1. What was the problem faced by Harmon Foods?
Harmon food depends greatly on a production forecast. Many of the business functions depended on the validity of these sales forecast. In fact, when it came to advertising, there was a limited amount of reason for some of the expenditures of this unit. They were spending a large amount of money on advertising when it came to large shipments, which increased supply; but conversely they where spending even more when it came down to the unplanned advertising. This spending even led them to overcompensate the budget and extreme reduction in sales in unsuccessful quarters. This all stems from their use of the sales forecast.
The overall problem with Harmon was not only its misspent money in advertising but also its dependency in the sales forecast. Their business was basing future sales on past sales and not quantity demanded. Demand forecasting is a way they could determine what the demand is for the product they are trying to sell. They should focus on the demand they are not obtaining from their competitors.
Using demand to dictate supply for the company could be useful for predicting the sales price, but they also have to acknowledge that supply and demand may be cyclical. There might be erroneous reasons for why sales may decrease that they will not be able to predict. The company already acknowledges events when the supply of Harmon food is reduced. They should focus on reducing their advertising costs when they know that the product is not in high demand at that time. They have focus highly on the supply of their product with little acknowledgement of the demand for their product. Even when observing the factors that affect sales, they focused on internal factors that affected supply. This seams to be a consumer driven market, and they are focused on the supply side.
2. What factors do you think affect the demand / shipments of Treat? Why? Based on the information / data provided did management identify the key factors? What is your assessment and recommendations regarding the demand forecast model?
There are many factors that affect the demand of Treats. Since treats is a ready-to-eat breakfast food it is important to distinct that this breakfast food might be viewed as a convenience and not a necessity. Income therefore becomes a key factor when dictating demand. When a family has less income to spend on their grocery budget they might restrict the amount they spend on convenience foods and purchase necessity items. Because of so many substitutes available, they might also consider buying the grocery store brand instead of this brand name cereal, or even buying other breakfast foods (substitutes); including: eggs, bread, oats, etc. If the prices of these substitutes decrease, then the demand of the Treat breakfast food decreases. They have a positive relationship, and the demand would also react the same in the prices of the substitute increased, increasing demand of Treat. The price of milk, a complementary product, is another key factor that affects demand. If the price of milk increases, the demand for cereal decreases, thus affecting the sales of Treats. Another key factor they failed to recognize is the expected price. If consumers know that Treat has special promotions certain time of the year, they will wait to make their purchases when the cereal will be on sale.
Management failed to focus on these key factors affecting demand and mostly focused on the supply side when looking at the factors that affect sales. They mentioned a decrease in sales due to seasonal factors, as shown in Exhibit 2. In November and December, they attribute a decrease in sales to low inventory levels and occupied jobbers. What they failed to mention is that a decrease in sales maybe due to a decrease in demand. Maybe around November and December, the holiday times, the household grocery budgets are smaller and the prices of substitutes maybe lower.
When it comes to their forecast model, it is clearly focused on the supply side and missing information regarding the demand for breakfast cereal. It is important the Harmon focuses not just on their past success but also on the factors that can affect their current and future sales.