Top - down methods, Corporate Finance

Assignment Help:

For a large set of SKUs and in two successive selling seasons, we have compared the accuracy of three quantitative forecasting methods based on advance (preview) demand information. The methods all use a top-down approach, and ?rst forecast the aggregate total demand for a group of SKUs by scaling up the aggregate preview demands. They differ in the subsequent division of that aggregate forecast over the individual SKUs; proportional to preview demand (Method 1), equal (Method 2), or top-?op.

A ?rst result was that all top-down methods performed best when the top level was de?ned at the more detailed product group level rather than the broader assortment group level or even for all assortment groups together. This is a useful ?nding for the case company, as they currently use the assortment group level. Amongst the considered top-down methods, the so-called top ?op method turned out to have the most robust performance. This method is based on the assumptions that, within a group of related SKUs, the top (?op) SKUs always account for a certain fraction of total demand for that group. To the best of our knowledge, this method has not been tested or described in the literature before.

Our results certainly suggest that it would be interesting to test the method for other real-life cases as well. An especially attractive feature of the top-?op method, as appeared from the overall results and was illustrated for speci?c product groups, is that it avoids over-forecasting for those SKUs with the largest preview demands. This is done by 'spreading' the total preview demand per class equally amongst the SKUs in a class, rather than dividing based on the individual preview demands per SKU as the more  'straightforward' Method 1 does.

Over-forecasting leads to too large orders and obsolescence problems, where left over stock needs to be discarded or sold below the cost price at the end of the season. For one assortment group with 89 SKUs, we extended the comparative study to include expert  judgment methods. It turned out that these methods outperformed all other methods. However, Tukey tests showed the performance differences not to be signi?cant at the 5% level. So, we should be cautious in announcing these expert judgment methods the 'winners'.


Related Discussions:- Top - down methods

Interested in your answers for this as an example, To determine Henkel''s c...

To determine Henkel''s corporate beta, unlever (and relever) the ordinary least squares (OLS) market betas for each company in the European Household and Personal Care segment. Pri

What the implications of the pecking order theory, Question: i) Show th...

Question: i) Show the Modigliani-Miller irrelevancy theorem for corporate capital structure. What assumptions underline the theorem? ii) What the implications with the exis

Modigliani–miller theorem, The FrontczakCompany is expecting to generate (a...

The FrontczakCompany is expecting to generate (after tax)a Net Income of $250 millionannuallyandindefinitely (in perpetuity), and this amount is paid out annually as dividends. T

Business finance task, Your company is considering using the payback period...

Your company is considering using the payback period for capital-budgeting. Discuss the advantages and disadvantages of this technique. Your company is considering the constructio

Replacement decision, Baobab rolling mills owns a lathe machine which was p...

Baobab rolling mills owns a lathe machine which was purchased 10years ago at sh. 75 million. The machine had an expected life of 15 yrs at the time it was purchased, and management

Replacement decision, Baobab rolling mills owns a lathe machine which was p...

Baobab rolling mills owns a lathe machine which was purchased 10years ago at sh. 75 million. The machine had an expected life of 15 yrs at the time it was purchased, and management

equivalent annual cost and sensitivity analysis, Mad Cat Inc. is debating ...

Mad Cat Inc. is debating between two alternative earth moving machines to use for the next 8 years.  The first supplier, Double Candle, offers the necessary machinery (CCA rate = 3

Find weighted average cost of capital - marginal tax rate, XYZ Corporation ...

XYZ Corporation has the following capital structure: 10 million shares of common stock selling at $12 each, with current dividend of $1.00 annually; $70 million (face value) of 8%

Describe the capital asset pricing model, Question 1: (a) Explain clear...

Question 1: (a) Explain clearly two semi-strong form tests of the Efficient Market Hypothesis (EMH), one supporting and one rejecting the EMH. (b) Summarise the evidence in

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd