produced a number of candies and toffees, including the most expensive of its products, a chocolate bar branded Seven Star. It was also one of the most popular Toffee Inc. products. The retailers sold the product loose but the company packaged it in bags of 20 bars each. These bags were then packaged into cartons of 100 bags each. Seven Star had different ingredients from the normal toffees and candies produced by Toffee Inc., including dark chocolate, cocoa butter, cocoa powder, nuts, condensed milk and sugar glucose. Each chocolate bar weighed 30 grams. In order to maintain the high quality of the product, Toffee Inc. was forced to use high-grade, fresh ingredients, thus ensuring that there was
 
not a large inventory of Seven Star bars. However, this meant that the product could not remain in storage for an extended period of time.

The sales and distribution team at Toffee Inc. were aware that the demand of this flagship brand followed a seasonal variation. It had reviewed the last three years’ sales records and concluded that the demand peaked during the festivals and marriage seasons (see Exhibit 1). Toffee Inc.’s sales and distribution branch managed the regions and was responsible for transportation, stocking and distribution. Primary distributors were concerned about the sales and distribution as they had experienced very impactful seasonal variations in the products that they bought and sold.

A high-level executive meeting was called at the Toffee Inc. main office. The core agenda of the meeting was to discuss the main issue of how and how much the sales and distribution branch had to decide on the expected sales for 2009, based on past performances.

1.Assume a perfect forecast for the month of January 2006. Develop the Exponential Smoothing forecasts using the following smoothing constants: A)