Practice Set 6 Demand Management and Forecasting

PART I.

Question 1
What are the four major principles behind demand forecasting?
1. A forecast is only a forecast, this means forecasts are usually not perfect and we should expect
some kinds of errors.
2. Causal relationship or trend has to be assumed in order to continue.
3. Group forecasts are usually more accurate than individual forecasts to eliminate any of extreme
values.
4. The longer the forecast horizon, the worst the forecast, as a result, we need to update our
forecast whenever new data are available.

Question 2
What are the benefits of the Delphi method over panel consensus?
The Delphi method does not reveal the participants’ true identity, This eliminates the negative of peer

m
pressure and dominating personality on individuals.

er as
Participants can express themselves more freely and openly.

co
eH w
Question 3
What factors affect a company’s choice of forecasting model?

o.
1. Time horizon to forecast
rs e
ou urc
2. Data visibility
3. Level of accuracy required
4. Size of forecasting budget
5. Availability of qualified personnel
o

6. The firm’s degree of flexibility

aC s

7. Consequence of a bad forecast

vi y re
ed d
ar stu
is
Th
sh

This study source was downloaded by 100000815598674 from CourseHero.com on 04-05-2021 09:30:09 GMT -05:00

https://www.coursehero.com/file/41362315/Practice-Set-6-Demand-Management-and-Forecasting-Ans-1pdf/
 PART II. Quantitative questions

Question 1 (Quantitative forecasting techniques)

Sunrice Baking Company markets doughnuts through a chain of food stores. The following data lists the
company’s demand in dozens of doughnuts for the past weeks. Sunrice Baking Company forecasts its
demand for each day of the week separately.

4 weeks ago 3 weeks ago 2 weeks ago Last week

Monday 2200 2400 2300 2400
Tuesday 2000 2100 2200 2200
Wednesday 2300 2400 2300 2500
Thursday 1800 1900 1800 2000
Friday 1900 1800 2100 2000
Saturday (Closed on Saturday)
Sunday 2800 2700 3000 2900

Make a forecast for this week on the following basis:

m
a. Daily, using a simple four-week moving average.

er as
FMonday = (2200 + 2400 + 2300 + 2400)/ 4 = 2325 dozens

co
FTuesday = (2000 + 2100 + 2200 + 2200)/ 4 = 2125 dozens

eH w
FWendesday = (2300 + 2400 + 2300 + 2500)/ 4 = 2375 dozens
FThursday = (1800 + 1900 + 1800 + 2000)/ 4 = 1875 dozens

o.
rs e
FFriday = (1900 + 1800 + 2100 + 2000)/ 4 = 1950 dozens
FSunday = (2800 + 2700 + 3000 + 2900)/ 4 = 2850 dozens
ou urc
b. Daily, using a weighted moving average with weights of 0.1, 0.2, 0.3 and 0.4 (from the farthest to
most recent weeks).
o

FMonday = 2200*0.1 + 2400*0.2 + 2300*0.3 + 2400*0.4 = 2350 dozens

aC s

FTuesday = 2000*0.1 + 2100*0.2 + 2200*0.3 + 2200*0.4 = 2160 dozens

vi y re

FWendesday = 2300*0.1 + 2400*0.2 + 2300*0.3 + 2500*0.4 = 2400 dozens

FThursday = 1800*0.1 + 1900*0.2 + 1800*0.3 + 2000*0.4 = 1900 dozens
FFriday = 1900*0.1 + 1800*0.2 + 2100*0.3 + 2000*0.4 = 1980 dozens
FSunday = 2800*0.1 + 2700*0.2 + 3000*0.3 + 2900*0.4 = 2880 dozens
ed d

c. Sunrice is also planning its purchase of ingredients for bread production. If bread demand had
ar stu

been forecasted for last week at 22000 loaves and only 21000 loaves were actually demanded,
what would be Sunrise’s forecast for this week using exponential with α = 0.1?
Ft = Ft-1 + α(At-1 – Ft-1) = 22000 + 0.1*(21000 - 22000) = 21900 loaves
is

Question 2 (Quantitative forecasting techniques)

Th

Historical demand for a product is:

Demand
January 12
February 11
sh

March 15
April 12
May 16
June 15

a. Using a weighted moving average with weights of 0.6, 0.3, and 0.1 (from the most recent to
farthest months), find the July forecast.

This study source was downloaded by 100000815598674 from CourseHero.com on 04-05-2021 09:30:09 GMT -05:00

https://www.coursehero.com/file/41362315/Practice-Set-6-Demand-Management-and-Forecasting-Ans-1pdf/
 FJuly = 0.6*15 + 0.3*16 + 0.10*12 = 15

b. Using a simple three-month moving average, find the July forecast.

FJuly = (15 + 16 + 12) / 3 = 14.3

c. Using an exponential smoothing with α = 0.2 and a June forecast = 13, find the July forecast.
Make whatever assumptions you wish.
FJuly = FJune + α(AJune – FJune) = 13 + 0.2*(15 - 13) = 13.4

d. Using simple linear regression analysis, calculate the regression equation for the preceding
demand data.
t y ty t2
1 12 12 1
2 11 22 4
3 15 45 9
4 12 48 16
5 16 80 25

m
er as
6 15 90 36
Total 81 297 91

co
eH w
Average 3.5 13.5

o.
rs e t = 3.5
ou urc
y = 13.5
ty − nt y =
o

0.77
t − nt
2 2
aC s

b=
a = y − bt =
vi y re

10.8

e. Using the regression equation in d, calculate the forecast for July.

Y7 = a + 7*b = 10.8 + 0.77t = 10.8 + 0.77*7 = 16.2
ed d
ar stu

Question 3 (Linear regression)

The following shows the demand for stereo headphones in the past year. The store owner, Nina, wants to
use this set of data to find the demand for headphones in the first month of the next year, using linear
regression.
is

Month Demand (Units)

Th

January 4200
February 4300
March 4000
sh

April 4400
May 5000
June 4700
July 5300
August 4900
September 5400
October 5700

This study source was downloaded by 100000815598674 from CourseHero.com on 04-05-2021 09:30:09 GMT -05:00

https://www.coursehero.com/file/41362315/Practice-Set-6-Demand-Management-and-Forecasting-Ans-1pdf/
 November 6300
December 6000

t y ty t2
1 4200 4200 1
2 4300 8600 4
3 4000 12000 9
4 4400 17600 16
5 5000 25000 25
6 4700 28200 36
7 5300 37100 49
8 4900 39200 64
9 5400 48600 81
10 5700 57000 100
11 6300 69300 121
12 6000 72000 144

m
Total 60200 418800 650

er as
Average 6.5 5016.667

co
eH w
o.
t = 3.5

rs e y = 13.5
ou urc
ty − nt y =
192.3077
t − nt
2 2

b=
o

a = y − bt = 3766.667
aC s
vi y re
ed d
ar stu
is
Th
sh

The demand for the first month of the next year is expected to be Y13 = a + 13*b = 3766.677 +
13*192.3077 = 6266.667 units.

Question 4 (Exponential smoothing)

Here are the actual tabulated demands for an item for a nine-month period (January through September).

This study source was downloaded by 100000815598674 from CourseHero.com on 04-05-2021 09:30:09 GMT -05:00

https://www.coursehero.com/file/41362315/Practice-Set-6-Demand-Management-and-Forecasting-Ans-1pdf/
 Month Actual
January 110
February 130
March 150
April 170
May 160
June 180
July 140
August 130
September 140

a) Use simple exponential smoothing with an alpha of 0.2 to estimate April through September.
The actual demand of February is taken as forecasted demand of March.
In other words, AFebruary is considered to be equal to FMarch.
Hence:
FApril = 130 + 0.2*(150 – 130) = 134

m
FMay = 134 + 0.2*(170 – 134) = 141.2

er as
FJune = 141.2 + 0.2*(160 – 141.2) = 145.0

co
FJuly = 145.0 + 0.2*(180 – 145.0) = 152

eH w
FAugust = 152 + 0.2*(140 – 152) = 149.6
FSeptember = 149.6 + 0.2*(130 – 149.6) = 145.7

o.
rs e
Question 5 (Exponential smoothing & MAD)
ou urc
The following tabulations are actual sales of units for six months and a starting forecast in January.

Actual Forecast
o

January 100 80
aC s

February 94
vi y re

March 106
April 80
May 68
June 94
ed d

a) Calculate forecasts for the remaining five months using simple exponential smoothing with α =
ar stu

0.2.
Actual Forecast
January 100 80
is

February 94 84
March 106 86
Th

April 80 90
May 68 88
June 94 84
sh

b) Calculate MAD for the forecasts.

Actual Forecast Error ∑|Error| MAD
January 100 80 20 20 20
February 94 84 10 30 15
March 106 86 20 50 16.6
April 80 90 -10 60 15
May 68 88 -20 80 16

This study source was downloaded by 100000815598674 from CourseHero.com on 04-05-2021 09:30:09 GMT -05:00

https://www.coursehero.com/file/41362315/Practice-Set-6-Demand-Management-and-Forecasting-Ans-1pdf/
 June 94 84 10 90 15

Question 6 (MAD & MSE)

The following data come from regression line projections:

Actual Forecast
406 410
423 419
423 428
440 435

Compute the MAD and MSE.

Actual Forecast Error ∑|Error| MAD

406 410 -4 4 4
423 419 4 8 4
423 428 -5 13 4.3

m
440 435 5 18 4.5

er as
co
Actual Forecast (Error)2 ∑(Error)2 MSE

eH w
406 410 16 16 16

o.
423 419 16 32 16

rs e
423 428 25 57 19
ou urc
440 435 25 82 20.5

Question 7 (MAPE)
You’re given the following actual demand and forecast:
o
aC s

Actual Forecast
vi y re

700 660
760 840
780 750
790 835
ed d

850 910
ar stu

950 890
Compute the MAPE.

Actual Forecast |Error| |Percent ∑|Percent MAPE

is

error| error|
October 700 660 40 5.7% 5.7% 5.7%
Th

November 760 840 80 10.5% 16.2% 8.1%

December 780 750 30 3.8% 20.1% 6.7%
January 790 835 45 5.7% 25.8% 6.45%
February 850 910 60 7.1% 32.9% 6.58%
sh

March 950 890 60 6.3% 39.2% 6.53%

Question 8 (MAD & TS)

Harlen Industries has a simple forecasting model: Take the actual demand for the same month last year
and divide that by the number of fractional weeks in that month. This gives the average weekly demand
for that month. This weekly average is used as the weekly forecast for the same month this year. This

This study source was downloaded by 100000815598674 from CourseHero.com on 04-05-2021 09:30:09 GMT -05:00

https://www.coursehero.com/file/41362315/Practice-Set-6-Demand-Management-and-Forecasting-Ans-1pdf/
 technique was used to forecast eight weeks for this year, which are shown below along with the actual
demand that occurred. The following eight weeks show the forecast (based on last year) and the demand
that actually occurred:

Week Forecast Actual

1 140 137
2 140 133
3 140 150
4 140 160
5 140 180
6 150 170
7 150 185
8 150 205

a. Compute the MAD.

Week Actual Forecast Error ∑|Error| MAD

m
1 137 140 -3 3 3

er as
2 133 140 -7 10 5

co
3 150 140 10 20 6.7

eH w
4 160 140 20 40 10

o.
5 180 140 40 80 16
6
7 rs e 170
185
150
150
20
35
100
135
16.7
19.3
ou urc
8 205 150 55 190 23.8

b. Compute the tracking signal.

o
aC s

Week Actual Forecast Error ∑|Error| MAD ∑(Error) TS

vi y re

1 137 140 -3 3 3 -3 -1
2 133 140 -7 10 5 -10 -2
3 150 140 10 20 6.7 0 0
4 160 140 20 40 10 20 2
ed d

5 180 140 40 80 16 60 3.75

6 170 150 20 100 16.7 80 4.8
ar stu

7 185 150 35 135 19.3 115 5.96

8 205 150 55 190 23.8 170 7.16
is

c. Based on your answers to a and b, comment (in one sentence) on Harlen’s method of forecasting.
The tracking signal is too large, so the forecast should be considered poor.
Th

Question 9 (Tracking signal)

The following table shows predicted product demand using your particular forecasting method along with
the actual demand that occurred:
sh

Actual Forecast
1,550 1,500
1,500 1,400
1,600 1,700
1,650 1,750
1,700 1,800

This study source was downloaded by 100000815598674 from CourseHero.com on 04-05-2021 09:30:09 GMT -05:00

https://www.coursehero.com/file/41362315/Practice-Set-6-Demand-Management-and-Forecasting-Ans-1pdf/
 a) Compute the tracking signal using the mean absolute deviation and running sum of forecast
errors.
Actual Forecast Error ∑|Error| MAD ∑(Error) TS
1,550 1,500 50 50 50 50 1
1,500 1,400 100 150 75 150 2
1,600 1,700 -100 250 83.3 50 0.60
1,650 1,750 -100 350 87.5 -50 -0.57
1,700 1,800 -100 450 90 -150 -1.67

b) Discuss whether your forecasting method is giving good predictions.

Model is okay since tracking is -1.67.

Question 10 (Tracking signal)

The tracking signals computed using past demand history for three different products are as follows. Each
product used the same forecasting technique.

m
er as
co
TS 1 TS 2 TS 3

eH w
1 -2.70 1.54 0.10
2 -2.32 -0.64 0.43

o.
3 -1.70 2.05 1.08
rs e 4 -1.1 2.58 1.74
ou urc
5 -0.87 -0.95 1.94
6 -0.05 -1.23 2.24
7 0.10 0.75 2.96
o

8 0.40 -1.59 3.02

9 1.50 0.47 3.54
aC s

10 2.20 2.74 3.75

vi y re

Discuss the tracking signals for each and what the implications are.
TS 1: This set of tracking signals shows that forecasting model is at first overestimating the demand, and
later turn to underestimation. The numbers continue to increase without falling back to anywhere near 0.
ed d

Therefore, the forecasting model is poor.

ar stu

TS 2: There are normal and consistent fluctuations along the actual demand, with tracking signals being
sometimes positive and sometimes negative. Overall, the numbers are generally small, which suggests
that the forecasts are usually accurate. This forecasting model is acceptable.
is
Th

TS 3: This series of tracking signals is concentrated on the positive side and the numbers are rising
rapidly. Consequently, the model is poor, as it has been and will be underestimating the actual demand.
sh

This study source was downloaded by 100000815598674 from CourseHero.com on 04-05-2021 09:30:09 GMT -05:00

https://www.coursehero.com/file/41362315/Practice-Set-6-Demand-Management-and-Forecasting-Ans-1pdf/
Powered by TCPDF (www.tcpdf.org)