CASE: MBC Industries

MBC Industries is a small. family owned corporation located in Seattle. Washington. The
stock of the company is equally divided among five members of the MBC family
(husband. wife. and three sons). but the acknowledged leader is the founder and patriarch.
Ed MBC. Ed MBC formed the company 20 years ago when he resigned as a mill
supervisor for a large paper manufacturer. Ironically. the same manufacturer formed a
container division five years ago and is presently one of MBC’s competitors.

Company Strategy

The family attributes the success of MBC Industries to the fact that it has found a market
niche and has no “serious” competition. MBC supplies stock bags to many small chain
stores scattered over a wide geographical area. It ships the bags directly to small regional
warehouses or drop ships directly to the individual stores. The family reasons that the
large bag manufacturers cannot profitably provide service to accounts on that small of a
scale. In fact. Ed MBC formed the business with one second-hand bagging machine to
provide bags for a small discount store chain and a regional chain of drug stores. These
two organizations have grown tremendously over the years. and Ed MBC proudly points
out that the Bag Company has grown with them. Today. these two original clients are
MBC’s largest customers.

The MBC family does not want its business to be too heavily reliant on any one
customer. Hence. they have a policy that no single customer can account for over than
15% sales. In fact. MBC Industries encourages its major customers to establish
alternative sources of bag supply for insurance against stock outs because of paper
shortages. freight line difficulties. local trucking/warehousing strikes. and production
problems that may locally affect MBC’s ability to supply bags.

MBC does not aggressively pursue new bag customers. yet it has over 500
customers. The smallest customers order five bales per year (smallest order processed and
shipped). and the largest order 15.000 bales per year. The number of bags per bale varies
according to the weight of paper used and the size of the bag. MBC manufactures only
pinch-bottom general merchandise bags. ranging in size from small 2 ½” X 10” pencil
bags to large 20” X 2”X 30” bags used for larger items sold in discount stores. They
make no flat bottom (grocery) bags or bags that require sophisticated printing (specialty
bags). Bag labels are restricted to 20 percent face coverage and one ink color placed on
one side only. Hence. MBC’s central strategy is built around low unit cost production due
to standardization. which allows a selling price that is competitive with the large bag
manufacturers. At the same time. MBC provides the
shipping and inventory services that are on too small of a scale for most of the large
manufacturers. The MBC family takes great pride in “ taking care of ” a customer who
has an emergency need for additional bags or who would like MBC to warehouse a bag
order for a given time because of storage problems at the customer warehouse.

Forecasting Demand

Providing this personal service requires tight inventory control and production scheduling
at MBC’s bag plant. A highly accurate demand forecast allows MBC to service the
special customer requests by use of MBC’s own warehouse facilities and routing
schedules of the company’s truck line. Heretofore. Ed MBC could manage the demand
forecasting and production scheduling by “ feel ”. Because of the ever-growing number
of accounts and changes in personnel in customer purchasing departments. the accuracy
of MBC’s forecasting has been rapidly declining. The percentage of short-shipped
accounts for particular types of bags is increasing alarmingly. Conversely. the warehouse
is becoming overstocked with other types of bags. As a result. a severe demurrage penalty
on three boxcars of incoming rolls of paper was recently paid because the paper
warehouse was partially used to store finished bags that spilled over from the finished
bag warehouse. This caused a delay in unloading the boxcars until space could be created
in the raw material warehouse.

Demand forecasting has historically been difficult due to the seasonal nature of
the product. There is always a surge in demand for bags prior to a holiday season. The
exact timing of the surge in demand for particular types of bags depends upon customer
stocking policies and the dates that holiday promotional activities begin.

The MBC family needs a forecasting method that would take this seasonal factor
into consideration. Moreover. they want a method that exhibits stability. because their
market is relatively stable with a large number of repeat customers. Finally. they want a
forecasting method that anticipates the growth patterns of their respective customers. A
forecasting method with these specifications would greatly enhance the company’s ability
to service its market profitably. It is believed that if such a method could be applied to
forecasting aggregate demand. the same method could be used to gain additional
accuracy by forecasting demand of its larger customers. By having an accurate forecast of
aggregate demand and demand of larger customers. the requirements of the smaller
customers could be processed within the existing warehousing and shipping flexibility.

To develop such a method. the MBC family compiled the following aggregate
demand data:
 monthly sales
Month I II III
January 2.000 2.000 5.000
February 5.000 4.000 2.000
March 5.000 4.000 3.000
April 3.000 2.000 2.000
May 4.000 5.000 6.000
June 7.000 6.000 6.000
July 7.000 10.000 8.000
August 10.000 14.000 10.000
September 15.000 16.000 20.000
October 15.000 16.000 20.000
November 18.000 20.000 22.000
December 8.000 12.000 14.500
TOTAL 99.000 111.000 118.500

Discussion Questions

1. Perform the analysis of demand behavior, comment widely.

2. Among the causal forecast models, select the best based on the forecast error
rates. (Bias and DMA). Minimum to evaluate three models.
3. Forecast aggregate demand by month for the year IV.