Assignment
SPM, Inc.
Background
Swiss Precision Motors, Inc. (SPM) is a globally recognized producer of miniaturized ultra– precision electric motors used in medical equipment, industrial machines, and other applications.
A family–owned business, SPM was established in 1947 by Heinrich Rohrer in Basel, Switzerland. In 2018, Steffi Rohrer – Heinrich’s granddaughter – became the CEO of SPM.
SPM’s product portfolio is composed of two major product families. While they offer multiple product models in each product family, these various models are all minor variations of a core model in each product family.
One product family is Indy–Motors, developed primarily for industrial applications that require high–precision movement and positioning, precise cutting, etc. The core model for the Indy–Motors product family is the Indy–1 platform.
Last year, SPM’s R&D group developed a new ultra–precision miniature motor for medical applications, primarily to serve the precision tools/robots used in robotic–surgery and other applications in medical equipment. This effort led to introduction of a new product family, named Med–Motors. The core model for Med–Motors product family is the Med–1 platform. SPM’s sales and marketing department has prepared a forecast of monthly demand for Med–Motors models for this year based on projected demand provided by their medical equipment manufacturing customers that had extremely favorable evaluation of the Med–Motors prototypes. All Med–Motors orders and deliveries will be handled by a SPM distribution center located in Germany.
Every year, SPM holds a strategic business review and planning at the very end of December. The focus of this review/planning process is to examine the business performance and trends for the current year (that has practically ended) and the prior four years. They also make plans for the year ahead based on the discussions on this review. The data that was reviewed in SPM’s most recently (end of last Dec.) is noted in the tables provided in the attached exhibits.
Questions
Prepare a forecast for the Indy–Motors demand and revenue, as outlined in questions A through C below. You forecast needs to address all three questions (A through C). Refer to the attached Exhibits 1 and 2 for more data and information.
A. Select very suitable forecasting models for forecasting demand and revenue for the Indy–Motors product family. Specifically and thoroughly articulate the forecasting models you have selected AND articulate in detail the justification for selection/suitability of the model, i.e. what makes the models you have selected very suitable for use in this case.
B. Using the model you have selected in Part–A, provide clearly shown demand and revenue forecasts for Indy–Motors product family each of the four calendar quarters of year–6, as well as for the whole year.
C. Based on the anticipated demand and revenue for years 6, 7, and 8, do you expect the Indy–Motors product family to exceed an annual revenue of $500M within the next three years? If yes, in which year? If not, why not?
Monthly demand forecast for Med–Motors is provided in the attached Ehibit–3
Med–Motors average selling price is $1700 per unit
Assume backordering is not an option for Med–Motors
SPM’s cost of build for Med–Motors is $700 per unit
Delivery lead time for Med–Motors orders is 1 month (just assume 1 month, do not worry about whether a month is 28, 30, or 31 days)
SPM incurs ordering costs of $150 each time an order is placed for Med–Motors
Monthly inventory carrying costs for med–Motors are $15 per unit
SPM wants to maintain a 96% service level with its Med–Motors customers
D. Choose an appropriate inventory model to recommend for managing Med–Motor inventories for year 6. Specifically, articulate what inventory model you have chosen AND why it is an appropriate model to use in this case. Show details of your work, i.e. describe the model/approach and show the equations, if any, that you use.
E. Determine the reorder point (ROP).
F. Determine the Total Annual Inventory costs for Med–Motors. Show details of your work, i.e. describe the approach and show the equations, if any, that you use.
Exhibit–1: Consolidated actual Indy–Motors demand data for the last five years (these are the year that has just ended and the prior four years) – by calendar quarter.
Calendar Quarter Demand, (units)
Year–1 Year–2 Year–3 Year–4 Year–5
1st Quarter 55,640 58,100 59,180 65,246 68,135
2nd Quarter 63,223 67,070 72,120 75,900 79,850
3rd Quarter 61,168 63,318 66,686 68,294 70,370
4th Quarter 46,250 43,436 47,980 50,154 57,625
Total (for the year) 226,281 231,924 245,966 259,594 275,980
Exhibit–2: Indy–Motors average selling price (ASP) for the last 5 years.
Average Selling Price per Unit
Year–1 Year–2 Year–3 Year–4 Year –5
$1,800 $1,740 $1,680 $1,600 $1,540
Exhibit–3: Med–Motors forecasted monthly demand for year 6.
Month Demand (units) for Next Year
Jan 6,500
Feb 4,200
Mar 2,000
Apr 1,700
May 9,500
Jun 7,500
Jul 11,500
Aug 14,500
Sep 2,000
Oct 8,100
Nov 3,100
Dec 3,700
Total 74300
