Running head: A-CAT CORP.

FORECASTING 1

A-CAT Corp. Forecasting Analysis

Janis Chartier

Southern New Hampshire University

A-CAT CORP. FORECASTING 2

Abstract

This paper will present a statistical analysis of the A-CAT Corporation: Forecasting case study

(Sharma, 2013). The analysis will review the company’s historical sales and inventory data,

provide an analysis of the data, and recommend the size and timing of the next order of VR-500

voltage regulators.
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Table of Contents

Introduction..........................................................................................................................3

Analysis Plan.......................................................................................................................4

Quantifiable Factors.........................................................................................................4

Effect on Operational Processes......................................................................................4

Problem Statement...........................................................................................................5

Proposed Analysis Strategy.............................................................................................5

Statistical Tools and Methods..............................................................................................6

Appropriate Family of Statistical Tools..........................................................................6

Categories of Provided Data............................................................................................6

Most Appropriate Statistical Tool and its Justification...................................................7

Best Quantitative Method................................................................................................7

Analysis of Data..................................................................................................................8

Outline of Process and its Validity..................................................................................8

Analysis of Data and Reliability of Results.....................................................................9

Data Driven Decision....................................................................................................13

Recommendations for Operational Improvements........................................................14

References..........................................................................................................................15
A-CAT CORP. FORECASTING 4

A-CAT Corp. Forecasting Analysis

This paper presents a statistical analysis of the A-CAT Corporation: Forecasting Case

Study (Sharma, 2013). The analysis will review the company’s historical sales and inventory

data, provide an analysis of the data, and recommend the size and timing of the next order of

VR-500 voltage regulators.

Introduction

A-CAT Corporation is a medium-scale company that produces and distributes electrical

appliances to rural customers in the Vidarbha region of India. A-CAT has been in business since

1986 and employs around 40 employees at of their two medium-sized manufacturing plants in

the town of Gondia.

A-CAT Corporation’s flagship product is the VR-500 Voltage Regulator commonly used

in appliances such as refrigerators and television sets. These voltage regulators are a key

component to ensure that appliances are not damaged due to the frequent electrical grid voltage

instabilities and outages. Due to the rural customer base, A-CAT Corporation’s products must

be affordably priced to ensure that the company’s customer base is not lost to competitors.

A-CAT Corporation Vice President, Arun Mittra, has directed Operations Manager,

Shirish Ratnaparkhi, to conduct a statistical analysis of the sales of the VR-500 voltage

regulators in order to determine the correct inventory levels needed to avoid over or

understocking of transformers needed to produce the VR-500. Key stake holders include the A-

CAT Corporation’s department heads, employees, customers, and the transformer supply vendor.
A-CAT CORP. FORECASTING 5

Analysis Plan

Quantifiable Factors

Several quantifiable factors are known. Most of these factors are historical in nature.

These quantifiable factors include the monthly quantity of transformers needed for the

production of voltage regulators from 2006 through 2010. Quarterly sales figures of refrigerators

are also given between 2006 through 2010. Sales of refrigerators are significant as the voltage

regulators are a key component of the appliance.

The construction of quality control charts requires the use of the descriptive statistics

provided. Descriptive statistics including the mean, standard deviation and sample variance are

known for the year 2006 (Sharma, 2013). Descriptive statistics are needed for 2007 through

2010 in order to estimate the mean number of transformers required to produce the voltage

regulators (Sharma, 2013).

A one-way analysis of variance (ANOVA) analysis is included for the years between

2006 and 2008. The results of this analysis indicate there has been a change in the mean number

of transformers required. The transformer requirements are provided for 2009 and 2010 are

given in order to determine the change in the number and mean of transformers required over the

two-year period.

Lastly, sales of refrigerators and the number of transformers required to produce those

refrigerators are given by each quarter and used to forecast the number of transformers required

for future sales.

Effect on Operational Processes

The number of transformers in stock is necessary in order to produce the required number

of VR-500 voltage regulators. If the stock is too low to meet customer demands, the company
A-CAT CORP. FORECASTING 6

stands to lose sales to competitors. If the stock is too high, the company is essentially wasting

capital funds that could be used for other products also impacting sales revenue.

The number and level of VR-500s produced directly affects the purchasing department,

the manufacturing department and the sales and service department. Purchasing is required to

buy and stock the transformers required to produce the VR-500s. The Manufacturing department

must staff and schedule the appropriate shifts to produce the VR-500s, and the Sales Department

must have the stock available to meet existing and future customer demands.

Problem Statement

In recent months, the sales of the VR-500 have declined. The various department

managers are interested in the cost of stocking the transformers required to make the VR-500s.

Too much inventory puts a strain on capital money that could be employed elsewhere to improve

profit margins. There is also a need to ensure that sufficient supply is on hand and to provide a

consistent strategy for ordering the transformers. As there is currently only one supplier for the

transformers, the purchase price could be negatively impacted if orders are inconsistent and

unpredictable. Therefore, it is also necessary to ensure consistent transformer purchase orders to

avoid any increases in prices by the supplier.

Proposed Analysis Strategy

The amount of stock is dependent on variables including sales, inaccurate forecasts, lead

times for the materials needed and manufacturing time (King, 2011). The current proposed

analysis strategy is to review the historical data provided. We can use the normal distribution

and z-scores to determine how to meet demand with a 95 percent confidence level (King, 2011).

Since we have historical data, we will employ a similar ANOVA analysis to the one provided in

the case study, as well as various “time-series” data analysis. This is based on the assumption
A-CAT CORP. FORECASTING 7

that the sales are related to the previous year’s sales, that they change over time, and that there

appear to be seasonal or time-related variances in the number of transformers required and VR-

500s produced (Sharpe, DeVeaux, & Vellman, 2015). Specific “time-series” analysis tools will

be included in the upcoming milestones for this report.

Statistical Tools and Methods

Appropriate Family of Statistical Tools

We have been provided the data sets in the case addendum and within the case exhibits

and we would be employing a range of statistical tools for analyzing the data sets to generate our

results. As we read the case study we need to understand that most of the data would be analyzed

through the use of the descriptive statistics and performing the hypothesis tests such as the One

Way ANOVA or the One Sample T-test.

There are a range of different statistical software out there to analyze the data based on

these methods such as SPSS, excel, Stata etc. The assumption on the basis of which we have

selected this statistical tool and the method as specified above is that the data sets that we have

been provided with are simple and the number of observations is small.

Categories of Provided Data

The decision variable of the case study is the demand quantity of the voltage regulators

that are either demanded or sold by the company. The level of measurement on which this

variable is measured is scale. Nominal and ordinal data are also other important levels of

measurement but the case study, exhibits and addendum does not provide us with any of such

data types.
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This is the reason due to which using SPSS or any other statistical tools would not be

appropriate and it would complicate the analysis of the data. All the data within the case study is

of the scale category and scale variables can be appropriately and easily analyzed within the

excel spreadsheet software. Therefore, it is highly important to make use of such simplistic

statistical tool for driving the decision and finding recommendations for the business problems.

Most Appropriate Statistical Tool and its Justification

As stated previously, we have seen that there is no use of any kind of ordinal or nominal

data and all the data sets that we have been provided are in the form of the scale measurement.

Hence, we would be employing the use of the excel spreadsheet to perform the analysis and

generate the descriptive statistics of the data (Chou, 2001). All the hypothesis tests and the

forecasting model would be generated within the excel spreadsheet.

There are two specific justifications for selecting this statistical tool. The first one is that

scale data can be easily analyzed using the different formulas and techniques, tests and methods

that are provided within the excel spreadsheet package and secondly, the data analysis performed

in excel would be more reliable and easier for us as the data sample is short (Chou, 2001).

Best Quantitative Method

We have employed a range of different quantitative methods for performing the analysis

of the data for this case. First of all, we have forecasted the data for the years 2009 and 2010

using the simplest forecasting technique that is the simple moving average technique (Freedman,

2005). Next, we have generated the descriptive statistics for the entire data set for the year 2006

to 2010 (Chou, 2001).

This is highly important as it would guide the operational managers to remove all sorts of

the discrepancies from the data and resolve the issues faced by them. We have employed no
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external sources to extract additional data for the company and all the data sets provided within

the case, exhibits and addendum have been used to perform the statistical analysis. Along with

this, we have employed a range of hypothesis tests such as the one sample t-test and the one-way

ANOVA test for determining the significance of the change in average number of regulators.

Finally, we have employed the linear regression model to generate the most appropriate

forecasting model for the company.

Analysis of Data

Outline of Process and its Validity

This is the analysis section of the report and the most important part of the entire report.

Here we state the outline of the process of analysis and its validity. Before performing any of the

analysis, we have forecasted the data for the demand quantities of the voltage regulators for the

years 2009 and 2010 as stated previously. The method of forecasting user here is the simple

moving average method for the past three months of the preceding three years (Freedman, 2005).

After this the actual analysis including of descriptive statistics, hypothesis tests like one-

way ANOVA, one sample t-test and forecasting models like regression analysis have been

performed. Following this outlined process would lead to data driven decision, because it

addresses all the issues step by step and most of these methods have been used by the company

in the past so they are valid for the company’s data (Chou, 2001). Finally, regression analysis

would be new for the company and it would guide the data driven process by formulating the

most appropriate statistical model for the company.

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Analysis of Data and Reliability of Results

As stated in the process outline, we have first generated the descriptive statistics for the

entire data including the data for 2009 and 2010 that we forecasted. These descriptive would be

utilized by the managers within the operational department to prepare the control charts and the

confidence limits for processes. The Vice President of A-Cat have requested these descriptive

and these are shown in the table below:

DESCRIPTIVE STATISTICS 2007-2010

2007 2008 2009 2010

Mean 898.667 990.333 896.722 928.574

Standard Error 39.529 41.950 32.835 36.480
Median 864.000 941.000 852.167 887.556
Mode - - - -
Standard Deviation 136.931 145.320 113.745 126.372
Sample Variance 18750.061 21117.879 12937.896 15969.834
Kurtosis -0.609 -0.853 -1.214 -1.055
Skewness 0.772 0.650 0.738 0.791
Range 394.000 448.000 307.333 344.444
Minimum 739.000 798.000 783.333 809.111
Maximum 1133.000 1246.000 1090.667 1153.556
Sum 10784.000 11884.000 10760.667 11142.889
Count 12.000 12.000 12.000 12.000
Confidence Level (95.0%) 87.002 92.332 72.270 80.293

If we look at the average demand of the transformers, then the demand first the

demand has declined from 2008 to 2009 but then it had increased by a much higher percentage

from 2009 to 2010. The maximum demand had been experienced in 2010 which is around 1154

units approximately. Furthermore, the trend of the variability of demand shows that standard

deviation has reduced in 2009-2010 as compared to the previous period of 2006-2008. The 95%

confidence level is also calculated for transformer demand for each of these years.
A-CAT CORP. FORECASTING 11

After, analyzing the descriptive of the data set, we determine the change in the

mean number of transformers over the same period. Previously, the vice president of operations

determined the mean number of transformers required for producing voltage regulators based on

the demand of regulators in 2006. However, now we have the demand for the year 2010 as well.

Hence, we determine once again that whether the mean number of the transformers needed to

manufacture voltage regulators has changed significantly over the years or not. This has been

analyzed by performing the one-sample t-test. The hypothetical mean for this test is set at 1000

units since the management believes that the mean number of the transformers to be produced is

likely to exceed 1000 units. The test results are shown below:

ONE SAMPLE T-TEST ( Based upon 2010 data)

Count 12
Mean 928.57
Standard Deviation 126.37
Standard Error 36.48

Hypothetical Mean 1000

Alpha 0.05
Tails 1
Df 11
t stat -1.9579
P value 3.80%
T crit 2.2010
Significance YES

The t-value of the test is less than the critical value and the p value is also less than the

level of significance of 0.05, therefore, we can conclude that the mean number of transformers

required are significantly high over these years and the actual mean number of transformers

required to produce the voltage regulators is equal to or greater than 1000 units.
A-CAT CORP. FORECASTING 12

Next, we use the one-way ANOVA test to determine that whether the change in the mean

number of the transformers required for manufacturing the voltage regulators is significant over

these years or not. This test had been previously tested by the operational managers based on the

data of the demand of transformers from 2006 to 2008 however, since we have a much bigger

data set from 2006 to 2010, therefore, this needs to be tested again. The results of this test are

shown in the table below:

SUMMARY
Groups Count Sum Average Variance
2006 12 9614 801.167 7020.515
2007 12 10784 898.667 18750.061
2008 12 11884 990.333 21117.879
2009 12 10760.667 896.722 12937.896
2010 12 11142.889 928.574 15969.834

ANOVA
Source of Variation SS df MS F P-value F crit
Between Groups 224511.81 4 56127.953 3.703 0.010 2.540
Within Groups 833758.02 55 15159.237

Total 1058269.8 59

The summary statistics in the first table show that the mean number of transformers had

increased between 2006 to 2008, then declined in 2009 and then again increased in 2010 by a

much higher percentage. The significance value of 0.01 and the F critical value of 2.540 then it

could be concluded that the results of this test are significant and the mean numbers of the

transformers has changed significantly from the year 2006 to 2010.

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Forecast Model for the Voltage Regulators

We have employed the linear regression analysis in excel spreadsheet by taking sales as

the independent variable and demand as the dependent variable to generate the forecast model

(Draper, 1998). The regression statistics and ANOVA results are shown in the tables below for

this model:

Regression Statistics
Multiple R 93%
R Square 86%
Adjusted R Square 85%
Standard Error 179.47
Observations 20

ANOVA
df SS MS F Significance F
Regression 1 3485332.92 3485332.92 108.21 0%
Residual 18 579756.88 32208.72
Total 19 4065089.80

The statistics of the regression model in table 1 show that the relationship between the

demand of the transformers and the sales of the refrigerators is 93% which is highly strong and

positive. If sales increases, then the demand of regulators also increase (Cohen, 2003) (Chou,

2001). Also, if we look at the adjusted r square value then the percentage change in the demand

of the regulators as a result of the sales of the refrigerators is 85% which is also quite high and

provides enough evidence for the relationship between sales of refrigerators and demand of

regulators (Draper, 1998). The sig value of the ANOVA is 0.000 and this suggests that the model

is fitted and significant. The coefficients table is shown below:

P-
Coeffic Standard t valu Lower Upper Lower Upper
ients Error Stat e 95% 95% 95.0% 95.0%
A-CAT CORP. FORECASTING 14

1233.49 7.36 0.00 881.64 1585.3 1585.35

Intercept 9 167.475 5 0 7 52 881.647 2
Sales of 10.4 0.00
Refrigerators 0.315 0.030 02 0 0.251 0.379 0.251 0.379

The coefficients table shows that if the sales of the refrigerator is increased by a single

unit then the demand for the regulators is increased by 0.315. This is the most appropriate

forecast model that should be used by the management of A-Cat for forecasting the demand of

the voltage regulators.

Overall, the analysis has shown us reliable results and this is evident by the high adjusted

r square of the regression model. The entire analysis is reliable because it is consistent as it is

based on historical data of the company and forecasted data for 2009 and 2010. The descriptive

statistics also suggest that the company is following rational trends for the demand of its

regulators. Hence, the entire analysis performed in reliable.

Data Driven Decision

The data driven decision that we have reached to is that management should produce at

least 1000 units or more than 1000 units of the transformers for manufacturing the voltage

regulators to avoid overstocking and understocking and to meet the actual demand of the

customers in the market (Nelder, 1990). Secondly, in future the management should not rely on

intuition to estimate the demand of regulators but it should make use of the above regression

model to forecast the future demand. Managers should never rely on their intuitions and they

need to follow a rational forecasting approaches. Finally, the operational managers of the

company need to determine other factors, internal or external, that might have an impact on the

demand of transformers and then include those factors in the forecasting model (Ellis, 2010).
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Recommendations for Operational Improvements

The analysis plan states that it is highly important to determine the right number of the

transformers to manufacture the right number of the voltage regulators. For operational

managers, this would enhance operational efficiency and they would not end up under-stocking

or overstocking the units. Regarding, the external stakeholders, the customers would be happy if

their complete demand is met on time. It is recommended for the managers of A-Cat that they

make use of the appropriate and authentic models for estimating the demand of their products

especially their main product, voltage regulators (Nelder, 1990).

The company needs to manufacture more than 1000 units of the transformers in future

years. Managers should never rely on their intuition for forecasting future demand but they

should make use of the regression model for estimate the future demand based upon the sales of

the refrigerators. This would help the company to overcome the issues of overstocking and

under-stocking and the customers would be always satisfied and the risks of lost sales would no

longer exist in the company.

Lastly, this is the best option for the company and it would lead to operational

improvement. This is because this model has enough room to incorporate other factors that might

have an impact on the demand of the voltage regulators. These factors could be regional factors

within the market of Vidarbha and other rural market areas. When these factors are incorporated

within the multiple regression model, then they would generate more accurate forecasts and

hence boost the sales for A-Cat Corporation.

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References

Draper, N.R.; Smith, H. (1998). Applied Regression Analysis (3rd ed.). John Wiley.

Chou, Y.-l. (2001). Statistical Analysis. Holt International .

Cohen, J., Cohen P., West, S.G., & Aiken, L.S. (2003). Applied multiple regression/correlation

analysis for the behavioral sciences. (2nd ed.) Hillsdale, NJ: Lawrence Erlbaum

Associates

Ellis, K. (2010). Production Planning and Inventory Control. McGraw-Hill. ISBN 0-412-03471-9

Freedman, D. (2005). Statistical Models: Theory and Practice,. Cambridge University Press.

King, P. L. (2011, July & Aug.). Crack the Code: Understanding Safety Stock and Mastering Its

Equations. APICS Magazine, 33-35.

Nelder, J. A. (1990). The knowledge needed to computerise the analysis and interpretation of

statistical information. . In Expert systems and artificial intelligence: the need for

information about data. Library Association Report .

Sharma, J. (2013). A CAT CORP: Forecasting. HBS No. 13377. U.S.A: IVEY Publishing.

Sharpe, N. R., D., D. V., & Velleman, P. F. (2015). Business statistics. Boston: Pearson

Education.