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You are on page 1of 18

TRUE/FALSE

1. It is possible to forecast the number of patients in a hospital but such demand analysis cannot be used

to determine how to set the agenda for the entire organization. This is especially true of planning work

schedules.

ANS: F

REF:

Introduction to Chapter 3

2. A good forecast strategy is not being reactive to what must happen. Instead, an effort is made to

modify the forecast. This is known as proactive planning.

ANS: T

REF:

Introduction to Chapter 3

3. Forecasting is not a term readily associated with gambling games for which the probabilities of

specific events are established. Ask the manager of Wynn Las Vegas or the Venetian-Macao about next

years occupancy. The manager will call upon a forecast sales demand volume.

ANS: T

REF:

3.1

4. In every sales forecasting situation, volatility of demand will determine if a good forecast can be made.

A good forecast is usually based upon finding a pattern that is likely to persist.

ANS: T

REF:

3.1

5. Sales patterns are becoming more stable with increasing information being available.

ANS: F

REF:

3.1

6. Strategists are often less affected by forecasts than one might suppose. The reason is summed up in

number 2 above. We might also say that brilliant strategists create the future.

ANS: T

REF:

Open to discussion

7. As new products move through life cycle stages, it becomes evident why P/OM must be comfortable

with forecasting future developments.

ANS: T

REF:

8. Strategies for the introduction of new products and for replacement of existing products must be

formulated with the fact in mind that operations managers time and talents are limited resources.

ANS: T

REF:

9. After market growth stops, share equilibrium occurs. Finally, the product starts to lose its demand

volume and it may either be restaged or terminated. Nothing should be done until the fall off is

significant. Then, the old is withdrawn to be replaced by a new version.

ANS: F

REF:

3.9.2

10. The cycle of the new product is similar to that of the one that is replaced in that it goes through

introduction, growth, maturation, and decline.

ANS: T

REF:

11. Marketing is responsible for the intelligent management of the production transformation process

which changes in various ways according to the life cycle stage.

ANS: F

REF:

3.9

12. The trick (to forecasting life cycle stages) is to estimate how fast demand will increase overtime, and

for how long a period growth will continue.

ANS: T

REF:

3.9.3

13. Businesspeople often use their sense of what is happening to reach decisions that might be better made

if someone had kept a record of what had taken place already. In other words, often some empirical

analysis can be helpful.

ANS: T

REF:

3.1

14. Stable patterns that persist for a short period of time make company forecasters confident that a

credible job of forecasting can be done.

ANS: F

REF:

3.1

15. In the time series analysis, external causes are brought into the picture.

ANS: F

REF:

3.2

16. Many decisions require believable forecasts before they can be made.

ANS: T

REF:

3.2

17. The historical forecast is not based on the assumption that what happened last year will happen again.

ANS: F

REF:

3.3.4

18. Historical forecasting is never applied to daily or weekly sales; only on a semiannual, quarterly, or

monthly basis.

ANS: F

REF:

3.3.4

ANS: F

REF:

3.1

20. Random variations occur in time series. The various causes of such random fluctuations are often

logical but not predictable. Nevertheless, forecasts can be prepared even when there is an associated

trend and/or seasonal variability.

ANS: T

REF:

3.2

21. How far to go back in calculating moving averages depends on the recency of events that tend to

determine the future. Very recent requires including more values; not so recent requires using

only a few values.

ANS: F

REF:

3.3.1

22. When the direction and magnitude of the trend is inconclusive and the pattern is not consistent, then

the fewer the number of periods in the set, the better.

ANS: F

REF:

3.3.1

23. With moving averages, reacting to fluctuations rapidlywhich means tracking them fasteris less

likely to occur if the number of values in the average (n) is large.

ANS: T

REF:

3.3.1

24. In the weighted moving average, the biggest weights are assigned to the most recent events when there

is a continuing trend.

ANS: T

REF:

3.3.2

25. Weighted moving averages cannot track strong trends more accurately than unweighted moving

averages.

ANS: F

REF:

3.3.2

26. When using regression analysis the simplest assumption that is generally made first is that the

relationship between the correlate pairs is nonlinear.

ANS: F

REF:

3.4

27. During linear regression analysis, when outcomes are to be forecast, the knowledge that one time

series leads another is valuable information. That lead in time may be due to a causal link.

ANS: T

REF:

3.5

28. A causal factor common to both x and y which operates as an unknown link may be responsible for

whatever relationship is found.

ANS: T

REF:

3.5

29. When considering a regression analysis, if nonlinear relations appear to exist, there are strong methods

for dealing with such analyses.

ANS: T

REF:

3.4

30. Usually, better forecasts can be obtained if both data and experience are pooled.

ANS: T

REF:

3.8

31. When actual demand results are known, the various forecasting methods are evaluated again, and the

one that is least successful is chosen to make the prediction for the next period.

ANS: F

REF:

3.8

32. Formal methods can be used to evaluate how well different forecasting techniques are doing.

ANS: T

REF:

3.6

33. Not all forecasting errors are based on comparing the actual demand for a time period with the forecast

demand for that same period.

ANS: F

REF:

3.6

34. The only forecasting error that can occur is when actual demand is greater than forecasting.

ANS: F

REF:

3.6

35. Absolute measures are signified by open brackets (see below) which mean that positive and negative

errors are not treated the same way.

ANS: F

REF:

3.6

36. A most commonly used method calculates Mean Absolute Deviation (MAD) of the error terms. To

determine MAD, divide the sum of the absolute measures of the errors by the number of observations.

ANS: T

REF:

3.6

37. MAD is simply the sum of all the error terms and is useful when overestimation errors cancel out

underestimation errors.

ANS: F

REF:

3.6

38. The Delphi Method is a forecasting method that relies on expert estimation of future events.

ANS: T

REF:

3.7

39. The Delphi manager is anonymous since that person does all the calculations and the promotions. The

experts are known and their forecasts are promoted by the Delphi manager to bring convergence to the

group as rapidly as possible.

ANS: F

REF:

3.7

40. MAD is often called a conservative estimate of error. In fact, absolute measures of error count over

and under-errors as errors to be added together. Without the absolute, plus errors cancel minus errors.

ANS: T

REF:

3-6

ANS: T

REF:

Summary

42. Throughout the company, the planning function marches to the drumbeat of product life cycle stages.

Operations managers need to be aware of timing and the stages required by development schedules.

ANS: T

REF:

3.9

43. Active participation of P/OM is characterized by doing just what is asked and nothing more. P/OM

lives by conformance to quality standards for its products. Why should that criterion be different for

organizational performance?

ANS: F

REF:

44. If a moving average trend is gradual, either up or down, and if fluctuations around the average are

common, then having fewer periods of time in the set is better than having too many.

ANS: F

REF:

3.3.1

45. To make forecasts more responsive to most recent actual occurrences, use weighted moving averages.

ANS: T

REF:

3.3.2

ANS: T

REF:

3.5

47. Time series data also can reflect erratic bursts called impulses.

ANS: T

REF:

3.2

48. Increased competition has led to higher levels of market volatility. Nevertheless, for most product

categories, there is still opportunity to benefit from mature product life cycle stages.

ANS: T

REF:

3.9.4

49. To compete in the global market, companies must deal with different time zones around the world.

ANS: T

REF:

50. Syzygy is a Greek word for conjunction. In business, various forces sometimes line up in this way

causing larger than normal amplitudes in time series values. We have gotten so used to the term a

perfect storm that we had better be prepared to discuss forecasting it and dealing with it.

ANS: T

REF:

51. The terms strategy and tactics have military origins. Both terms are deeply involved with forecasting.

ANS: T

REF:

52. @RISK uses Monte Carlo simulation to answer what-if questions and allows planners and decision

makers to take into account all possible outcomes of any particular course of action. Palisade is the

software company that has installed @RISK in many companies all over the world.

ANS: T

www.palisade.com)

REF:

53. Exponential smoothing (ES) method is a forecasting method. Like the weighted moving average

(WMA) method, it calculates an average demand. It is a simpler method, requiring fewer calculations

than WMA.

ANS: T

REF:

3.3.3

54. It is never beneficial for forecasters in an organization to pool or share their forecasts and information.

ANS: F

REF:

3.8

55. The Delphi forecasting method relies on the opinions of experts who are totally unbiased and whose

estimates of future events are almost always correct.

ANS: F

REF:

3.7

56. The participants in a Delphi Forecast are rewarded by the Delphi manager for agreeing with each

other.

ANS: F

REF:

3.7

this is false, but worry that a biased manager could influence results.)

(We hope

57. When actual demand is significantly less than the forecast, there is a substantial forecasting

underestimate.

ANS: F

REF:

3.6

MULTIPLE CHOICE

1. _____ is the comprehensive and overall planning for the organizations future.

a. Adaptation

c. Profit maximization

b. Conversion

d. Strategy

ANS: D

REF:

Introduction to Chapter 3

2. Strategy entails broad-based, cooperative goal setting followed by planning to achieve this goal by:

a. modifying the forecast.

b. influencing what the future might bring.

c. rejecting the forecast as inevitable truth.

d. all of the above

ANS: D

REF:

Introduction to Chapter 3

a. random variations

b. increasing trend values

ANS: D

REF:

d. all of the above

3.2

a. step functions

b. impulse functions

ANS: C

REF:

c. a and b

d. strategic functions

3.2

5. The evolution of both new and existing products follows a pattern that is called:

a. life cycles

c. syzygistic alignment

b. synergistic cycles

d. lunar cycle

ANS: A

REF:

3.9.3

6.

a. mobile averages

c. exponential smoothing

b. average harmonics

d. seasonal smoothing

ANS: C

REF:

3.3

a. there are n observations

c. there are n-1 observations

b. there are n+1 observations

d. there are n2 observations

ANS: A

REF:

3.3.1

a. introduction, growth, maturity, decline.

b. introduction, maturity, decline.

c. introduction, decline.

d. growth, decline.

ANS: A

REF:

3.9

9. Much time and talent is needed to conceptualize the product, design its specifics, organize the process

for making it, cost it out, pilot test it, and so forth. When the product is accepted, it is released for

production and marketing. All of this takes place in the _____ stage.

a. growth

c. introduction

b. maturity

d. decline

ANS: C

REF:

3.9.1

10. _____ is responsible for using different pricing, advertising, and promotion activities during

appropriate life cycle stages.

a. management

c. marketing

b. operations management

d. management information technology

ANS: C

REF:

3.9

a. growth plans

c. demand analytics

b. forecasts

d. statistical phenomena

ANS: B

REF:

Introduction to Chapter 3

12. Marketing models for predicting sales (lacking a contract) deal with levels of uncertainty that make

forecasts of _____ difficult, but not irrational.

a. demand volumes

c. revenues

b. market shares

d. all of the above

ANS: D

REF:

3.1

13. _____ and _____ are sales that move around the globe in response to currency fluctuations that are

increasingly unstable.

a. Inputs; outputs

c. Time; extrapolation

b. Exports; imports

d. Methods; forecasting

ANS: B

REF:

3.1

14. _____ is a stream of numbers that represent different values over time.

a. Extrapolation

c. Time series

b. Time series analysis

d. Cycle time

ANS: C

REF:

3.2

15. _____ is the process of moving from observed data to the projected values of future points.

a. Time series

c. Cycle time

b. Extrapolation

d. Time series analysis

ANS: B

REF:

3.2

a. cyclical wave patterns.

b. trend lines.

c. step functions.

d. combinations of any or all of these patterns.

ANS: D

REF:

3.2

17. _____ are the basic pallet for the development of forecasting models.

a. Cycles

c. Steps

b. Trends

d. all of the above

ANS: D

REF:

3.2

18. _____ deals with using knowledge about cycles, trends, and averages to forecast future events.

a. Time analysis

c. Time series analysis

b. Time series

d. Series analysis

ANS: C

REF:

3.3

19. If the time series shows a linear trend, there is a(n) _____ of the numbers.

a. constant rate of change

c. estimated rate of change

b. historical forecast rate of change

d. seasonal rate of change

ANS: A

REF:

3.2

20. When they work,_____ allow P/OM to excel at capacity planning and production scheduling for

mature manufactured products and services.

a. forecasting systems

c. historical cycles

b. seasonal cycles

d. semiannual forecasting methods

ANS: C

REF:

3.3.4

21. Assume that in 2013 the quarterly demands were 10, 30, 20, and 40. This gives a yearly demand of

100 units. Further, assume that in 2014 the annual demand is expected to increase to 120 units. Then,

the model for the second quarter (2nd Q) forecast adjustments would be

a. 120(35/100) = 42.

c. 120(20/120) = 20.

b. 120(30/100) = 36.

d. 120(40/150) = 32.

ANS: B

REF:

3.3.4

22. Assume that in 2013 the quarterly demands were 10, 30, 20, and 40. This gives a yearly demand of

100 units. Further, assume that in 2014 the annual demand is expected to increase to 120 units. Then,

the first quarter (1st Q) forecast adjustments would be

a. 120(40/100) = 48.

b. 120(20/100) = 24.

ANS: C

c. 120(10/100) = 12.

d. all of the above

REF:

3.3.4

23. Assume that in 2013 the quarterly demands were 10, 30, 20, and 40. This would give a yearly demand

of 100 units. Further, assume that in 2014 the annual demand is expected to increase to 130 units.

Then, the model for the second quarter (2nd Q) forecast adjustments would be

a. 130(30/100) = 39.

c. 10(130/100) = 13.

b. 100(40/100) = 40.

d. 40(100/130) = 30.77.

ANS: A

REF:

3.3.4

24. Exponential smoothing forecasts the demand for a given period t by combining the forecast______ and

the actual demand of the previous period t-1.

a. of the next period t+1

c. of the first period t=1

b. of the previous period t-1

d. of the Nth period t=N

ANS: B

REF:

3.3.3

25. A way to make forecasts more responsive to the most recent actual occurrences is to use

a. exponential smoothing with alpha being very small.

b. moving averages for trends.

c. weighted moving averages.

d. the Delphi method.

ANS: C

REF:

3.3.3

26. The method that is useful when trying to establish a relationship between two sets of time series

numbers is _____.

a. the Delphi method

c. regression analysis

b. the weighted moving average

d. exponential smoothing

ANS: C

REF:

3.4

27. When last years monthly sales are used to predict next years monthly sales values, the method is

based on using_____ to forecast.

a. exponential smoothing

c. weighted moving averages

b. past history

d. regression analysis

ANS: D

REF:

3.3.4

a. straight-line equations

c. average values

b. any form of relationship

d. regression equations

ANS: C

REF:

3.4

29. In regression analysis X is the independent variable and Y is the dependent variable which means that

X could be_____ and Y could be_________.

a. Umbrellas bought, rain

c. Study hours, grades

b. Rain, umbrellas bought

d. Grades, study hours

ANS: B and C

PTS: 2

REF: 3.4

30._____ is a forecasting method that relies on expert estimation of future events occurring.

a. Weighted moving average

c. Delphi method

b. Time series analysis

d. Exponential smoothing

ANS: C

REF:

3.7

31. The _____ is meant to put all participants on an equal footing with respect to getting their ideas heard.

a. exponential smoothing

c. Delphi method

b. weighted moving average

d. regression analysis

ANS: C

REF:

3.7

a. actual demand is greater than the forecast.

b. actual demand is less than the forecast.

c. both a and b

d. neither a nor b

ANS: C

REF:

3.6

33. To calculate MAD take the _____ of the_______ measures of the errors and divide that sum by the

number of observations.

a. Sum, absolute

c. Product, absolute

b. Quotient, sign-valued

d. Sum, plus and minus

ANS: A

REF:

3.6

34. Using Table 3.12, what is the sum of all the error terms without using absolute values?

a. 171

c. 171-127 = 44

b. 127

d. -127

ANS: B

REF:

3.6

35. It is always true that the sum of a set of absolute values will be _____ than the sum of the same series

of numbers without absolute values.

a. Greater

c. Less

b. Equal to or greater

d. Better

ANS: B

REF:

3.6

36. Today, sales patterns are becoming _____ stable with _____ competition and information.

a. less; decreasing

c. more; decreasing,

b. less; increasing

d. more; increasing

ANS: B

REF:

3.1

37. Product life cycles have been speeding up, which means that growth has to occur _____.

a. neither slower nor faster

c. slower

b. at historical average levels

d. faster

ANS: D

REF:

a. growth.

b. introduction.

ANS: B

REF:

3.9.3

c. maturity.

d. decline.

3.9.3

a. introduction

c. maturity

b. growth

d. decline

ANS: C

REF:

3.9.3

40. _____ is responsible for using different pricing, advertising, and promotion activities during

appropriate life cycle stages.

a. Accounting

c. Production

b. Finance

d. Marketing

ANS: D

REF:

3.9

41. When the new product or service stops growing its market share, it is considered mature. This means

that its volume is _____ at the_______for that brand.

a. Stabilized, saturation level

c. Destabilized, saturation level

b. Stabilized, equilibrium level

d. Restabilized, fatuation level

ANS: A

REF:

3.9.2

42. When actual demand is greater than the forecast, there is a forecasting _____.

a. overestimate

c. both a and b

b. underestimate

d. neither a nor b

ANS: B

REF:

3.6

SHORT ANSWER

1. Why should we maintain a history of forecasting errors? In line with that question, should we care

about who are the good estimators and who are bad ones?

ANS:

Keep historical records about hits and misses on forecasts, predictions and estimates. Companies can

gain major advantages by finding out which team members are good estimators in general, and in

specific situations. For example, some people are good at estimating next months sales but not good at

estimating the cost of buying and making something. Each has value as long as we dont get them

confused in their challenges.

PTS: 1

REF: 3.6

ANS:

Successful strategies are required for the organizations effective pursuit of its clearly defined goals.

Strategy is the comprehensive and overall planning for the organizations future. It has to be productoriented and marketing-aware in order to take the customer and the competition into account, and

process-oriented and P/OM oriented to deliver the product that customers want. It needs to be systemsoriented to coordinate marketing and P/OM. In direct answer to the text, a good strategy modifies

forecasts to influence what the future holds in store.

REF:

Introduction to Chapter 3

ANS:

Moving averages should be used to extrapolate next events if there are no discernible cyclical patterns

and if the system appears to be generating a series of values such that the last set of values provides the

best estimate of what will be the next value. If these occur, there is momentum which can be a vital

indicator. Momentum has magnitude and direction. The continuity of magnitude and direction are

both reflected by the time series movements.

REF:

3.3.1

ANS:

Forecasting requires an understanding of the momentum of the system. The reason not to use just a

single reading is that several readings provide information from different perspectives about a trend

over time. Several readings provide a trend line that captures rates of change along the trajectory.

Pooling information usually (but not always) increases the probabilities of reducing forecasting error.

REF:

3.8

ANS:

Regression analysis is useful when trying to establish a relationship between two sets of numbers that

are individual time series. It is straightforward when that relationship between the numbers or correlate

pairs is linear. When outcomes are to be forecast, the knowledge that one times series leads (or lags)

another can be valuable information.

REF:

3.4

6. How does the trial and error method relate to successful pooling of information for combining multiple

forecasts?

ANS:

Methods for pooling information to provide stronger forecasts are recommended and should be

explored. It is critical that all parties share their forecasts as much as possible and try to find ways to

combine them. Usually stronger forecasts can be obtained if both data and experience are pooled.

Experience may have to do with weightings applied or the number of observations used. One of the

keys to success in combining forecasts is trial and error. For example, different weighting systems are

applied to past forecasts for which actual results are already known. Averaging of forecast results is

also used to predict demand.

REF:

3.8

7. Could one of the experts be a computer when applying the Delphi Method of forecasting?

ANS:

Increasingly, computers will be used

by experts to form their own opinions. It is quite possible to program an artificially intelligent

computer to provide expert estimation of future events without human intervention. Consider the fact

that Watson (the IBM expert computer) beat the best contenders at the game of Jeopardy. In 2011,

Watson beat human experts to win the first prize of $1 million. In February, 2013, IBM assigned

Watson the task of diagnosing and prescribing (a type of forecasting) for lung cancer treatments for

Memorial-Sloan Kettering Cancer Center.

REF:

3.7

8. What is the mean squared error (MSE) and how is it calculated? How is it different from the MAD?

ANS:

The mean square error is calculated by squaring all the error terms obtained from forecasting and then

adding them together. Then, the sum is divided by the number of observations. Since both positive and

negative errors are squared, the positive and negative errors dont cancel each other out. The MSE

does magnify large errors. The MAD (mean absolute deviation) is the sum of the absolute measures of

the errors divided by the number of observations. Here too, positive and negative errors do not cancel

out. Because MAD treats all errors linearly, it is a more conservative measure than MSE.

PTS: 2

REF: 3.6

This Q&A introduces material not covered in the text. Students can learn what is required by googling

mean squared error and using Wikipedia plus other explanations.

9. Why is it important to maintain a history of all forecasting errors?

ANS:

A history of all forecasting errors should be maintained for all personnel that are making the forecasts,

predictions, and estimates. Some individuals are good at forecasting and others are not. Some people

are better at forecasting under certain circumstances. Companies gain a major advantage by finding out

who can make good estimates, and under what circumstances. Bad forecasters can be shifted to other

activities. When a record is not kept, all such advantage potentials are lost. Further, training certain

candidates may be effective. There is evidence that is possible to make a good forecaster even better.

Certain types of forecasting errors are correctable leading to the conversion of a bad forecaster into an

exceptionally good forecaster.

REF:

3.6

10. What is the history of time series analysis and why is it important?

ANS:

Time series analysis has a rich history that clearly shows TSA evolving out of the practical efforts of

bankers and financiers to understand cycles, trends, and averages in order to better forecast future

events. The history of at least 350 years is compelling because it encompasses such diverse streams of

data as prices for wheat, sunspot activity, tidal movements, population growth, disease epidemics,

stock prices, cost of gasoline, trade deficits, business failures, and the list goes on and on. Learning

about the history of statisticians working to derive intelligence from sequences of information is a

fascinating and rewarding subject for further study by those who want to forecast the future.

REF:

All sections devoted to forecasting

This Q&A introduces material not covered in the text. Students can learn what is required by looking

at a book such as Statistical Visions in Time: A History of Time Series Analysis, 1662-1938. This

work by Judy L. Klein is a classic even though it was first published by Cambridge University Press in

December of 2008.

PROBLEM

1. Use the moving average forecasting method with n = 2 to develop a forecast for May.

Month

January

February

March

April

May

June

Actual

40

50

50

60

Forecast

ANS:

Forecast for May = (50 + 60)/2 = 55 (which is the average of the forecast for the prior two months of

March and April.

REF:

3.3.1

2. Use the moving average forecasting method with n = 3 to develop a forecast for May.

Month

January

February

March

April

May

June

Actual

40

50

50

60

Forecast

ANS:

Forecast for May = (50 + 50 + 60)/3 = 53.3333 (which is the average of the forecast for the prior Three

months of February, March and April.

REF:

3.3.1

3. Use the moving average forecasting method with n = 4 to develop a forecast for May.

Month

January

February

March

April

May

June

Actual

40

50

50

60

Forecast

ANS:

Forecast for May = (40 + 50 + 50 + 60)/4 = 50 (which is the average of the forecast for the prior four

months of January, February, March and April.

REF:

3.3.1

Month

January

February

March

April

May

June

Actual

40

50

50

60

Forecast

ANS:

The two month moving average projected more than March and less than April. That is reasonable if

the driving forces are immediate and not long-term.

The three month moving average projected more caution to earlier results. So it diminished the

forecast from 55 to 53.3333. That makes sense because both March and February were 50 and only

April jumped ahead to 60.

The four month moving average showed a lot more caution. After all, January was only 40 and this

moving average is saying let January play a part in reaching a conclusion. Therefore, the forecast has

been reduced from 55 (n=2) to 50 (n=4).

This simple example provides an intuitive example of how forecasts can be optimistic (accelerating)

short-term and become cautious (decelerating) or even pessimistic longer-term.

REF:

3.3.1

5. Employ weights of 0.5, 0.25 and 0.25 to obtain a 3-month weighted moving average for May.

Calculate the error term if the actual demand in May is 65.

Month

January

February

March

April

May

June

Actual

40

50

50

60

Forecast

ANS:

Forecast for May = .5(60) + .25 (50) + .25(50) = 55.

The error term is positive ten (+10) calculated by Actual - Forecast = 65 - 55.

REF:

3.6

6. Employ weights of 0.4, 0.3, 0.2, 0.1, to obtain a 4-month weighted moving average for May. Calculate

the error term if the actual demand in May is 65.

Month

January

February

March

April

May

June

Actual

40

50

50

60

Forecast

ANS:

Forecast for May = .4(60) + .3(50) + .2 (50) + .1(40) = 53.

The error term is positive twelve (+12) calculated by Actual - Forecast = 65 - 53.

REF:

3.6

7. With respect to the same table (below) what did we learn from Problems 5 and 6?

Month

January

February

March

April

May

June

Actual

40

50

50

60

Forecast

ANS:

We learned that the forecast error is increased (from +10 to +12) by letting January have a say in this

forecast. In other words, Januarys low value of 40 introduces a force for lowering the forecast, even

though it is clear that momentum is building over the four months for higher values. Specifically, the

error term increases when we include January. It goes from positive ten (+10) calculated by Actual Forecast = 65 55 to positive twelve (+12) calculated by Actual - Forecast = 65 53. It would be

more informative if we had been given data from prior months as well as the times series of forecasts.

REF:

3.6

8. Employ weights of 0.4, 0.3, and 0.3 to obtain a weighted moving average for April, May and June.

Calculate the error terms.

Month

January

February

March

April

May

June

Actual

10

12

16

16

18

20

Forecast

ANS:

Forecast for April = .4(16) + .3 (12) + .3(10) = 13.0

Forecast for May = .4(16) + .3 (16) + .3(12) = 14.8

Forecast for June = .4(18) + .3 (16) + .3(16) = 16.8

The error term for April is + 3.0, computed as (16 - 13).

The error term for May is + 3.2, computed as (18 - 14.8).

The error term for June is + 3.2, computed as (20 - 16.8).

REF:

3.6

Month

January

February

March

April

May

June

Actual

100

120

160

160

180

200

Forecast

120

100

140

140

200

180

Deviation

ANS:

Given the following data, compute the MAD.

Month

January

February

March

April

May

June

Actual

100

120

160

160

180

200

Forecast

120

100

140

140

200

180

Absolute Deviation

20

20

20

20

20

20

REF:

3.6

10. Given the following data, calculate the forecast for June using the moving average method with n = 3.

Month

January

February

March

April

May

June

Actual

100

120

160

160

180

Forecast

ANS:

Moving Average for June (180 + 160 + 160)/3 = 166.67

11. Continuing with the data from Problem 8, calculate a weighted moving average forecast for June using

weights of 0.5, 0.3, and 0.2. Assume the actual demand for June was 200 units. Comparing Problem 8

with Problem 9, which method produced the best results?

Month

January

February

March

April

May

June

Actual

100

120

160

160

180

200

Forecast

ANS:

Weighted Moving Average Forecast for June = .5(180) + .3(160) + .2(160) = 170.

Moving Average for June (180 + 160 + 160)/3 = 166.67

Month

January

February

March

April

May

June

Actual

100

120

160

160

180

200

Forecast

170 or 166.67

Given an actual demand of 200 units in June, the weighted moving average produced a better (closer)

forecast but both methods underestimated demand.

REF:

3.6

12. The data in the table below illustrates the forecast using Exponential Smoothing Method. Calculate the

MAD value for the months of July through December. A value of alpha = 0.2 was used.

Month

July

August

September

October

November

December

Actual

95

115

120

90

105

110

Forecast

100.62

99.5

102.6

106.08

102.86

103.29

ANS: SUM [(95 - 100.62) + (115 99.5) + (120 102.6) + (90 106.08) + (105 102.86) + (110

103.29)] = 63.45

13. The data in the table below illustrates the Exponential Smoothing Method. A value of alpha = 0.2

was used. Change the value of alpha from 0.2 to 0.4. Calculate the MAD value for the months of July

through December. Then, compare the results obtained in Problem 12 with those obtained with

Problem 13. Use forecast

Month

Actual

July

August

September

October

November

December

95

115

120

90

105

110

Forecast

(alpha = 0.2)

100.62

99.5

102.6

106.08

102.86

103.29

Forecast

(alpha = 0.4)

100.62

ANS:

SUM [(95 - 102) + (115 99.9) + (120 104.43) + (90 109.1) + (105 103.37) + (110 103.86)] =

64.54

Since MAD is larger with alpha = 0.4, we prefer alpha = 0.2. Using the same logic, we could test alpha

values of 0.195 for example. Through trial and error we might find the optimal value of alpha.

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