Chapter

13

Forecasting

DISCUSSION QUESTIONS
1. a. There is no trend in the data. Exponential smoothing or simple moving average would
be appropriate for estimating the average.
b. The primary external factors that can be forecasted three days in advance and can
appreciably affect air quality are wind velocity and temperature inversions.
c. Weather conditions cannot be forecast two summers in advance. Medium-term causal
factors affecting air quality are population, regulations and policies affecting wood
burning, mass transit, use of sand and salt on roads, relocation of the airport, and
scheduling of major tourism events such as parades, car races, and stock shows.
d. In the area of technological forecasting, qualitative methods of forecasting are best.
One such approach is the Delphi method, whereby the consensus of a panel of experts
is sought. Here we would survey experts in the fields of electric-powered vehicles,
coal-fired combustion for electric utilities, and development of alternatives to sand
and salt on roads. We hope to determine whether to expect any technological
breakthroughs sufficient to affect air quality within the next 10 years.
2. Whats Happening? Our objective in writing this discussion question is to ensure
students recognize the difference between sales and demand. Demand forecasting
techniques require demand data. Michael is making the common mistake of using sales
data as the basis for demand forecasts. Sales are generally equal to the lesser of demand
or inventory. Say that inventory matches average demand at a particular location and is
100 newspapers. However, for the current edition, demand is less than average, say 90.
Michael enters sales (which happens to be equal to demand in this period) into the
forecasting system, resulting in an inventory reduction at that location for the next
edition. Now suppose that demand for the next edition is 110. But because inventory has
been reduced to 90, only 90 newspapers will be sold. Michael would then enter sales
(which happens to be equal to inventory, not demand) into the forecasting system. This
approach ratchets downward and tends to starve the distribution system. Because the
publication is not reliably available, some customers eventually stop looking for Whats
Happening? and demand truly declines. It is important that data used for demand
forecasting are demand data, not sales data.

346

PART 3

Managing Value Chains

PROBLEMS
1. Printer rentals
a. The forecast for week 11 is 29 rentals.
Forecast for Following
Week ( Ft +1 )

Week Forecast Calculated

At

23 + 24 + 32 + 26 + 31
5

= 27.2 or 27

24 + 32 + 26 + 31 + 28
5

= 28.2 or 28

32 + 26 + 31 + 28 + 32
5

= 29.8 or 30

26 + 31 + 28 + 32 + 35
5

= 30.4 or 30

31 + 28 + 32 + 35 + 26
5

= 30.4 or 30

10

28 + 32 + 35 + 26 + 24
5

= 29.0 or 29

b. The Mean Absolute Deviation is 4 rentals.

Week
6
7
8
9
10

Actual
28
32
35
26
24

Forecast
27
28
30
30
30
TOTAL
MAD

Absolute Error
1
4
5
4
6
20
20/5 = 4

Forecasting z CHAPTER 13 z 347

2. Dalworth Company
a. Three-month simple moving average
Month

Actual Sales
(Thousands)

Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
Total
Average

20
24
27
31
37
47
53
62
54
36
32
29

Three-Month Simple
Moving Average
Forecast

Absolute
Error

Absolute
% Error

Squared
Error

(20+24+27)/3 = 23.67
(24+27+31)/3 = 27.33
(27+31+37)/3 = 31.67
(31+37+47)/3 = 38.33
(37+47+53)/3 = 45.67
(47+53+62)/3 = 54.00
(53+62+54)/3 = 56.33
(62+54+36)/3 = 50.67
(54+36+32)/3 = 40.67

7.33
9.67
15.33
14.67
16.33
0.00
20.33
18.67
11.67
114.00
12.67

23.65
26.14
32.62
27.68
26.34
0.00
56.47
58.34
40.24
291.48
32.39

53.73
93.51
235.01
215.21
266.67
0.00
413.31
348.57
136.19
1,762.20
195.80

Such results also can be obtained from the Time Series Forecasting Solver:
Actual Data

Three-Period Moving Average

Forecast
1/1/02
2/1/02
3/1/02
4/1/02
5/1/02
6/1/02
7/1/02
8/1/02
9/1/02
10/1/02
11/1/02
12/1/02

20
24
27
31
37
47
53
62
54
36
32
29

Error

23.67
27.33
31.67
38.33
45.67
54.00
56.33
50.67
40.67

7.33
9.67
15.33
14.67
16.33
0.00
-20.33
-18.67
-11.67

Method 1Moving Average:

Three -period moving average
Forecast for 1/1/03
CFE
MAD
MSE
MAPE

32.33
12.67
12.67
195.80
32.39%

CFE

7.33
17.00
32.33
47.00
63.33
63.33
43.00
24.33
12.67

348

PART 3

Managing Value Chains

b. Four-month simple moving average

Month

Actual Sales
(Thousands)

Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
Total
Average

31
37
47
53
62
54
36
32
29

Four-Month Simple
Moving Average
Forecast
(20+24+27+31)/4 = 25.5
(24+27+31+37)/4 = 29.75
(27+31+37+47)/4 = 35.5
(31+37+47+53)/4 = 42.00
(37+47+53+62)/4 = 49.75
(47+53+62+54)/4 = 54.00
(53+62+54+36)/4 = 51.25
(62+54+36+32)/4 = 46.00

Absolute
Error

Absolute
% Error

Squared
Error

11.50
17.25
17.50
20.00
4.25
18.00
19.25
17.00
124.75
15.59

31.08
36.70
33.02
32.26
7.87
50.00
60.16
58.62
309.71
38.71

132.25
297.56
306.25
400.00
18.06
324.00
370.56
289.00
2,137.68
267.21

Similarly, using Time Series Forecasting Solver, we get:

Actual Data

Four-Period Moving Average

Forecast
1/1/02
2/1/02
3/1/02
4/1/02
5/1/02
6/1/02
7/1/02
8/1/02
9/1/02
10/1/02
11/1/02
12/1/02

20
24
27
31
37
47
53
62
54
36
32
29

Error

25.50
29.75
35.50
42.00
49.75
54.00
51.25
46.00

11.50
17.25
17.50
20.00
4.25
-18.00
-19.25
-17.00

Method 1Moving Average:

Four -period moving average
Forecast for 1/1/03
CFE
MAD
MSE
MAPE

37.75
16.25
15.59
267.21
38.71%

CFE

11.50
28.75
46.25
66.25
70.50
52.50
33.25
16.25

Forecasting z CHAPTER 13 z 349

c.e. Comparison of performance

Question
c.
d.
e.

Measure

3-Month
SMA
12.67
32.39
195.80

MAD
MAPE
MSE

4-Month
SMA
15.59
38.71
267.21

Recommendation
3-month SMA
3-month SMA
3-month SMA

3. Karls Copiers
Week Forecast
Calculated
7/3
7/10
7/17
7/24
7/31

Ft +1 = D + (1 ) Ft

Ft +1

0.20(24) + 0.80(24)
0.20(32) + 0.80(24)
0.20(36) + 0.80(25.6)
0.20(23) + 0.80(27.68)
0.20(25) + 0.80(26.744)

= 24
= 25.6 or 26
= 27.68 or 28
= 26.744 or 27
= 26.3952 or 26

The forecast for the week of August 7 is 26 calls.

Similarly, using Time Series Forecasting Solver, we get:
Actual Data
7/3/02
7/10/02
7/17/02
7/24/02
7/31/02

24
32
36
23
25

Exponential Smoothing
Forecast
Error
CFE
24.00
0.00
0.00
24.00
8.00
8.00
25.60
10.40
18.40
27.68
-4.68
13.72
26.74
-1.74
11.98

Method 3Exponential Smoothing:

Initial Forecast

0.20
24.00

Forecast for 8/7/02

26.40

CFE
MAD
MSE
MAPE

11.98
4.96
49.28
20.30%

350

PART 3

Managing Value Chains

4. Dalworth Company (continued)

a. Three-month weighted moving average (weights of 3/6, 2/6, and 1/6)
Month Actual Sales
Three-Month Weighted
(000s)
Moving Average Forecast
Jan.
20
Feb.
24
Mar.
27
Apr.
31
[(3 27)+(2 24)+(l 20)]/6 = 24.83
May
37
[(3 31)+(2 27)+(l 24)]/6 = 28.50
June
47
[(3 37)+(2 31)+(l 27)]/6 = 33.33
July
53
[(3 47)+2 37)+(l 31)]/6 = 41.00
Aug.
62
[(3 53)+(2 47)+(l 37)]/6 = 48.33
Sept.
54
[(3 62)+(2 53)+(l 47)]/6 = 56.50
Oct.
36
[(3 54)+(2 62)+(l 53)]/6 = 56.50
Nov.
32
[(3 36)+(2 54)+(l 62)]/6 = 46.33
Dec.
29
[(3 32)+(2 36)+(l 54)]/6 = 37.00
Total
Average

Absolute Absolute %
Error
Error

6.17
8.50
13.67
12.00
13.67
2.50
20.50
14.33
8.00
99.34
11.04

19.90
22.97
29.09
22.64
22.05
4.63
56.94
44.78
27.59
250.59
27.84

The results from Time Series Forecasting Solver give the same results:
Three-Period Weighted Moving Average

Forecast

24.8332
28.4999
33.3332
40.9998
48.333
56.4998
56.4997
46.3336
37.0006

Error

CFE

6.17
8.50
13.67
12.00
13.67
-2.50
-20.50
-14.33
-8.00

6.17
14.67
28.33
40.33
54.00
51.50
31.00
16.67
8.67

Method 2Weighted Moving Average:

Three -Period Weighted Moving Average
Forecast for 1/1/03
CFE
MAD
MSE
MAPE

31.17
8.67
11.04
147.09
27.84%

Squared
Error

38.07
72.25
186.87
144.00
186.87
6.25
420.25
205.35
64.00
1,323.91
147.09

Forecasting z CHAPTER 13 z 351

b. Exponential smoothing ( = 0.6)

Month
(t)
Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
Total
Average

Dt
(millions)
20
24
27
31
37
47
53
62
54
36
32
29

Ft

Ft+1 = Ft + (Dt Ft)

22.00
20.80
22.72
25.29
28.72
33.69
41.67
48.47
56.59
55.04
43.62
36.64

Absolute Absolute
Error
% Error

20.80
22.72
25.29
28.72
33.69
41.67
48.47
56.59
55.04
43.62
36.64
32.06

5.71
8.28
13.31
11.33
13.53
2.59
19.04
11.61
7.65
93.05
10.34

18.41
22.38
28.32
21.38
21.82
4.80
52.88
36.28
26.38
232.65
25.85

Squared
Error

32.60
68.56
177.16
128.37
183.06
6.71
362.52
134.79
58.52
1,152.29
128.03

c.e. Comparison of performance

Question
c.
d.
e.

Measure
MAD
MAPE
MSE

3-Month
WMA
11.04
27.84
147.10

Exponential
Smoothing
10.34
25.85
128.03

Recommendation
Exponential smoothing
Exponential smoothing
Exponential smoothing

5. Convenience Store
At = 0.2 Dt + 0.8 ( At 1 + Tt 1 )
Tt = 0.1( Averagethisperiod Averagelastperiod ) + 0.9(Trendlastperiod )
Ft +1 = At + Tt

May
AMay = 0.2 ( 760 ) + 0.8 ( 700 + 50 ) = 752

TMay = 0.1( 752 750 ) + 0.9 ( 50 ) = 50.2

Forecast for June = 752 + 50.2 = 802.2 or 802
June
AJune = 0.2 ( 800 ) + 0.8 ( 752 + 50.2 ) = 801.76 or 802

TJune = 0.1( 801.76 752 ) + 0.9 ( 50.2 ) = 50.16 or 50

Forecast for July = 801.76 + 50.16 = 851.92 or 852

352

PART 3

Managing Value Chains

July
AJuly = 0.2 ( 820 ) + 0.8 ( 801.76 + 50.16 ) = 845.54 or 846

TJuly = 0.1( 845.54 801.76 ) + 0.9 ( 50.16 ) = 49.52

Forecast for August = 845.54 + 49.52 = 895.06 or 895
6. Community Federal
AMay = 0.3 ( 680 ) + 0.7 ( 600 + 60 ) = 666
TMay = 0.2 ( 666 600 ) + 0.8 ( 60 ) = 61.2
FJune = 666 + 61.2 = 727.2
June
AJune = 0.3 ( 710 ) + 0.7 ( 666 + 61.2 ) = 722.04

TJune = 0.2 ( 722.04 666 ) + 0.8 ( 61.2 ) = 60.17

Forecast for July = 722.04 + 60.17 = 782.21

July
AJuly = 0.3 ( 790 ) + 0.7 ( 722.04 + 60.17 ) = 784.55

TJuly = 0.2 ( 784.55 722.04 ) + 0.8 ( 60.17 ) = 60.64

Forecast for August = 784.55 + 60.64 = 845.18 or 845
7. Heartville General Hospital
i. Exponential smoothing, = 0.6
Year Demand
1
2
3
4
5

45
50
52
56
58

Exponential Smoothing
41
41 + .6(45 41) = 43.4
43.4 + .6(50 43.4) = 47.4
47.4 + .6(52 47.4) = 50.2
50.2 + .6(56 50.2) = 53.7
Total
Average

Absolute
Deviation

Absolute %
Deviation

Square
Error

6.60
4.60
5.80
4.30
21.30
5.33

13.20
8.85
10.36
7.41
39.82
9.96

43.56
21.16
33.64
18.49
116.85
29.2125

Forecasting z CHAPTER 13 z 353

ii. Exponential smoothing, = 0.9

Year Demand
1
2
3
4
5

Exponential Smoothing

45
50
52
56
58

41
41 + .9(45 41) = 44.6
44.6 + .9(50 44.6) = 49.5
49.5 + .9(52 49.5) = 51.8
51.8 + .9(56 51.8) = 55.6
Total
Average

Absolute
Deviation

Absolute %
Deviation

5.40
2.50
4.20
2.40
14.50
3.63

10.80
4.81
7.50
4.14
27.25
6.81

Squared
Error
29.16
6.25
17.64
5.76
58.81
14.7025

iii. Trend-adjusted exponential smoothing ( = 0.6, = 01

. )
Year

Demand

At

Tt

1
2
3
4
5

45
50
52
56
58

43.40
48.26
51.50
55.23
57.97

2.24
2.50
2.58
2.69
2.70

Ft
41.00
45.64
50.76
54.08
57.92
Total
Average

Absolute
Deviation
4.00
4.36
1.24
1.92
0.08
11.60
2.32

Calculations by year:
Year 1
A1 : 0.6 ( 45 ) + 0.4 ( 39 + 2 ) = 27.0 + 16.4 = 43.40
T1 : 0.1 + ( 43.4 39.00 ) + 0.9 ( 2 ) = 0.44 + 1.80 = 2.24
F2 + T1 = 45.64
Year 2
A2 : 0.6 ( 50 ) + 0.4 ( 43.4 + 2.24 ) = 30.0 + 18.26 = 48.26

T2 : 0.1( 48.26 43.40 ) + 0.9 ( 2.24 ) = 0.49 + 2.02 = 2.50

F3 : A2 + T2 = 50.76

Year 3
A3 : 0.6 ( 52 ) + 0.4 ( 48.26 + 2.50 ) = 31.2 + 20.30 = 51.50

T3 : 0.1( 51.50 48.26 ) + 0.9 ( 2.50 ) = 0.32 + 2.25 = 2.58

F4 : A3 + T3 = 54.08

Year 4
A4 : 0.6 ( 56 ) + 0.4 ( 51.50 + 2.58 ) = 33.6 + 21.63 = 55.23

T4 : 0.1( 55.23 51.50 ) + 0.9 ( 2.58 ) = 0.37 + 2.32 = 2.69

F5 : A4 + T4 = 57.92

Absolute %
Deviation
8.89
8.72
2.38
3.43
0.14
23.56
4.71

Squared
Error
16.00
19.01
1.54
3.69
0.01
40.24
8.05

354

PART 3

Year 5

Managing Value Chains

A5 : 0.6 ( 58 ) + 0.4 ( 55.23 + 2.69 ) = 34.8 + 23.17 = 57.97

T5 : 0.1( 57.97 55.23) + 0.9 ( 2.69 ) = 0.27 + 2.42 = 2.70

iv. Three-year moving average
Year

Demand

1
2
3
4
5

45
50
52
56
58

3-Year Moving
Average

(45 + 50 + 52)/3 = 49
(50 + 52 + 56)/3 = 52.7
Total
Average

Absolute
Deviation

Absolute %
Deviation

Square
Error

7.00
5.30
12.30
6.15

12.50
9.14
21.64
10.82

49.00
28.09
77.09
38.55

Absolute
Deviation

Absolute %
Deviation

Squared
Error

6
4
10
5

10.71
6.90
17.61
8.81

36
16
52
26

v. Three-year weighted moving average

Year Demand
1
2
3
4
5

45
50
52
56
58

3-Year Weighted
Moving Average

(45(1/6) + 50(2/6) + 52(3/6)) = 50

(50(1/6) + 52(2/6) + 56(3/6)) = 54
Total
Average

vi. Regression model Y = 42.6 + 32

. X
Year

Demand

1
2
3
4
5

45
50
52
56
58

Trend Projection
42.6 + 3.2 1 = 45.8
42.6 + 3.2 2 = 49.0
42.6 + 3.2 3 = 52.2
42.6 + 3.2 4 = 55.4
42.6 + 3.2 5 = 58.6

Total
Average

Absolute
Deviation
0.80
1.00
0.20
0.60
0.60
3.20
0.64

Absolute %
Deviation
1.78
2.00
0.38
1.07
1.03
6.26
1.25

Squared
Error
0.64
1.00
0.04
0.36
0.36
2.40
0.48

a.-c. Comparison of the forecasting methodologies

Forecast
Methodology
Exponential smoothing = .6
Exponential smoothing = .9
Trend-adjusted exp. smoothing
Three-year moving average
Three-year weighted moving average
Regression model

MAD

MAPE

MSE

5.33
3.63
2.32
6.15
5.00
0.64

9.96
6.81
4.71
10.82
8.81
1.25

29.21
14.70
8.05
38.55
26.00
0.48

Regression model methodology works best in this case under all performance criteria.

Forecasting z CHAPTER 13 z 355

8. Calculator sales
A1 = 0.2 ( 46 ) + 0.8 ( 45 + 2 ) = 46.8

T1 = 0.2 ( 46.8 45 ) + 0.8 ( 2 ) = 1.96

F2 = 46.8 + 1.96 = 48.76 or 48.8

A2 = 0.2 ( 49 ) + 0.8 ( 46.8 + 1.96 ) = 48.81

T2 = 0.2 ( 48.81 46.8 ) + 0.8 (1.96 ) = 1.97

F3 = 48.81 + 1.97 = 50.78 or 51

A3 = 0.2 ( 43) + 0.8 ( 48.81 + 1.97 ) = 49.224

T3 = 0.2 ( 49.224 48.81) + 0.8 (1.97 ) = 1.659

F4 = 49.22 + 1.66 = 50.88 or 51

A4 = 0.2 ( 50 ) + 0.8 ( 49.22 + 1.66 ) = 50.7

T4 = 0.2 ( 50.7 49.22 ) + 0.8 (1.66 ) = 1.624

F5 = 50.7 + 1.62 = 52.32 or 52

A5 = 0.2 ( 53) + 0.8 ( 50.7 + 1.62 ) = 52.456

T5 = 0.2 ( 52.456 50.7 ) + 0.8 (1.62 ) = 1.648

F6 = 52.456 + 1.65 = 54.11 or 54

356

PART 3

Managing Value Chains

9. Forrests boxes of chocolates

a. One possible estimated forecast for Year 4:
Quarter
1
2
3
4

Forecast
3,700
2,700
1,900
6,500
14,800

b. Multiplicative seasonal method

Quarter
1
2
3
4
Total
Average

Year 1
3,000
1,700
900
4,400
10,000
2,500

Seasonal
Factor
1.20
0.68
0.36
1.76

Year 2
3,300
2,100
1,500
5,100
12,000
3,000

Seasonal
Factor
1.1
0.7
0.5
1.7

Year 3
3502
2448
1768
5882
13,600
3,400

Seasonal
Factor
1.03
0.72
0.52
1.73

Average
Seasonal
Factor
1.11
0.70
0.46
1.73

Forecast for year 4, 14,800. Average = 3,700.

Quarter
1
2
3
4

Average
3,700
3,700
3,700
3,700

Factor
1.11
0.70
0.46
1.73

Forecast
4,107
2,590
1,702
6,401
14,800

This technique forecasts that the third-quarter sales will decrease compared to sales
for the third quarter of the third year. Betcha thought it would increase. Mamma
always said: Life is full of surprises!
Just to make sure, we find confirmation of our calculations using the Seasonal
Forecasting Solver:
Quarter
1
2
3
4

Seasonal
Index
1.1100
0.7000
0.4600
1.7300

Forecast
4107
2590
1702
6401

Forecasting z CHAPTER 13 z 357

10. Snyders Garden Center

Quarter
1
2
3
4
Total
Average

Seasonal
Factor
0.179
1.573
1.303
0.944

Year 1
40
350
290
210
890
222.50

Year 2
60
440
320
280
1,100
275.00

Seasonal
Factor
0.218
1.600
1.164
1.018

Average
Seasonal Factor
0.199
1.587
1.234
0.981

Average quarterly sales in year 3 are expected to be 287.50 (1,150/4). Using the average
seasonal factors, the forecasts for year 3 are:
Quarter
1
2
3
4

0.199(287.50)
1.587(287.50)
1.234(287.50)
0.981(287.50)

Forecast
57
456
355
282

With the Seasonal Forecasting Solver, we get the same results

Quarter
1
2
3
4

Seasonal
Index
0.1990
1.5865
1.2335
0.9810

Forecast
57.213
456.119
354.631
282.038

11. Utility company

Quarter
1
2
3
4
Total
Average

Year 1
103.5
126.1
144.5
166.1
540.2
135.05

Year 2
94.7
116.0
137.1
152.5
500.3
125.075

Year 3
118.6
141.2
159.0
178.2
597.0
149.25

Year 4
109.3
131.6
149.5
169.0
559.4
139.85

Quarter

Year 1

Year 2

Year 3

Year 4

1
2
3
4
Total

0.7664
0.9337
1.0700
1.2299
4.0

0.7571
0.9274
1.0961
1.2193
4.0

0.7946
0.9410
1.0653
1.1940
4.0

0.7816
0.9410
1.0690
1.2084
4.0

Average
Seasonal Index
0.7749
0.9371
1.0751
1.2129
4.0

358

PART 3

Managing Value Chains

Forecast for Year 5

Quarter
1
2
3
4

Average Demand
per Quarter
150
150
150
150
600

Adjusted
Demand
116.235
140.565
161.265
181.935
600

=
=
=
=

116
141
161
182

Turning to the Seasonal Forecasting Solver, we get the same results:

Quarter
1
2
3
4

Seasonal
Index
0.7749
0.9371
1.0751
1.2129

Forecast
116.235
140.565
161.265
181.935

12. Garcias Garage

a. The results, using the Regression Analysis Solver, are:
R-squared

0.668

0.817

Constant
Standard Error of Estimate
Trial X1 Value

42.464
4.572
9

X1 Coefficient
Predicted Y Value

The regression equation is Y = 42.464 + 2.452X

b. Forecasts
Y (Sep) = 42.464 + 2.452 (9) = 64.532 or 65
Y (Oct) = 42.464 + 2.452 (10) = 66.984 or 67
Y (Nov) = 42.464 + 2.452 (11) = 71.888 or 72

2.452
64.532

Forecasting z CHAPTER 13 z 359

13. Hydrocarbon Processing Factory

Using the Regression Analysis Solver, we get:
R-squared

0.450

0.671

Constant

0.888

Standard Error of Estimate

0.331

Trial X1 Value

3.5

X1 Coefficient
Predicted Y Value

0.622
3.065

a. Relationship to forecast Y from X

Y = 0.888 + 0.622 X
b. Strength of relationship between Y and X is moderate as indicated by
R2 = 0.450
R = 0.671
Standard Error of Estimate = 0.331
14. Ohio Swiss Milk
The results from the Regression Analysis Solver are:
R-squared
R

0.888
-0.942

Constant
Standard Error of Estimate
Trial X1 Value

1121.212
12.342
325

X1 Coefficient
Predicted Y Value

-0.282
1029.562

a. Y = 1,121.212. 0.282 X
b. R2 = 0.888
R = 0.942 indicates a fairly strong negative relationship. Increases in costs
explain 89% of the decreases in gallons sold
c. Y = 1,121.212 0.282 (325) = 1,029.562

360

PART 3

Managing Value Chains

ADVANCED PROBLEMS

15. Large Public Library

Using the Time Series Forecasting Solver, we get the following results by varying the
number of periods (n) in the Simple Moving Average method:
n
1
2
3
4
5
10

Forecast for
January, Year 4
2,451
2,299
2,221
2,127
2,037
2,189

MAD

CFE

282
267
257
242
242
216

604
68
291
524
846
444

In general, as n increases, MAD decreases and CFE (bias) increases. The two-month
moving average appears to be the best because of its relatively low MAD and CFE.
16. Large Public Library (continued, using 1,847 as initial average)
Using the Time Series Forecasting Solver, we get the following results by varying in
the exponential smoothing model:

0.10
0.20
0.30
0.50
0.65
0.70
0.80
1.00

Forecast for
January, Year 4
2,193
2,178
2,186
2,259
2,325
2,346
2,385
2,451

MAD
257
249
249
251
248
249
254
274

CFE
3,458
1,655
1,131
823
736
713
673
604

As increases, CFE (bias) generally decreases and MAD generally increases. When
alpha = 0.65 there seems to be a good combination of low bias and low MAD.

Forecasting z CHAPTER 13 z 361

17. Large Public Library (continued, using 1,847 as initial average and 0 as initial trend)
Using the Time Series Forecasting Solver, we get the following results by varying and
in the Trend-Adjusted Exponential Smoothing model:

0.10
0.20
0.20
0.30
0.35
0.40
0.45

0.1
0.1
0.2
0.1
0.1
0.1
0.1

Forecast for
January, Year 4
2,257
2,144
2,077
2,139
2,153
2,173
2,198

MAD

CFE

286
271
271
274
276
278
279

983
876
876
1,102
1,058
1,092
1,113

Equating both and to 0.2 gives fairly low values for both MAD and CFE (bias).
The two month moving average seems to be the best forecast because of the relatively
low CFE and MAD results.
18. Cannister Inc.
a. Multiplicative Seasonal Method
Year
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Total
Average

1
742
697
776
898
1,030
1,107
1,165
1,216
1,208
1,131
971
783
11,724
977

2
741
700
774
932
1,099
1,223
1,290
1,349
1,341
1,296
1,066
901
12,712
1,059.333

3
896
793
885
1,055
1,204
1,326
1,303
1,436
1,473
1,453
1,170
1,023
14,017
1,168.083

4
951
861
938
1,109
1,274
1,422
1,486
1,555
1,604
1,600
1,403
1,209
15,412
1,284.333

5
1,030
1,032
1,126
1,285
1,468
1,637
1,611
1,608
1,528
1,420
1,119
1,013
15,877
1,323.083

362

PART 3

Year
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec

Managing Value Chains

0.759
0.713
0.794
0.919
1.054
1.133
1.192
1.245
1.236
1.158
0.994
0.801

0.699
0.661
0.731
0.880
1.037
1.154
1.218
1.273
1.266
1.223
1.006
0.851

0.767
0.679
0.758
0.903
1.031
1.135
1.116
1.229
1.261
1.244
1.002
0.876

0.740
0.670
0.730
0.863
0.992
1.107
1.157
1.211
1.249
1.246
1.092
0.941

0.778
0.780
0.851
0.971
1.110
1.237
1.218
1.215
1.155
1.073
0.846
0.766

Average
Seasonal Index
0.749
0.701
0.773
0.907
1.045
1.153
1.180
1.235
1.233
1.189
0.988
0.847

b. Simple Linear Regression Model to forecast annual sales

Y = 10, 646.6 + 1,100.6 X
c. Forecast for Year 6 (or X = 6 ) is: Y = 17, 250.2
d. Monthly Seasonal Forecast for Year 6
(17,250/12)*Average Seasonal Index
Jan
Feb
Mar
Apr
May
Jun

1,076.7
1,007.3
1,110.9
1,304.4
1,501.9
1,658.1

Jul
Aug
Sep
Oct
Nov
Dec

1,696.4
1,774.9
1,773.1
1,708.9
1,420.2
1,217.5

19. Midwest Computer Company

a. Trend-adjusted exponential smoothing
= 0.35, = 015
.
= 0.70, = 10
.

MAD
65.17
90.67

CFE
18.67
1.22*

The trend-adjusted exponential smoothing model provides the lowest CFE (bias) with
a reasonable MAD value when = 0.7 and = 10
. . The forecasts for weeks 5153
using this method are
Month
51
52
53

Forecast Sales
2,452
2,493
2,535

b. The linear regression model is

Y = -152.578 + 4.910 X or Sales = -152.578 + 4.910 (number of leases)

Forecasting z CHAPTER 13 z 363

The forecast for months 5153 can be based on actual lease information for months
4850.
Month
51
52
53

Forecast Sales
2,283
2,347
2,411

These results are confirmed by the following output from the Regression Analysis
Solver, including the forecasts for month 51 (when X = 496):

Results
Solver - Regression Analysis
R-squared

0.988

0.994

Constant

-152.578

Standard Error of Estimate

81.186

Trial X1 Value
Trial X2 Value
Trial X3 Value
Trial X4 Value
Trial X5 Value

496 X1 Coefficient
X2 Coefficient
X3 Coefficient
X4 Coefficient
X5 Coefficient
Predicted Y Value

4.910
0.000
0.000
0.000
0.000
2282.782

c. The linear regression model has a MAD of 632.81 and a CFE (bias) of 603.1.
Therefore, the trend-adjusted exponential smoothing model of part (a) will still
provide the best forecasts.
Bias (Mean Error)
-603.1
MAD (Mean Absolute Deviation) 632.81
MSE (Mean Squared Error) 648630.6
Standard Error (denom=n-2=48)
821.98
MAPE (Mean Absolute Percent Error)
1.9
The actual data are (give to students for comparison):
Month
51
52
53

Actual Sales
2,450
2,497
2,526

364

PART 3

Managing Value Chains

20. P&Q Supermarkets

Numerous methods could be used.
Moving Average
Number of Periods
2
3
4
5
6
7
12

MAD
7.09
6.87
6.21
4.52
4.80
4.94
5.15

CFE
5.00
13.67
12.75
1.00
7.00
7.43
3.08

Forecast
39.50
41.33
41.50
44.80
44.17
43.43
43.08

Exponential smoothing
Use = 0.20 for the lowest MAD.
MAD
5.34
7.52

= 0.20
= 100
.

CFE
47.62
5.00

Forecast
42.53
38

Use = 1.00 (equivalent of nave model) for the lowest bias.

Exponential smoothing with trend
Best MAD

MAD
5.34

CFE
47.64

Forecast
42.53

Best Bias

MAD
6.72

Bias
0.03

Forecast
39.81

= 0.20
= 0.00

= 0.63
= 0.05

A graphic plot of the data reveals a spike every fifth data point. The best of the
preceeding methods would appear to be the moving average with five periods, due to its
relatively low MAD and CFE (bias). But none of these methods reasonably account for
the fifth-period spike. Another way to deal with this cyclical data is to use the
multiplicative seasonal method with five periods in a cycle. With this method, the
forecast for the 25th month would be 60.

Period
1
2
3
4
5

Cycle 1
33
37
31
39
54
194

Seasonal
Index
0.1701
0.1907
0.1598
0.2010
0.2784

Cycle 2
38
42
40
41
54
215

Seasonal
Index
0.1767
0.1953
0.1860
0.1907
0.2512

Cycle 3
43
39
37
43
56
218

Seasonal
Index
0.1972
0.1789
0.1697
0.1972
0.2569

Cycle 4
41
36
39
41
58
215

Seasonal
Index
0.1907
0.1674
0.1814
0.1907
0.2698

Forecasting z CHAPTER 13 z 365

Month
21
22
23
24
25

Actual
Cycle 5
42
45
41
38
??

Average
Seasonal
Index
0.1837
0.1831
0.1742
0.1949
0.2640

Forecast
Cycle 5
42
42
40
44
60
227

The demand forecast (227 units) for all of cycle 5, which was used as the basis for the
forecasts for months 2125, comes from the following regression model:
Linear Regression, Y = 38.989 + .241X
When X = 25 , Y = 45.014 .
These regression results are obtained from the Regression Analysis Solver, which gives
the following output:

Results
Solver - Regression Analysis
R-squared
R
Constant
Standard Error of Estimate
Trial X1 Value

0.060
0.246
38.989
6.873
25 X1 Coefficient
Predicted Y Value

0.241
45.014

21. Air visibility

a. These data contain no detectable trend component over the two-summer history.
Either the simple moving average or exponential smoothing should give unbiased
results. As long as forecast parameters are chosen for stability (high n in simple
moving average, or low in exponential smoothing), the forecast for August 31 will
be about 120.5. Because the data are stable, linear regression will yield a nearly zero
slope with a forecast of about 120.5 as well.
b. There are no historical data to support expectations for air quality in the third year to
be any different than that of the first two years. It will average about 120.5 unless
public policy affects transportation, population growth, or utilities burning natural gas
rather than coal. That might make a detectable difference in air quality. However, the
effects of public policy are not recorded in the database, so qualitative forecasting
methods are needed.

366

PART 3

Managing Value Chains

22. Flatlands Public Power District

The historical data show both trend and seasonal components. We will use the
multiplicative seasonal method to forecast demand for the next year, then look for a lowdemand period of two weeks during which the Comstock plant can be serviced. Weeks 7
and 8 look like the best two-week period to schedule maintenance.
Demand Seasonal Demand Seasonal Demand Seasonal Demand Seasonal Demand Seasonal
Week Year 1
Index
Year 2
Index
Year 3
Index
Year 4
Index
Year 5
Index
1
2,050
0.1017
2,000
0.0959
1,950
0.0922
2,100
0.1010
2,275
0.1064
2
1,925
0.0955
2,075
0.0995
1,800
0.0851
2,400
0.1154
2,300
0.1076
3
1,825
0.0906
2,225
0.1067
2,150
0.1017
1,975
0.0950
2,150
0.1006
4
1,525
0.0757
1,800
0.0863
1,725
0.0816
1,675
0.0805
1,525
0.0713
5
1,050
0.0521
1,175
0.0564
1,575
0.0745
1,350
0.0649
1,350
0.0632
6
1,300
0.0645
1,050
0.0504
1,275
0.0603
1,525
0.0733
1,475
0.0690
7
1,200
0.0596
1,250
0.0600
1,325
0.0626
1,500
0.0721
1,475
0.0690
8
1,175
0.0583
1,025
0.0492
1,100
0.0520
1,150
0.0553
1,175
0.0550
9
1,350
0.0670
1,300
0.0624
1,500
0.0709
1,350
0.0649
1,375
0.0643
10
1,525
0.0757
1,425
0.0683
1,550
0.0733
1,225
0.0589
1,400
0.0655
11
1,725
0.0856
1,625
0.0779
1,375
0.0650
1,225
0.0589
1,425
0.0667
12
1,575
0.0782
1,950
0.0935
1,825
0.0863
1,475
0.0709
1,550
0.0725
13
1,925
0.0955
1,950
0.0935
2,000
0.0946
1,850
0.0889
1,900
0.0889
20,850
21,150
20,800
21,375
Total 20,150

Week
1
2
3
4
5
6
7
8
9
10
11
12
13
Total

Demand
Year 6
2,147
2,172
2,135
1,707
1,343
1,371
1,396
1,164
1,422
1,475
1,529
1,733
1,992
21,585

Average
Seasonal
Index
0.0995
0.1006
0.0989
0.0791
0.0622
0.0635
0.0647
0.0539
0.0659
0.0683
0.0708
0.0803
0.0923

Linear Regression Y = 20,145 + 240 ( X ) . When X = 6 , Y = 21,585 .

Forecasting z CHAPTER 13 z 367

23. A manufacturing firm

The results from the Regression Analysis Solver are:

Results
Solver - Regression Analysis
R-squared

0.933

0.966

Constant

4.184

Standard Error of Estimate

5.126

Trial X1 Value

80 X1 Coefficient
Predicted Y Value

0.943
79.624

a. From the output, the relationship is

Rating = 4.184 + 0.943 (Score)
b. Score = 80
Rating = 4.184 + 0.943 (80) = 79.624
c. R = R 2 = 0.934 = 0.966
There is a very strong positive relationship. Increases in scores explain 93% of increases
in ratings.

368

PART 3

Managing Value Chains

24. Materials handing

The results from the Regression Analysis Solver are:
R-squared

0.477

0.691

Constant

323.791

Standard Error of Estimate

283.358

Trial X1 Value

X1 Coefficient
Predicted Y Value

a. From the Solver output shown, the relationship is

Cost = 323.791 + 131.640 (Age)
b. Annual Cost to maintain a three-year old tractor
y = 323.791 + 131.640 (3) = $718.71
Annual Cost to maintain a fleet of 20 three-year-old tractors
= (20) ($718.711) = $14,374.22

131.640
718.711

Forecasting z CHAPTER 13 z 369

CASE: YANKEE FORK AND HOE COMPANY

A. Synopsis
Yankee Fork and Hoe is a company that produces garden tools for a mature, pricesensitive market in which customers also want on-time delivery. Recently customers have
been complaining about late shipments. The president has hired a consultant to look into
the problem. The consultant traces the production planning process and its reliance on
accurate forecasts. The consultant must make a recommendation to management.
B. Purpose
This case provides the basis for a discussion of the need for accurate forecasts in an
industry where low-cost production is critical. It also contains sufficient data to enable
the student to generate forecasts for each month of the following year. Specifically, the
case can be used to:
1. Discuss the effects of poor forecasts on capacities and schedules.
2. Discuss the choice of the proper data to use for forecasts.
3. Quantitatively analyze forecasting data and provide forecasts for the following year.
C. Analysis
Yankee Fork and Hoe is experiencing two major problems with the current forecasting
system. First, the production department is unaware of how marketing arrives at its
forecasts. Production views the forecasts as the result of an overinflated estimate of
actual customer demand. However, the forecasting technique in use by the marketing
department is based on actual shipments rather than on actual demand. Second,
marketing, in its desire to reflect production capacity, is compounding the problems
experienced by Yankee Fork and Hoe by trying to rectify past problems. Although
marketing adjusts for shortages in the actual shipment data, it is still reflecting past
problems and not future demand. If Yankee would move to a system that utilizes past
demand to forecast future demand, production would be able to schedule bow rake
production more effectively. In addition, production must be aware of how the forecasts
are made and what information is being provided so that arbitrary adjustments are no
longer needed.
A forecasting system based on actual demands requires careful analysis of Exhibit TN.
1. It is apparent that the bow rake experiences seasonal demand. It is also obvious that there
is an upward trend in the annual demand. A forecasting system that recognizes both of these
factors is desirable. To arrive at the average monthly demand for year 5, the average
increase in the average monthly demands was determined to be 2,589 units. Therefore the
average monthly demand for year five is 45,928 + 2,589 = 48,517. This value is then
multiplied by the average seasonal factors (see Exhibit TN.2) to arrive at the forecast
shown in Exhibit TN.1. Exhibits TN.3 and TN.4 show graphs of the series.

370

PART 3

Managing Value Chains

D. Recommendations
The recommendations to management could include the following:
1. Improve the lines of communication between marketing and production regarding the
preparation of forecasts. This will eliminate arbitrary adjustments to the forecasts.
2. Use actual demand data rather than shipment data.
3. Use models that somehow handle seasonality, such as the seasonal forecast method,
the weighted moving average (with significant weights placed on time periods lagged
by one year), or regression a trend variable and also dummy variables for the seasons.
4. Consider a combination forecasting approach or possibly focus forecasting, rather
than using a single model.
E. Teaching Suggestions: As an Experiential Exercise
This case makes for an excellent team-based experiential exercise, spread over two days.
Presumably the basic concepts and techniques of forecasting have already been covered.
The exercise might take 45 minutes on the first day and 30 minutes on the second day.
Day 1
Introduce the exercise after the basic concepts and techniques of forecasting have been
covered. Students should have read the case beforehand, and each team should bring at
least one laptop to class. To get things started, briefly open up and demonstrate three
solvers:
1. Regression Analysis (describe how you should use it with one independent variable
for the trend, and dummy variables for some of the major seasons)
2. Seasonal Forecasting
3. Time-Series Forecasting (which represents four basic models and countless options in
their use)
Have the team members discuss among themselves which forecasting methods might
be best, and begin to experiment with some of the models to see how they perform. Have
them do their analysis only using data from the first three years, and reserving the fourth
year as a holdout sample. They should totally block out that information, as it will
provide the acid test for their assignment due on the second day. After they get into the
project and determine their general approach, give them the assignment for the next day.
Day 2
Between the first day and the second session, each team is to develop combination
forecasts for the holdout sample (year 4). They must commit to their combination
forecasting procedure (such as which methods to include in the combination and their
weights) before they evaluate its results for the holdout sample. They are to prepare a
short report on their results.
On the first page of their report, they should describe the approach taken and indicate
why they are confident in their forecasts. On the subsequent page(s) they should show a
spreadsheet of actual demand, forecasts (from two or more individual methods and then
the combination), period-by-period forecast error terms, and summary error measures

Forecasting z CHAPTER 13 z 371

(CFE, MAD, MAPE, and MSE). They can hand compute the errors, or develop formulas
to make the calculations (perhaps borrowing some of the formulas used in the Time
Series Forecasting Solvers worksheet). If students use dynamic models, they must
bootstrap one period at time. If judgment is used as one forecasting technique, the team
must control what information the judgment expert is given (such as time series model
information to date). Actually, a judgment forecasting approach is unlikely to be effective
because students have no contextual knowledge. It might be convenient to have the
teams not only submit hard copy, but also e-mail their results to the instructor before
class. If done this way, have the elements in the report combined into one electronic file
(such as using the Edit/Paste Special/Picture option to insert spreadsheets and graphs into
a Word document.
Based on experience to date, a team typically reports CFE values of plus/minus
20,000 for CFE, 6,000 for MAD, 22% for MAPE, and 85,000,000 for MSE. In all cases
to date, the combination forecast did better than any individual forecasting method.
F. Teaching Suggestions: Out-of-Class Exercise
This case should be made an overnight assignment because the student needs to develop
forecasts for year 5. A computer program can be used to get the forecasts; however, it is
not mandatory. The forecasts contained in Exhibit TN.1 were done manually using the
multiplicative seasonal method described in the text.
This case is based on an actual company that supplies garden tools to companies such
as Sears and Scotts & Sons. The initial discussion should focus on the competitive
priorities for Yankee Fork and Hoe (low costs and on-time delivery) and how operations
can support these priorities. The need for accurate forecasts in that sort of competitive
environment should be emphasized.
The instructor should raise the question, How would you revise the forecasting
system in use at Yankee Fork and Hoe? This discussion will lead to the issue of which
data (shipments or actual demands) to use and how the marketing and production
departments can coordinate on the development of the forecasts.
Finally, the students can be asked to present their forecasts (perhaps on blank
transparencies provided with the assignment). Discuss how each students forecast was
developed and explore the reasons for the differences between the students forecasts.
The forecast provided in Exhibit TN. I can be used as a benchmark.
G. Board Plan
Board 1
Competitive Priorities
Low costs
On-time delivery

Operations Support
Efficient internal schedules
Proper inventory levels
Good supplier contracts

372

PART 3

Managing Value Chains

Board 2
Current Forecasting System
Based on shipments
One months lead on promotions
Marketing passed to production
Second-guessing marketing

EXHIBIT TN.1

Month
1
2
3
4
5
6
7
8
9
10
11
12
Averages

Actual Bow Rake Demands and Forecast

Year 1
55,220
57,350
15,445
27,776
21,408
17,118
18,028
19,883
15,796
53,665
83,269
72,991
38,162

EXHIBIT TN.2
Month
1
2
3
4
5
6
7
8
9
10
11
12

Proposed Forecasting System

Based on actual demands
Several months lead on promotions
Coordinated between marketing and production
Take the forecasts as given

Actual Demands
Year 2
Year 3
39,875
32,180
64,128
38,600
47,653
25,020
43,050
51,300
39,359
31,790
10,317
32,100
45,194
59,832
46,530
30,740
22,105
47,800
41,350
73,890
46,024
60,202
41,856
55,200
40,620
44,805

Year 4
62,377
66,501
31,404
36,504
16,888
18,909
35,500
51,250
34,443
68,088
68,175
61,100
45,928

Forecast
70,203
72,911
19,636
35,312
27,217
21,763
22,920
25,278
20,082
68,226
105,862
92,796
48,517

Year 4
1.358
1.448
0.684
0.795
0.368
0.412
0.773
1.116
0.750
1.482
1.484
1.330

Average
1.126
1.348
0.705
0.932
0.652
0.452
0.923
0.867
0.694
1.389
1.536
1.376

Seasonal Factors
Year 1
1.447
1.503
0.405
0.728
0.561
0.449
0.472
0.521
0.414
1.406
2.182
1.913

Year 2
0.982
1.579
1.173
1.060
0.969
0.254
1.113
1.145
0.544
1.018
1.133
1.030

Year 3
0.718
0.862
0.558
1.145
0.710
0.694
1.335
0.686
1.067
1.649
1.344
1.232

Forecasting z CHAPTER 13 z 373

EXHIBIT TN.3

Monthly Demands

90000

Year 1
Year 2
Year 3
Year 4

80000
70000
60000
50000
40000
30000
20000
10000
1

EXHIBIT TN.4

6
7
Months

10

11 12

Four-Year Plot

100000
80000
60000
40000
20000

11

16

21

26

Months

31

36

41

46