CASE

Merriwell Bag Company

Merriwell Bag Company is a small, family owned corporation located in Seattle,
Washington. The stock of the company is equally divided among five members of the
Merriwell family (husband, wife, and three sons), but the acknowledged leader is the
founder and patriarch, Ed Merriwell. Ed Merriwell 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
Merriwells competitors.
Company Strategy
The family attributes the success of Merriwell Bag Company to the fact that it has found
a market niche and has no serious competition. Merriwell 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 Merriwell 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
Merriwell proudly points out that the Bag Company has grown with them. Today, these
two original clients are Merriwells largest customers.
The Merriwell 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, Merriwell Bag Company 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 Merriwells ability to supply bags.
Merriwell 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. Merriwell manufactures
only pinch-bottom general merchandise bags, ranging in size from small 2 X 10
pencil bags to large 20 X 2X 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, Merriwells 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, Merriwell provides the

shipping and inventory services that are on too small of a scale for most of the large
manufacturers. The Merriwell family takes great pride in taking care of a customer
who has an emergency need for additional bags or who would like Merriwell 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 Merriwells bag plant. A highly accurate demand forecast allows Merriwell to service
the special customer requests by use of Merriwells own warehouse facilities and routing
schedules of the companys truck line. Heretofore, Ed Merriwell 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 Merriwells forecasting has been rapidly declining. The percentage of shortshipped 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 Merriwell 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
companys 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 Merriwell family compiled the following
aggregate demand data:

Sales (In no. Of Bales)

January
February
March
April
May
June
July
August
September
October
November
December

2008
2,000
3,000
3,000
3,000
4,000
6,000
6,000
6,000
10,000
12,000
14,000
8,000

2009
3,000
4,000
3,000
5,000
5,000
8,000
4,000
8,000
12,000
12,000
16,000
10,000

2010
2,000
5,000
5,000
3,000
4,000
7,000
7,000
10,000
15,000
15,000
18,000
8,000

2011
2,000
4,000
4,000
2,000
5,000
6,000
10,000
14,000
16,000
16,000
20,000
12,000

2012
5,000
2,000
3,000
2,000
6,000
6,000
8,000
10,000
20,000
20,000
22,000
8,000

TOTAL

77,000

90,000

99,000

111,000

112,000

Discussion Questions
1. Develop and justify a forecasting method that fulfills the companys
specifications.
2. Forecast aggregate demand by month for the year 2013.
3. In addition to forecasting demand of larger customers and aggregate demand, how
might the accuracy of the forecast be improved?
4. What role should Ed Merriwells feel of the market play in establishing new
sales forecasts?