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Produce a report and prepare a presentation;Select an appropriate forecasting model and use that to forecast shipments for January thru December 1988. Explain and discuss your result.;Attachment Preview;Harmon_foods_case.pdf;9-171-248;REV: SEPTEMBER 29, 2006;WILLIAM B. WHISTON;Harmon Foods, Inc.;John MacIntyre, general sales manager of the Breakfast Foods Division of Harmon Foods, Inc.;was having difficulty in forecasting the sales of Treat. Treat was a ready-to-eat breakfast cereal with;an important share of the market. It was the main product in those company plants that;manufactured it. MacIntyre was responsible for sales forecasts from which production schedules;were prepared. In past months, actual Treat sales had varied from 50% to 200% of his forecast. The;greatest difficulty in preparing forecasts arose from the wide variability in historical sales. (See;Exhibit 1. Sales were debited on the day of shipment, therefore, Exhibit 1 represents unit shipments;as well as sales. Consumer Packs and Dealer Allowances, which are discussed later, are also shown;in Exhibit 1.);Manufacturing Problems;Accurate production forecasts were essential for the health of the entire business. The plant;managers received these forecast schedules and certified their ability to meet them. A plant;managers acceptance of a schedule represented a promise to deliver: crews and machines were;assigned, materials ordered, and storage space allocated to meet the schedule.;Schedule changes were expensive. On the one hand, the lead time on raw material orders was;several weeks, so that ordering too little not only caused expensive shortages in lost production time;but also disappointed customers. Reducing schedules, on the other hand, created a surplus of raw;material. Lack of storage space required materials to be left on the trucks, railroad cars, or barges that;brought them. Retaining these vehicles resulted in expensive demurrage charges.1;Overshadowing the storage problem was the problem of efficient use of the work force. Tight;production schedules prevented unnecessary costs. Overtime was avoided because it was expensive;and interfered with weekend maintenance. The labor force was highly skilled and difficult to;increase in the short run. Layoffs, however, were avoided to preserve the crews skills. This job;security was an important part of the companys labor policy, and it created high employee morale.;1 Demurrage charges are assessments made by a carrier against a consignee for delays in the unloading (or the initiation of;unloading) of a transport vehicle. Usually one free hour is allowed after the normal unloading time for trucks. Railcars and;barges have typical allowances of three days and one day, respectively, including unloading time. Charges for delays beyond;these allowances range from $20 an hour for a truck and $32 a day for a railcar to $4,000 a day for a barge.;Professor William B. Whiston prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve;as endorsements, sources of primary data, or illustrations of effective or ineffective management.;Copyright 1970 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685;write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be;reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical;photocopying, recording, or otherwisewithout the permission of Harvard Business School.;171-248;Harmon Foods, Inc.;Thus, the production manager attempted to make production schedules efficient for a constant-size;work force while using as little overtime as possible.;Advertising Expenditures;Inaccurate sales forecasts also reduced the effectiveness of Treats advertising expenditures. Most;of Treats advertising dollars were spent on Saturday morning network shows for children. This time;was purchased up to a year or more in advance and cost $80,000 per one-minute commercial. The;brand managers in the Breakfast Foods Division, however, believed that these network programs;delivered the best value for each advertising dollar spent. This opinion was based upon cost per;million messages delivered, viewer-recall scores, and measures of audience composition.;Like many other companies, Harmon Foods budgeted advertising expenditures at a fixed amount;per unit sold. Each year the monthly budgets for advertising were established, based on forecast;sales. Brand managers tended to contract for time on network programs to the limit of their budget;allowance. When shipments ran high, however, brand managers tended to increase advertising;expenditures in proportion to actual sales. In such circumstances, they would seek contracts for time;from other brand managers who were shipping below budget. Failing this, they would seek network;time through the agencies, or if such time were unavailable, they would seek spot advertising as close;to prime program time as possible. Thus, unplanned advertising expenditures could result in time;that gave lower value per advertising dollar spent than did prime time.;Budgets and Controls;The controller of the Breakfast Foods Division also complained about forecasting errors. Each;brand manager prepared a budget based on forecast shipments. This budget promised a contribution;to division overhead and profits. Long-term dividend policy and corporate expansion plans were;partly based on these forecasts. Regular quarterly increases in earnings over prior years had resulted;in a high price-earnings ratio for the company. Because the owners were keenly interested in the;market value of the common stock, profit planning played an important part in the management;control system.;Discretionary overspending on advertising, noted earlier, amplified the problems of profit;planning. These expenditures did not have budgetary approval, and until a new budget base (sales;forecast) for the fiscal year was approved at all levels, such overspending was merely borrowing;ahead on the current fiscal year. The controllers office charged only the budgeted advertising to;sales in each quarter and carried the excess over, because it was unauthorized. This procedure;resulted in spurious accounting profits in those quarters where sales exceeded forecast, with;counterbalancing profit reductions in subsequent quarters.;The significant effect of deferred advertising expenditures on profits had been demonstrated in;the past fiscal year. Treat and several other brands had overspent extensively in the early quarters, as;a result, divisional earnings for the fourth quarter were more than $4 million below corporate;expectations. The division manager, her sales manager, brand managers, and controller had felt very;uncomfortable in the meetings that were held because of this shortage of reported profits. The extra;profits recorded in earlier quarters had offset the shortages of other divisions, but in the final quarter;no division was able to offset the Breakfast Foods shortage.;2;Harmon Foods, Inc.;171-248;The Brand Manager;Donald Carswell, the brand manager for Treat, prepared his brands budget based on a set of;monthly, quarterly, and annual forecasts that governed monthly advertising and promotional;expenditures. These forecasts, along with forecasts from the divisions other brand managers, were;submitted to MacIntyre for approval. This approval was necessary because, in a given month, the;salesforce could only support the promotions of a limited number of brands. Once approved, the;brand managers forecasts were the basis for MacIntyres official forecasts.;The production schedule, in turn, was based upon MacIntyres official forecast. This required;mutual confidence and understanding. MacIntyre provided information on Harmons and also;competitors activities and pricings at the stores. The brand managers furnished knowledge of;market trends for their brands and their brands competitors. The brand managers also kept records;of all available market research reports on their brands and similar brands and were aware of any;package design and product formulations under development.;As Treats brand manager, Carswell knew that it was his responsibility to improve the reliability;of sales forecasts for Treat. After talking to analysts in the Market Research, Systems Analysis, and;Operations Research departments, he concluded that better forecasts were possible. Robert Haas of;the Operations Research Department offered to work with him on the project. MacIntyre and the;controller enthusiastically supported Carswells undertaking. Although such projects were outside;the normal scope of a brand managers duties, Carswell recognized this as an opportunity to find a;solution to his forecasting problem that would have companywide application.;Factors Affecting Sales;Carswell and Haas delved into the factors that influenced sales. A 12-month moving average of;the data in Exhibit 1 indicated a long-term rising trend in sales. This trend confirmed the A.C.;Nielsen store audit, which reported a small but steady rise in market share for Treat and a steady rise;for the commodity group to which Treat belonged.;Besides trend, Carswell felt that seasonal factors might be important. In November and;December, sales slowed down as inventory levels among stores and jobbers were drawn down for;year-end inventories. Summer sales were often low because of plant shutdowns and sales personnel;vacations. There were fewer selling days in February. Salespeople often began the fiscal year with a;burst of energy, jockeying for a strong quota position for the rest of the year. Carswell obtained data;made available by the National Association of Cereal Manufacturers, showing seasonal effects on;shipments of breakfast cereals in the United States. These indexes appear in Exhibit 2.;Nonmedia promotions, which represented about 25% of Treats advertising budget, strongly;influenced sales. The two main types of promotions were consumer packs and dealer allowances.;Promotions targeted directly at the consumer were called consumer packs, so named because the;consumer was reimbursed in some way for each package of Treat that was purchased. Promotions;that sought to increase sales by encouraging the dealer to push the brand were called dealer;allowances, so called because allowances were made to dealers to compensate them for expenditures;incurred in promoting Treat. Consumer packs and dealer allowances were each offered two or three;times a year during different canvass periods. (A sales canvass period is the time required for a;salesperson to make a complete round to all customers in the assigned area. Harmon Foods;scheduled 10 five-week canvass periods each year. The remaining two weeksone at mid-summer;and one at year-endwere for holidays and vacations.);3;171-248;Harmon Foods, Inc.;Consumer Packs;Consumer packs were usually a 20-cent-per-package reduction in the price the consumer paid.;The promotion could also be made as a coupon, an enclosed premium, or a mail-in offer. Based on;the results of consumer-panel tests of all such promotions, however, Carswell was confident that;these forms were roughly equivalent to the 20-cent price reduction in its return to the brand.;Consequently, he decided not to make a distinction among the different kinds of consumer packs.;(Exhibit 1 shows the history of consumer pack shipments.);Consumer packs, supporting advertising material, and special cartons were produced before the;assigned canvass period for shipment throughout the five-week period. Any packs not shipped;within this period would be allocated among the salespeople for shipment in periods in which no;consumer promotion was officially scheduled. From a study of historical data that covered several;consumer packs, Haas found that approximately 35% of a consumer-pack offering moved out during;the first week, 25% during the second week, 15% during the third week, and approximately 10%;during each of the fourth and fifth weeks of the canvass period. Approximately 5% was shipped;after the promotional period. Because they saw no reason for this historical pattern to change, Haas;and Carswell were confident that they could predict with reasonable accuracy future monthly;consumer pack shipments.;Total shipments were favorably affected, of course, during the month in which the consumer;packs were shipped. Because the consumer ate Treat at a more or less constant rate over time;Carswell was convinced that part of the increase in total shipments resulted from inventory build-ups;by jobbers, stores, and consumers. Thus, he thought that the consumer packs might have a negative;influence on total shipments in subsequent months as these excess inventories were depleted in the;first, or possibly the second, month after the packs were shipped.;Dealer Allowances;Sales seemed even more sensitive to allowances offered to dealers for cooperative promotional;efforts. Participating dealers received a $4 to $8 per-case discount on their purchases during the;allowances canvass period.;The total expenditure for dealer allowances during a given promotional canvass period was;budgeted in advance. As with consumer packs, any unspent allowances would be allocated to the;salespeople for disbursement after the promotional period. The actual weekly expenditures resulting;from these allowances followed approximately the same pattern as the one for the shipment of;consumer packs. Consequently, Carswell believed that the monthly expenditures resulting from any;given schedule of future dealer allowances could also be predicted with reasonable accuracy.;Dealers promoted Treat by using giant, spectacular end-of-aisle displays, newspaper ads;coupons, fliers, and so forth. Such efforts could affect sales dramatically. For example, an end-ofaisle display located near a cash register could do an average of five weeks business in a single;weekend. As with consumer packs, however, Carswell believed that much of the sales increase was;attributable to inventory build-ups, and therefore he expected reactions to these build-ups as late as;two months after the initial sales increase.;Actual expenditures made for dealer allowances from 1983 to 1987 appear in Exhibit 1.;4;Harmon Foods, Inc.;171-248;Conclusion;Carswell and Haas felt that they had identified, to the best of their abilities, the important factors;affecting sales. They knew that competitive advertising and price moves were important but;unpredictable, and they wished to restrict their model to variables that could be measured or;predicted in advance.;Haas agreed to formulate the model, construct the data matrix, and write an explanation of how;the models solution could be used to evaluate promotional strategies, as well as to forecast sales and;shipments. Carswell and Haas would then plan a presentation to divisional managers.;5;171-248;Exhibit 1;Harmon Foods, Inc.;Case Shipments, Consumer Packs, Dealer Allowances, 19831987;Consummer;Packs;(cases)a;Month;Case;Shipments;Consummer;Packs;cases;Dealer;Allowance;$396,776;$152,296;$157,640;$246,064;$335,716;$326,312;$263,284;$488,676;$33,928;$224,028;$304,004;$325,872;Jan-86;Feb-86;Mar-86;Apr-86;May-86;Jun-86;Jul-86;Aug-86;Sep-86;Oct-86;Nov-86;Dec-86;655,748;270,483;365,058;313,135;528,210;379,856;472,058;254,516;551,354;335,826;320,408;276,901;544,807;43,708;5,740;9,614;1,507;13,620;101,179;80,309;335,768;91,710;9,856;107,172;$664,712;$536,824;$551,560;$150,080;$580,800;$435,080;$361,144;$97,844;$30,372;$150,324;$293,044;$162,788;Jan-87;Feb-87;Mar-87;Apr-87;May-87;Jun-87;Jul-87;Aug-87;Sep-87;Oct-87;Nov-87;Dec-87;455,136;247,570;622,204;429,331;453,156;320,103;451,779;249,482;744,583;421,186;397,367;269,096;299,781;21,218;157;12,961;333,529;178,105;315,564;80,206;5,940;36,819;234,562;71,881;$32,532;$23,468;$4,503,456;$500,904;$0;$0;$46,104;$92,252;$4,869,952;$376,556;$376,556;$552,536;Month;Case;Shipmentsa;Jan-83;Feb-83;Mar-83;Apr-83;May-83;Jun-83;Jul-83;Aug-83;Sep-83;Oct-83;Nov-83;Dec-83;#N/A;#N/A;#N/A;#N/A;#N/A;#N/A;#N/A;#N/A;#N/A;#N/A;#N/A;#N/A;Jan-84;Feb-84;Mar-84;Apr-84;May-84;Jun-84;Jul-84;Aug-84;Sep-84;Oct-84;Nov-84;Dec-84;425,075;315,305;367,286;429,432;347,874;435,529;299,403;296,505;426,701;329,722;281,783;166,391;75,253;$457,732;15,036;$254,396;134,440;$259,952;119,740;$267,368;135,590;$158,504;189,639;$430,012;9,308;$388,516;41,099;$225,616;9,391 $1,042,304;942;$974,092;1,818;$301,892;672;$76,148;Jan-85;Feb-85;Mar-85;Apr-85;May-85;Jun-85;Jul-85;Aug-85;Sep-85;Oct-85;Nov-85;Dec-85;629,402;263,467;398,320;376,569;444,404;386,986;414,314;253,493;484,365;305,989;315,407;182,784;548,704;52,818;2,793;27,749;21,887;1,110;436;1,407;376,650;122,906;15,138;5,532;a 1 case contains 24 packs.;6;0;0;0;0;15,012;62,337;4,022;3,130;422;0;0;0;Dealer;Allowance;$0;$315,196;$703,624;$198,464;$478,880;$457,172;$709,480;$45,380;$28,080;$111,520;$267,200;$354,304;Harmon Foods, Inc.;Exhibit 2;171-248;Seasonal Effects on Breakfast Cereals Shipments;Seasonal Indices for Treat Breakfast Cereal Shipments;Month;Index;January;113;February;98;March;102;April;107;May;119;June;104;July;107;August;September;81;113;October;97;November;95;December;65;7

 

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