Loemongga Irene 29120355

Chinese Pharmaceuticals (HK) Limited: Effecting forecasting for Optical Inventory

Management

Chinese pharmaceuticals, headquartered in Hong Kong, has already been attempting to

forecast potential demand for their Noto37 product line. Since this is their most popular product,
they, therefore, need to reserve more storage space to accommodate the extra inventory. Their
fear is that they'll be unable to reliably forecast potential demand, resulting in a stock deficit and
unused storage space, all of which are counterproductive to the corporation. They needed a much
more reliable prediction of future demand using three separate forecast methods, exponential
smoothing, linear regression, and decay using the least square regression. After making all the
necessary estimates, it was concluded that the approach of decomposition is the most reliable,
based on the fact that the prediction tends to be the least diverged from the real demand.
Chinese Pharmaceuticals (HK) is a business that will have marketed Chinese herbal
medicines. They were popular in a few markets, covering a total of 980 outlets. That being said,
95% of sales are generated from their home country, Hong Kong. They seem to have a range of
product lines, the far more profitable of which is Noto37. Chinese Pharmaceuticals have seen a
seasonal pattern in sales of their Noto37 stock. During the winter months, revenue rose by about
50 percent above average and declined by about 50 percent below average during the spring
season. In order to pay for excess revenue, the business leases extra storage space. While doing
so, their fear is that they would not be sufficient to retain them supplied with the commodity
because they foresee inventories requirements. In order to avoid this situation, they demanded a
more reliable inventory management practice using forecasting methods.
Using the past 3 years of demand, the first projection formula to be used and the
estimation of potential revenue for the next year is exponential smoothing (shown in exhibit 1).
This approach uses data from time series, which reduces weights exponentially over time and
gives more weight to recent historical developments, to predict potential demand. Once the
forecast has been determined using an alpha of 1, the absolute standard deviation of the forecast
will be calculated to assess the amount of variance of the forecast from the real demand. In order
to further optimize the results, you should measure the mean absolute variance by averaging the
standard deviation to determine the degree of uncertainty in the data by measuring the average
error. The greater the importance of the MAD, the greater the variability of the prediction. As the
MAD is comparatively greater at 272 for this system, it means that the prediction is not the most
reliable method.