UMass Lowell 63.

371
College of Management T. Sloan

Productivity Example Problems with Solutions

1. Long Beach Bank employs three loan officers, each working eight hours per day. Each officer processes an
average of five loans per day. The bank’s payroll cost for the officers is $820 per day, and there is a daily
overhead expense of $500.

a. Compute the labor productivity.

b. Compute the multifactor productivity, using loans per dollar cost as the measure.

The bank is considering the purchase of new computer software for the loan operation. The software will
enable each loan officer to process eight loans per day, although the overhead expense will increase to $550.

c. Compute the new labor productivity.

d. Compute the new multifactor productivity.

e. Should the bank proceed with the purchase of the new software? Explain.

Solution

a. Labor productivity is simply the ratio of loans to labor-hours:

output (loans) 3 officers × 5 loans/day

= = 0.625 loans/labor-hr.
input (labor-hrs.) 3 officers × 8 hrs./day

b. Multifactor productivity accounts for both labor cost and overhead:

output (loans) 3 officers × 5 loans/day

= = 0.0113 loans/$.
input (labor cost + overhead) $820 + $500

The new software increases the number of loans processed per day, but it also increases the overhead.

c. New labor productivity:

output (loans) 3 officers × 8 loans/day

= = 1.0 loans/labor-hr.
input (labor-hrs.) 3 officers × 8 hrs./day

d. New multifactor productivity:

output (loans) 3 officers × 8 loans/day

= = 0.0175 loans/$.
input (labor cost + overhead) $820 + $550

e. Purchasing the new software would increase the labor productivity by 60 percent (= [1.0−0.625]/0.625)
and would increase the multifactor productivity by 55 percent (= [0.0175 − 0.0113]/0.0113), so it is
certainly worth the added overhead.

over Spring 2007

2. Modern Lumber, Inc. (MLI) produces apple crates, which it sells to growers. With the current equipment,
MLI produces 240 crates per 100 logs. It currently purchases 100 logs per day, and each log requires three
labor hours to process. MLI is considering the hire of a professional buyer who can buy better quality logs
at the same cost. If this is the case, MLI can increase production to 260 crates per 100 logs, and the labor
hours required will increase by eight hours per day (for the buyer).

a. Compute the labor productivity for the current method (i.e., no buyer).

b. What will the labor productivity be if MLI hires the professional buyer?

Suppose that MLI spends $12 per hour for each worker who constructs the crates. The buyer, however, is
paid $24 per hour. The material cost is $10 per log (regardless of who purchases them).

c. Compute the multifactor productivity for the current method, using crates per dollar cost (labor +
materials) as the measure.

d. How does the multifactor productivity change if the professional buyer is hired?

Solution

a. Labor productivity for the current method:

240 crates
= 0.8 crates/labor-hr.
100 logs × 3 hrs./log

b. Adding the labor of the buyer increases both the inputs and the outputs; the labor productivity would
be:
260 crates
= 0.844 crates/labor-hr.
(100 logs × 3 hrs./log) + 8 hrs.
This means that the labor productivity would increase by 5.5 percent (= [0.844 − 0.8]/0.8).

To combine different factors, we need a common unit of measure: in this case, dollars. The multifactor
productivity measures how much output (crates) is produced per unit of input (dollars)

c. For the current method, the multifactor productivity is:

240 crates 240

= = 0.0522 crates/$.
(100 logs × 3 hrs./log × $12/hr.) + (100 logs × $10/log) 3600 + 1000

d. If the professional buyer is hired, the multifactor productivity would be:

260 crates 260

=
(100 logs × 3 hrs./log × $12/hr.) + (8 hrs. × $24/hr.) + (100 logs × $10/log) 3600 + 192 + 1000

= 0.0543 crates/$.

This represents an increase of 4.0 percent (= [0.0543 − 0.0522]/0.0522).

 Chapter 2 Productivity Problems with sample solutions

Problem 1:

A company that processes fruits and vegetables is able to produce 400 cases of canned peaches
in one-half hour with four workers. Each worker is paid 2 Rials per hour. What is labor
productivity in terms of cases/hour, cases/rial?

output
Productivity=
input

Productivity in cases/hour

400(cases)
productivity= =266.67 cases/hour
1.5 (hours)

Productivity in cases/rial

output 400(cases)
productivity= =
input 2 ( Rials per hours per worker ) × 1.5 ( hours ) × 4 ( workers )=¿ ¿

productivity=33.33 cases per rial

Problem 2:

A company that processes fruits and vegetables is able to produce 6400 cases of canned peaches
in a day with four workers. Each worker is paid 2 Rials per hour. What is labor productivity in
terms of cases/day, cases/worker?

Productivity (cases /day)

6400(cases)
productivity= =6400 cases/day
1(day )

Productivity (cases/worker)

6400(cases)
Productivity= =1600 cases/worker
4(workers)
Problem 3:

A company that processes fruits and vegetables is able to produce 400 cases of canned peaches
in one-half hour with four workers. Each worker is paid 2 Rials per hour. What is the change in
labor hours if output remains the same and the labor productivity in terms of cases/hour
increased by 20%?

Current productivity = 33.33 cases/Rial

New productivity = 1.2 ×33.33=39.996 cases /rial

For new labor hours

400(cases)
productivity=39.996=
2 ( Rials per hours per worker ) × X ( hours ) × 4 ( workers ) =¿ ¿

X =1.25 hours

Problem 4
Determine the productivity for these cases:
a. Four workers installed 720 square yards of carpeting in eight hours.

720( yards)
productivity= =9 yards /hour
8 (hours)

b. A machine produced 70 pieces in two hours. However, two pieces were unusable.

output 70 ( gross )−2 ( loss )

productivity= = =34 pieces/hour
input 2(hours)

Problem 5
Determine the multifactor productivity for the combined inputs of labor and machine time,
materials and overhead using the following data:
Output: 7,040 units
Input
Labor: $1,000
Materials: $520
Overhead: $2,000
 Output Output
multi factor productivity = =
Input Labor + Material+Overhead

7040(units)
¿ =0.858 units/ $
1000+ 5200+2000

Problem 6

A company that processes fruits and vegetables is able to produce 800 cases of canned peaches
in one-half hour with four workers. What is labor productivity?

Problem 7

A company that processes fruits and vegetables is able to produce 500 cases of canned peaches
in one-half hour with four workers. Each worker is paid 2 Rials per hour. What is labor
productivity in terms of cases/hour, cases/rial?

Problem 8

A company that processes fruits and vegetables can produce 9000 cases of canned peaches in a
day with four workers. Each worker is paid 3 Rials per hour. What is labor productivity in terms
of cases/day, cases/worker?

Problem 9

A company that processes fruits and vegetables is able to produce 500 cases of canned peaches
in one-half hour with four workers. Each worker is paid 4 Rials per hour. What is the change in
labor hours if output remains the same and the labor productivity in terms of cases/hour
increased by 50%?
Problem 10

A wrapping-paper company produced 2,000 rolls of paper one day. Labor cost was $160,
material cost was $50, and overhead was $320 on a daily basis. Determine the multifactor
productivity.

Problem 11
Compute the multifactor productivity measure for an eight-hour day in which the output was 300
units, produced by three workers who used 600 pounds of materials. 10% of the output was not
usable and had to be scrapped. Workers have an hourly wage of $20, and material cost is $1 per
pound. Overhead is 1.5 times labor cost.

Daily productivity
Net output=0.9× 300=270 units
Inputs
$
Material cost=600 ( pounds ) ×1 =600 $
pound
Labor cost=number of worker × hours worked × hourly wage¿ 3 ×8 × 20=480 $
¿ head cost=1.5 ×labor cost=1.5 ×480=720 $

Net Output 270

multifactor productivity = = =0.15 units/ $
Material cost+ Labor cost +Overhead cost 600+ 480+720

a. If due to methods improvement, all the output was usable, compute multifactor productivity
in terms of units per dollar?

Daily productivity
Net output=300 units
Inputs
$
Material cost=600 ( pounds ) ×1 =600 $
pound
Labor cost=number of worker × hours worked × hourly wage¿ 3 ×8 × 20=480 $
¿ head cost=1.5 ×labor cost=1.5 ×480=720 $

Net Output 300

multifactor productivity = = =0.1667 units/ $
Material cost+ Labor cost +Overhead cost 600+ 480+720
b. If due to methods improvement, all the output was usable, but the material cost increased by
20%, compute multifactor productivity in terms of units per dollar?

Daily productivity
Net output=300 units
Inputs
Material cost=600 ( pounds ) ×1.2 $ per pound=720 $
Labor cost=number of worker × hours worked × hourly wage¿ 3 ×8 × 20=480 $
¿ head cost=1.5 ×labor cost=1.5 ×480=720 $

Net Output 300

multifactor productivity = = =0.156 units /$
Material cost+ Labor cost +Overhead cost 720+480+ 720

c. If due to methods improvement, the usable output increased by 5%, find the old and new
labor productivity and the change in labor productivity in terms of units per labor hour?

Problem 12:
A health club has two employees who work on lead generation. Each employee works 40 hours
a week, and is paid $20 an hour. Each employee identifies an average of 400 possible leads a
week from a list of 8,000 names. Approximately 10 percent of the leads become members and
pay a onetime fee of $100. Material costs are $130 per week, and overhead costs are $1,000 per
week. Calculate the multifactor productivity for this operation in fees generated per dollar of
input.
 Homework 4 (Location Planning & Analysis)

Q1) A company is planning on expanding and building a new plant in one of three Southeast Asian
countries. Chris Ellis, the manager charged with making the decision, has determined that five
key success factors can be used to evaluate the prospective countries. Ellis used a rating system
of 1 (least desirable country) to 5 (most desirable) to evaluate each factor.

a) Which country should be selected for the new plant?

b) Political unrest in Thailand results in a lower score, 2, for Political and legal aspects.
Does your conclusion change?
c) What if Thailand’s score drops even further, to a 1, for Political and legal aspects?

Q2) The following table gives the map coordinates and the shipping loads for a set of cities that
we wish to connect through a central hub.

a) Near which map coordinates should the hub be located?

b) If the shipments from city A triple, how does this change the coordinates?\
Q3) Hyundai Motors is considering three sites—A, B, and C—at which to locate a factory to build
its new-model automobile, the Hyundai Sport C150. The goal is to locate at a minimum cost
site, where cost is measured by the annual fixed plus variable costs of production. Hyundai
Motors has gathered the following data:

The firm knows it will produce between 0 and 60,000 Sport C150s at the new plant each
year, but, thus far, that is the extent of its knowledge about production plans.

a) For what values of volume, V, of production, if any, is site C a recommended site?

b) What volume indicates site A is optimal?
c) Over what range of volume is site B optimal? Why?
 Aggregate Planning:
Example
(Adapted from Chase and Aquilano,
“Fundamentals of Operations Management”,
Irwin Pub., 1991)
 Example: Introduction
A vacuum cleaner manufacturer tries to “plan ahead” in order to
effectively address the seasonal variation appearing in the annual
demand of its products. A planning horizon of 6 months is used.
The (aggregate) demand forecast for the next six months along
the number of working days are as follows:

Month Demand Forecast No. of Working Days

Jan. 1,800 22
Febr. 1,500 19
March 1,100 21
April 900 21
May 1,100 22
June 1,600 20
Total: 8,000 units Total: 125 Days
 Example: Introduction (cont.)
The associated cost break-down is as follows:

Cost Item Cost($)

Material $100 per unit
Inventory Holding $5 per unit per month
Marginal Stockout $10 per unit per month
Marginal Cost of Subcontracting $20 per unit
(Cost of buying less material costs)
Hiring and Training $1000 per worker
Layoff $1500 per worker
Regular Labor cost per hour $15 per employee per hour
Overtime labor cost per hour $20 per employee per hour
 Example: Introduction (cont.)
Starting and Operating Conditions:

Current Inventory 400 units

Current Workforce 38 workers
Labor hours per unit 5 employee-hours/unit
Regular labor time per employee per day 8 hours
Inventory at the end of each month 25% of coresp. demand
 The tabular approach:
Computing net requirements

Month Beg. Inv. Forc. Dem. End. Inv. Prod. Req.

Jan. 400 1,800 450 1,850
Febr. 450 1,500 375 1,425
March 375 1,100 275 1,000
April 275 900 225 850
May 225 1,100 275 1,150
June 275 1,600 400 1,725
8,000
 Plan 1: Demand Chasing
Produce exactly the quantities required for each period through
regular labor, by varying the workforce size.

Month Prod. Req. Req. Labor Hours Work Days Workers PC WC HC FC

Jan. 1,850 9,250 22 53 185000 139920 15000 0
Febr. 1,425 7,125 19 47 142500 107160 0 9000
March 1,000 5,000 21 30 100000 75600 0 25500
April 850 4,250 21 25 85000 63000 0 7500
May 1,150 5,750 22 33 115000 87120 8000 0
June 1,725 8,625 20 54 172500 129600 21000 0
800000 602400 44000 42000
TC= 1488400
Plan 1: Demand Chasing (cont.)

2,000
1,800
1,600
1,400
1,200
Series2
1,000
Series1
800
600
400
200
0
1 2 3 4 5 6
 Plan 2: Minimum Production Workforce
+ Subcontracting
•Adjust the workforce so that the minimal monthly demand is
met through regular labor.
•Subcontract all excess demand.

Month Prod. Req. Req. Labor Hours Work Days Workers Int. Prod. Subcontr. Quantity PC WC SC FC
Jan. 1,850 9,250 22 26 915 935 91500 68640 112200 18000
Febr. 1,425 7,125 19 26 790 635 79000 59280 76200 0
March 1,000 5,000 21 26 874 126 87400 65520 15120 0
April 850 4,250 21 26 850 0 85000 65520 0 0
May 1,150 5,750 22 26 915 235 91500 68640 28200 0
June 1,725 8,625 20 26 832 893 83200 62400 107160 0
517600 390000 338880 18000
TC= 1264480
Plan 2: Minimum Production Workforce
+ Subcontracting

2,000
1,800
1,600
1,400
1,200 Series1
1,000 Series2
800 Series3
600
400
200
0
1 2 3 4 5 6
 Plan 3: Anticipatory (Seasonal)
Inventories + Backlogging
•Employ the minimal workforce level that can cover the total
production requirements over the considered planning horizon,
by working only regular hours.
•Take care of the demand fluctuations by building anticipatory
inventories and/or backlogging excess demand.
Month Prod. Req. Work Days Workers Act. Prod. Inventory Backlogs PC WC IC BC
Jan. 1,800 22 38 1338 0 62 133800 100320 0 620
Febr. 1,500 19 38 1155 0 407 115500 86640 0 4070
March 1,100 21 38 1277 0 230 127700 95760 0 2300
April 900 21 38 1277 147 0 127700 95760 735 0
May 1,100 22 38 1338 385 0 133800 100320 1925 0
June 1,600 20 38 1215 0 0 121500 91200 0 0
8000 125 7600 760000 570000 2660 6990
TC= 1339650
 Plan 3: Anticipatory (Seasonal)
Inventories + Backlogging (cont.)

2,000

1,500

1,000
Series1
500 Series2
Series3
0
1 2 3 4 5 6
-500

-1,000
 Aggregate Planning Practice Problems

Question 1: Use the transportation method to develop an initial aggregate plan, given

the following data:

Period

G 1 2 3

Demand 130 160 140 Costs

Capacity Regular time $10

Regular 100 100 100 Overtime $15

Overtime 20 20 20 Subcontracting $20

Subcontracting 30 30 30 Carrying costs $2

Backorder $5
 Aggregate Planning Practice Problems

Question2: Prepare a master schedule based on the following information

Beginning inventory is 145 units
Schedule production whenever projected-on-hand drops below 20. Production lot size is 250 units.

Week 1 2 3 4 5 6 7 8

Forecast 100 100 120 120 150 150 180 180

Committed 106 94 65 40 21 9 2 0
Orders
Forecasting Example Problems
UMass Lowell 63.371
College of Management T. Sloan

Forecasting Example Problems with Solutions

1. The Instant Paper Clip Office Supply Company sells and delivers office supplies to companies, schools, and
agencies within a 50-mile radius of its warehouse. The office supply business is competitive, and the ability
to deliver orders promptly is a big factor in getting new customers and maintaining old ones. (Offices
typically order not when they run low on supplies, but when they completely run out. As a result, they
need their orders immediately.) The manager of the company wants to be certain that enough drivers and
vehicles are available to deliver orders promptly and that they have adequate inventory in stock. Therefore,
the manager wants to be able to forecast the demand for deliveries during the next month. From the records
of previous orders, management has accumulated the following data for the past 10 months:

Month Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct.
Orders 120 90 100 75 110 50 75 130 110 90

a. Compute the monthly demand forecast for February through November using the naive method.
b. Compute the monthly demand forecast for April through November using a 3-month moving average.
c. Compute the monthly demand forecast for June through November using a 5-month moving average.
d. Compute the monthly demand forecast for April through November using a 3-month weighted moving
average. Use weights of 0.5, 0.33, and 0.17, with the heavier weights on the more recent months.
e. Compute the mean absolute deviation for June through October for each of the methods used. Which
method would you use to forecast demand for November?

Solution:

a. The naive method simply uses the demand for the current month as the forecast for the next month:
Ft+1 = Dt . So for February we would have FFeb. = DJan. = 120. Similarly, FNov. = DOct. = 90. See the
table below for the other months.
b. For a simple 3-month moving average, we take the average of the previous three months’ demand
Dt + Dt−1 + Dt−2
as our forecast for next month: Ft+1 = . Since we need at least three months to
3
compute the average, and we only have data beginning in January, April is the earliest month for
DMar. + DFeb. + DJan. 100 + 90 + 120
which we can compute the forecast: FApr. = = = 103.3. The
3 3
forecasts for the other months are reported in the table below.
c. The 5-month moving average is similar to the 3-month moving average, except now we take the
average of the previous five months’ demand. We start with the forecast for June (since we need
DMay + DApr. + DMar. + DFeb. + DJan.
at least five months’ worth of previous demand): FJun. = =
5
110 + 75 + 100 + 90 + 120
= 99.0. The forecasts for the remaining months are computed similarly,
5
and the values are reported in the table below.
d. Simple moving averages (like parts b and c above) place an equal weight on all of previous months.
A weighted moving average allows us to put more weight on the more recent data. For a weighted
3-month moving average we have Ft+1 = w1 Dt + w2 Dt−1 + w3 Dt−2 . (Note that the weights should
add up to 1.) Using the weights specified in the question, the forecast for April is computed as
FApr. = 0.5(DMar. ) + 0.33(DFeb.) + 0.17(DJan. ) = 0.5(100) + 0.33(90) + 0.17(120) = 100.1. Forecasts for
May through November are reported in the table below.

1 Spring 2007
 Forecast
Naive 3-Month 5-Month 3-Month
Month Orders Method Moving Avg. Moving Avg. Weighted Avg.
Jan. 120 — — — —
Feb. 90 120 — — —
Mar. 100 90 — — —
Apr. 75 100 103.3 — 100.1
May 110 75 88.3 — 85.8
Jun. 50 110 95.0 99.0 96.8
Jul. 75 50 78.3 85.0 74.1
Aug. 130 75 78.3 82.0 72.7
Sep. 110 130 85.0 88.0 98.3
Oct. 90 110 105.0 95.0 110.7
Nov. ? 90 110.0 91.0 103.4

e. Mean absolute deviation is one measure of how close the forecast is to the actual demand. Recall that
forecast error is simply Et = Dt − Ft , and that the absolute deviation is simply the absolute value of
error: |Et |. For example, the error for the Naive Method for June is EJun. = DJun. − FJun. = 50 − 110 =
−60. To compute the mean absolute deviation, take P the absolute value of each error term, add them
|Et |
up, and divide by the number of terms: MAD = . (Note: You must take the absolute value of
n
each error term before adding them up!) In this case, we compute the mean over five months. The
error and MAD for the months June through October are reported below. In general, the forecast
accuracy increases as more information is incorporated into the forecast.

Error (Et = Dt − Ft )
Naive 3-Month 5-Month 3-Month
Month Orders Method Moving Avg. Moving Avg. Weighted Avg.
Jun. 50 −60 −45.0 −49.0 −46.8
Jul. 75 25 −3.3 −10.0 0.9
Aug. 130 55 51.7 48.0 57.3
Sep. 110 −20 25.0 22.0 11.8
Oct. 90 −20 −15.0 −5.0 −20.7
MAD 36.0 28.0 26.8 27.5

2. PM Computer Services assembles customized personal computers from generic parts. Formed and operated
by part-time UMass Lowell students Paulette Tyler and Maureen Becker, the company has had steady
growth since it started. The company assembles computers mostly at night, using part-time students.
Paulette and Maureen purchase generic computer parts in volume at a discount from a variety of sources
whenever they see a good deal. Thus, they need a good forecast of demand for their computers so that
they will know how many parts to purchase and stock. They have compiled demand data for the last 12
months as reported below.

Period Month Demand Period Month Demand

1 January 37 7 July 43
2 February 40 8 August 47
3 March 41 9 September 56
4 April 37 10 October 52
5 May 45 11 November 55
6 June 50 12 December 54

2
 a. Use exponential smoothing with smoothing parameter α = 0.3 to compute the demand forecast for
January (Period 13).
b. Use exponential smoothing with smoothing parameter α = 0.5 to compute the demand forecast for
January (Period 13).
c. Paulette believes that there is an upward trend in the demand. Use trend-adjusted exponential
smoothing with smoothing parameter α = 0.5 and trend parameter β = 0.3 to compute the demand
forecast for January (Period 13).
d. Compute the mean squared error for each of the methods used.

Solution:

a. The formula for exponential smoothing is: Ft+1 = Ft + α(Dt − Ft ). To determine the forecast for
January, F13 , we need to know the forecast for December, F12 . This, in turn, requires us to know
the forecast for November, F11 . So we need to go all the way back to the beginning and compute the
forecast for each month. For Period 2, we have F2 = F1 +α(D1 −F1 ). But how do we get the forecast for
Period 1? There are several ways to approach this, but we’ll just use the demand for Period 1 as both
demand and forecast for Period 1. Now we can write F2 = F1 + α(D1 − F1 ) = 37 + 0.3(37 − 37) = 37.
For Period 3 we have F3 = F2 + α(D2 − F2 ) = 37 + 0.3(40 − 37) = 37.9. The forecasts for the
other months are show in the table below. For Period 13 we have F13 = F12 + α(D12 − F12 ) =
50.85 + 0.3(54 − 50.85) = 51.79.
b. For α = 0.5 we follow the same exact procedure as we did in part a. See the table below for the
forecast values.
c. Incorporating a trend simply requires us to include a bit more information. The formula is: Ft+1 =
At + Tt where At = αDt + (1 − α)(At−1 + Tt−1 ) and Tt = β(At − At−1 ) + (1 − β)Tt−1 . Once
again we need to go back to the beginning in order to find the necessary values to plug into the
formula, and once again we need to make some assumptions about our initial values. For Period 2,
we have F2 = A1 + T1 , so to get the process started, let A0 = 37 and T0 = 0. We can now
compute A1 and T1 as follows: A1 = αD1 + (1 − α)(A0 + T0 ) = 0.5(37) + (1 − 0.5)(37 + 0) = 37,
and T1 = β(A1 − A0 ) + (1 − β)T0 = 0.3(37 − 37) + (1 − 0.3)(0) = 0. Therefore, the forecast for
Period 2 is F2 = A1 + T1 = 37 + 0 = 37. For Period 3, we first compute A2 and T2 as follows:
A2 = αD2 + (1 − α)(A1 + T1 ) = 0.5(40) + (1 − 0.5)(37 + 0) = 38.5, and T2 = β(A2 − A1 ) + (1 − β)T1 =
0.3(38.5 − 37) + (1 − 0.3)(0) = 0.45. The forecast for Period 3 is F3 = A2 + T2 = 38.5 + 0.45 = 38.95.
The forecasts for the remaining months are reported in the table below.

Expon. Expon. Trend-Adjusted Expon.

Smooth. Smooth. Smooth. (α = 0.5, β = 0.3)
Period Month Demand α = 0.3 α = 0.5 At Tt Ft
1 Jan. 37 37.00 37.00 37.00 0.00 37.00
2 Feb. 40 37.00 37.00 38.50 0.45 37.00
3 Mar. 41 37.90 38.50 39.98 0.76 38.95
4 Apr. 37 38.83 39.75 38.87 0.20 40.73
5 May 45 38.28 38.38 42.03 1.09 39.06
6 Jun. 50 40.30 41.69 46.56 2.12 43.12
7 Jul. 43 43.21 45.84 45.84 1.27 48.68
8 Aug. 47 43.15 44.42 47.05 1.25 47.11
9 Sep. 56 44.30 45.71 52.15 2.41 48.31
10 Oct. 52 47.81 50.86 53.28 2.02 54.56
11 Nov. 55 49.07 51.43 55.15 1.98 55.30
12 Dec. 54 50.85 53.21 55.56 1.51 57.13
13 Jan. ? 51.79 53.61 57.07
3
 e. To compute the mean square error, first compute the error for each period:
P 2 Et = Dt − Ft . Take that
Et
number and square it, then take the average over all periods: MSE = . (Note: You must square
n
the error terms before adding them up!) Take the Exponential Smoothing method with α = 0.3, for
example. In the month of April, the error is EApr. = DApr. − FApr. = 37 − 38.83 = −1.83. We square
this value, add it to the other squared error terms, and divide by 12 to get the mean. The error,
squared error, and MSE for each of the methods are reported below. The trend-adjusted forecast,
which incorporates the most information, has the highest accuracy (lowest MSE).

Expon. Smooth. Expon. Smooth. Trend-Adj.

α = 0.3 α = 0.5 α = 0.5, β = 0.3
Month Demand Et Et2 Et Et2 Et Et2
Jan. 37 0.00 0.00 0.00 0.00 0.00 0.00
Feb. 40 3.00 9.00 3.00 9.00 3.00 9.00
Mar. 41 3.10 9.61 2.50 6.25 2.05 4.20
Apr. 37 −1.83 3.35 −2.75 7.56 −3.73 13.93
May 45 6.72 45.14 6.63 43.89 5.94 35.24
Jun. 50 9.70 94.15 8.31 69.10 6.88 47.33
Jul. 43 −0.21 0.04 −2.84 8.09 −5.68 32.26
Aug. 47 3.85 14.86 2.58 6.65 −0.11 0.01
Sep. 56 11.70 136.85 10.29 105.86 7.69 59.20
Oct. 52 4.19 17.55 1.14 1.31 −2.56 6.55
Nov. 55 5.93 35.19 3.57 12.76 −0.30 0.09
Dec. 54 3.15 9.94 0.79 0.62 −3.13 9.78
MSE 31.31 22.59 18.13

Forecasting Formulas

Simple Moving Average Weighted Moving Average

Dt + Dt−1 + Dt−2 + · · · + Dt−n+1
Ft+1 = Ft+1 = w1 Dt + w2 Dt−1 + · · · + wn Dt−n+1
n

Exponential Smoothing Trend-Adjusted Exponential Smoothing

Ft+1 = αDt + (1 − α)Ft Ft+1 = At + Tt

= Ft + α(Dt − Ft ) where At = αDt + (1 − α)(At−1 + Tt−1 )

and Tt = β(At − At−1 ) + (1 − β)Tt−1

Error Mean Squared Error Mean Absolute Deviation

P 2 P
Et |Et |
Et = Dt − Ft MSE = MAD =
n n

4
 Forecasting Problems with Answer.

1- Given the following data: prepare a forecast using each of these approaches:
a- The naïve approach
b- A 3-period moving average
c- A weighted average using weights of 0.5, 0.3 and 0.2.
d- Exponential smoothing with a smoothing constant of 0.4.
Period 1 2 3 4 5
Number of
60 65 55 58 64
complaints
Solution:

a. The Most recent value of the series becomes the next forecast for period 6: 64.
55+58+64
b. A 3-period forecast for period 6: MA = = 59.
3
3
c. A weighted average forecast for period 6:
F = 0.50(64) + 0.30(58) + 0.20(55) =60.4.
d. Exponential smoothing forecast

Number
Period of Forecast Calculations
complaints
1 60
2 65 60 [ Use previous value of series]
3 55 62 60 + 0.40 ( 64 – 60 ) = 62
4 58 59.2 62 + 0.40 ( 55 - 62 ) = 59.2
5 64 58.72 59.2 + 0.40 ( 58 – 59.2 ) = 58.72
6 60.83 59.72 + 0.40 ( 64 – 58.72 ) = 60.83

2- The number of bushels of apples sold at a roadside fruit stand over 12 day period were as follows:
Day 1 2 3 4 5 6 7 8 9 10 11 12
Numbe
25 31 29 33 34 37 35 32 38 40 37 32
r sold
a. If a two moving average has been used to forecast sales, what were the daily forecasts starting with the
forecast for day 3.
b. If a four period moving average has been used, what were the forecasts for each day starting with day5
c.Plot the original data and each set of forecasts on the same graph. Which forecast has the greater
tendency to smooth? Which forecast has the better ability to respond quickly to changes?
‫‪Solution:‬‬
‫)‪(a‬‬ ‫)‪(B‬‬
‫‪Two period‬‬ ‫‪Four period moving‬‬
‫‪Day‬‬ ‫‪Number‬‬
‫‪moving average‬‬ ‫‪average‬‬
‫‪………………..‬‬
‫‪1‬‬ ‫‪25‬‬ ‫‪………………………….‬‬

‫………………‬
‫‪2‬‬ ‫‪31‬‬
‫‪.‬‬ ‫‪…………………………..‬‬

‫‪25+31‬‬
‫‪3‬‬ ‫‪29‬‬ ‫ـــــــــــــــ = ‪28‬‬ ‫‪…………………………..‬‬
‫‪2‬‬
‫‪29+31‬‬
‫‪4‬‬ ‫‪33‬‬ ‫ـــــــــــــــــــ = ‪30‬‬ ‫‪…………………………..‬‬
‫‪2‬‬
‫‪33+29‬‬ ‫‪25+31+29+33‬‬
‫‪5‬‬ ‫‪34‬‬ ‫ـــــــــــــــ = ‪28‬‬ ‫ــــــــــــــــــــــــــــ ‪= 29.5‬‬
‫‪4‬‬
‫‪2‬‬
‫‪34+33‬‬ ‫‪31+29+33+34‬‬
‫‪6‬‬ ‫‪37‬‬ ‫ـــــــــــــــ = ‪33.5‬‬ ‫ــــــــــــــــــــــــــــ ‪= 31.75‬‬
‫‪2‬‬ ‫‪4‬‬
‫‪37+34‬‬ ‫‪29+33+34+37‬‬
‫‪7‬‬ ‫‪35‬‬ ‫ـــــــــــــــ = ‪35.5‬‬ ‫ــــــــــــــــــــــــــــ ‪= 33.5‬‬
‫‪2‬‬ ‫‪4‬‬
‫‪35+37‬‬ ‫‪33+34+37+35‬‬
‫‪8‬‬ ‫‪32‬‬ ‫ـــــــــــــــ = ‪36‬‬ ‫ــــــــــــــــــــــــــــ ‪= 37.75‬‬
‫‪2‬‬ ‫‪4‬‬
‫‪32+35‬‬ ‫‪34+37+35+32‬‬
‫‪9‬‬ ‫‪38‬‬ ‫ـــــــــــــــ = ‪33.5‬‬ ‫ــــــــــــــــــــــــــــ ‪= 34.5‬‬
‫‪2‬‬ ‫‪4‬‬
‫‪38+32‬‬ ‫‪37+35+32+38‬‬
‫‪10‬‬ ‫‪40‬‬ ‫ـــــــــــــــ = ‪35‬‬ ‫ــــــــــــــــــــــــــــ ‪= 35.5‬‬
‫‪2‬‬ ‫‪4‬‬
‫‪40+38‬‬ ‫‪35+32+38+40‬‬
‫‪11‬‬ ‫‪37‬‬ ‫ـــــــــــــــ = ‪39‬‬ ‫ــــــــــــــــــــــــــــ ‪= 36.25‬‬
‫‪2‬‬ ‫‪4‬‬
‫‪37+40‬‬ ‫‪32+38+40+37‬‬
‫ـــــــــــــــ = ‪38.5‬‬ ‫ــــــــــــــــــــــــــــ ‪= 36.75‬‬
‫‪12‬‬ ‫‪32‬‬ ‫‪4‬‬
‫‪2‬‬
 50

Four -period moving average

40

Actual data
30

Two-period moving average

20

10

0
1 2 3 4 5 6 7 8 9 10 11 12

✓ Four period moving average has the greater tendency to smooth

✓ Two period moving average model has the ability to respond quickly to changes

3- If the exponential smoothing with α = 0.4 has been used to forecast daily sales for apples in problem
2, determine what the daily forecasts would have been. Then plot the original data, the exponential
forecasts, and a set of naïve forecasts on the same graph. Based on the visual comparison, is the naïve more
accurate or less accurate than the exponential smoothing method, or are they about the same?
Solution: The exponential smoothing with α = 0.4➔ F t =F t−1 +α ( At−1−Ft−1)

Exponential smoothing = 0.4 Naïve method

Perio Forecaste Forecaste
d Actual demand d Error d Error
1 25 --- --- --- ----
2 31 25.00 6.00 25 6
3 29 27.40 1.60 37 -8
4 33 28.04 4.96 21 12
5 34 30.02 3.98 45 -11
6 37 31.61 5.39 23 14
7 35 33.77 1.23 51 -16
8 32 34.26 -2.26 19 13
9 38 33.36 4.64 45 -7
10 40 35.21 4.79 31 9
11 37 37.13 -0.13 49 -12
12 32 37.08 -5.08 25 7
 60

50
Naïve approach

40

30

Exponential
20 smoothing forecasting

Actual demand

10

0
1 2 3 4 5 6 7 8 9 10 11 12

✓ From the graph we can see that the exponential forecasting is more accurate than the naïve
approach

4- Apple’s Citrus fruit farm ships boxed fruit anywhere in the continental United States. Using the
following information forecast shipments for the first four mouths. The monthly forecast equation being
used is: y= 402+3t where: t0 January of last year and y is the number of shipments. Determine the
amounts of shipments for the first four months of the next year: January t=24; February t=25 etc.

Month Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
Seasonal
1.2 1.3 1.3 1.1 0.8 0.7 0.8 0.6 0.7 1.0 1.1 1.4
relative

Solution:

- Determine trend amounts for the first four months of next year: January, t = 24;
February t = 25; etc. Thus,
First forecast the monthly demand by the given trend equation
Then multiply the gotten value by the month seasonal index
y jan = 402 + 3(24) = 474 ➔ SI of Jan = 1.2 ➔ 474(1.2) = 568.8
yfeb = 402 + 3(25) = 477 ➔ SI of Feb = 1.3 ➔477(1.3) = 620.1
yMar = 402 + 3(26) = 480 ➔ SI of Mar = 1.3 ➔ 480(1.3) = 624.0
yApr = 402 + 3(27) = 483 ➔ SI of Apr = 1.1 ➔ 483(1.1) = 531.3
5- Develop a linear trend line for the following data. Plot the line and the data on a graph, and verify
visually that a linear trend line is appropriate. Then use the equation to predict the next two values of
the series.
Period 1 2 3 4 5 6 7 8 9
Deman 44 52 50 54 55 55 60 56 62
d

Solution:
Period Demand
t*y t2
(t) (Y)
1 44 44 1
2 52 104 4
3 50 150 9
4 54 216 16
5 55 275 25
6 55 330 36
7 60 420 49
8 56 448 64
9 62 558 81
Sum 45 488 2545 285

n=9
∑t = 45
∑t *y= 2545
∑(t^2) = 285

n∑ ty−∑ t ∑ y
b= =9 ¿¿
n ∑ t 2−(∑ t )
2

∑ y−b ∑ t 488−1.75(45)
a= = =45.47
n 9

y
Thus, the linear trend equation is t =45.47 + 1.75t. The next two forecasts are:
y 10 = 45.47 + 1.75(10) = 62.97
y 11 = 45.47 + 1.75(11) = 64.72
A plot of the data indicates that a linear trend line is appropriate:
6- The owner of a small hardware store has noted a sales pattern for window locks that seems to parallel
the number of break-ins reported each week in the newspaper. The data are:
sales 46 18 20 22 27 34 14 37 30
Break-ins 9 3 3 5 4 7 2 6 4
a. Plot the data to determine which type of equation is appropriate
b. Obtain a regression equation for the data
c. Estimate sales when the number of break-ins is five
Solution:
a. Plot the data to determine which type of equation is appropriate:

From the scatter plot of the data the linear relation is clear between sales and the number of break-ins thus
the linear regression is appropriate model

b. the computations for a straight line are :

Break-ins Sales
xy x2
x y
9 46 414 81
3 18 54 9
3 20 60 9
5 22 110 25
4 27 108 16
7 34 238 49
2 14 28 4
6 37 222 36
4 30 120 16
43 248 1354 245

n∑ xy−∑ x ∑ y 9(1345)−43(248)

b= = =4.275
n ∑ x2−( x)
2
9 (245)−(43)2
∑

∑ y−b ∑ x 248−4.275(43)
a= = =7.129
n 9
 Thus, the equation is yx = 7.129 + 4.275x.
c. x = 5, y = 7.129 + 4.275(5) = 28.50.
x
 7- National mixer, Inc., sells can openers. Monthly sales for a seven-month period were as follows:
Month Feb. Mar. Apr. May Jun. Jul. Aug.
Sales (1000 units) 19 18 15 20 18 22 20
a- Plot the monthly data on a sheet of graph paper
b- Forecast September sales volume using each of the following:
1. A linear regression
2. A five-month moving average
3. Exponential smoothing with a smoothing constant equal to 0.2, assuming a March forecast of
19000 units
4. The naive approach
5. Aweighted average using 0.6, 0.3, and 0.1 wieghts
c- Which method seems least appropariate? Why?

Solution :
a- Plot the monthly data
25

20

15

10

0
Feb. Mar. Apr. May Jun. Jul. Aug.

b- Forcasting the septamper value using :

1. linear regrission :
Month ( t ) t2 Sales ( Y ) Ty
---- --- ---- 0
Feb. (2) 4 19 38
Mar. (3) 9 18 54
Apr. (4) 16 15 60
May (5) 25 20 100
Jun. (6) 36 18 108
Jul (7) 49 22 154
Aug (8) 64 20 160
35 203 0 0
2
= 1225
(∑ t ) ∑t = 203
2

Yt = a + bt n∑ xy−∑ x ∑ y
b=
where n ∑ x2−(∑ x)
2

t = specified number of time periods from t=0

Yt = forecast for period t a=
∑ y−b ∑ x
n
a=value of Yt at t=0
n=number of periods = 7
b=slope of the line
y=value of time series
 7 ( 674 ) −( 35 )( 132 )
b= =0 .5
7(203 )−1225

132−(0 . 5)35
a= =16 .36
7

y (9 )=16 .36 +0 .5 (9)=20. 86

2. a five month moving average :

∑
n
Ai
MAn = t =1
where
n
i="Age" of the data (i=1,2,3,…)
n=Number of periods in the moving average
Ai = Actual value with age i
MA= forecast
20+22+18+20+15
=
MA = 5 19

3. exponential forcasting :

Sales α = 0.2

Period
Unit (1000) F t =F t−1 +α ( At −1−Ft −1)
Forecasted Error

Feb. (2) 19 --- ---

Mar. (3) 18 19 -1
Apr. (4) 15 18.8 - 4.2
May (5) 20 18.36 - 0.04
Jun. (6) 18 20.032 - 2.048
Jul (7) 22 19.6384 1.5424
Aug (8) 20 20.76608 0.14912
Sep (9) 20.119296

4. Naïve approach :
Sales Forecasted
Period Error
Unit (1000) ( Naïve)
Feb. (2) 19 --- ---
Mar. (3) 18 19 -1
Apr. (4) 15 17 -2
May (5) 20 13 7
Jun. (6) 18 27 -9
Jul (7) 22 9 11
Aug (8) 20 33 -13
Sep (9) 7
5- A weighted average :
F =0.60(20) + 0.30(22) + 0.10(18) =20.4.

c- Which method seems least appropariate? Why?

The least appropiate method is the naive one

8- Mark Cotteleer owns a company that manufactures sailboats. Actual demand for Mark’s sailboats
during each season in 2006 through 2009 was as follows:
Year
Season 2006 2007 2008 2009
Winter 1400 1200 1000 900
Spring 1500 1400 1600 1500
Summer 1000 2100 2000 1900
Fall 600 750 650 500
Mark has forecasted that the annual demand for his sailboats in 2011 will equal 5600 sailboats. Based onthis
data determine the forecasted value for the spring 2011.

Soltuion:

Averag
Average e
Seasonal
year 2006-2009 seasona
Season index
Demand l
demand
2006 2007 2008 2009
Winter 1400 1200 1000 900 1125 1250 0.9
Spring 1500 1400 1600 1500 1500 1250 1.2
Summer 1000 2100 2000 1900 1750 1250 1.4
Fall 600 750 650 500 625 1250 0.5
Total Average Seasonally demand = 5000/4 = 1250 0
Seasonal index = (Average 2006-2009 demand) / (Average seasonal demand )

Forecasted value for the spring 2011 is

5600
spring 2011= ( 1 .2 )=1680
❖ 4
9- The manager of a large manufacturer of industerial pumps must choose between two alternative
forecasting techniques. Both techniques have been used to prepare forecasts for a six-months period.
Compute the MAD and MSE. Relying on MAD which technique has the beter performance.
Month 1 2 3 4 5 6
Demand 492 470 485 493 498 492
Forecast Tech-1 488 484 480 490 497 493
Tech-2 495 482 478 488 492 493
Soltuion:

Month Demand Tech-1 e |e| e2 Tech-2 e |e| e2

1 492 488 4 4 16 495 -3 3 9
2 470 484 -14 14 196 482 -12 12 144
7 7 49
3 485 480 5 5 25 478
5 5 25
4 493 490 3 3 9 488 6 6 36
5 498 497 1 1 1 492 -1 1 1
6 492 493 -1 1 1 493 ‫ــــــــــ‬ ‫ـــــــــ‬ ‫ـــــــــ‬
 ‫ـــــــــــــ‬ ‫ــــــــــــــ ــــــــــــــ‬ +2 34 264
-2 28 248

MAD1=
∑∣actual−forcast∣=28 =4 . 67
n 6
. MAD 2=
∑∣actual−forcast∣=34 =5 . 67
6 6
∑ (actual−forcast )2
248
6−1=52. 8

MSE 1= = =49. 6
n−1 6−1
∑ (actual−forcast )2 ¿
MSE 2= =¿
n−1 264 ¿
Technique 1 is better than technique 2 in this comparison where both MAD and MSE of
technique 1 are less than that of technique 2.
Problems on Economic Ordering Quantity

1. Calculate the economic order quantity for material M. The following details are furnished:
Annual usage = 90000 units
Buying cost per order = Rs. 10
Cost of carrying inventory = 10% of cost
Cost per unit = Rs.50

EoQ=❑√ 2 A B/C x S

A = Annual Consumption

B = Buying cost per order

C = Cost per unit

S = Storage and carrying cost (if it is given in % apply on cost of the material)

EoQ = ❑√ 2 x 90,000 units x 10/(50 x 10 %) = ❑√ 18,00,000/ 5

=❑√ 3,60,000 = 600 units

2) From the following information, calculate Economic Order Quantity and the number of orders
to be placed in one quarter of the year.

(a) Quarterly consumption of materials = 2000 kg

(b) Cost of placing one order = Rs. 50
(c) Cost per unit = Rs. 40

(d) Storage and carrying cost = 8% of average inventory

EoQ=❑√ 2 A B/C x S

A = Annual Consumption ( 2000 for quarterly and for annual = 2000x 4 = 8000)

B = Buying cost per order

C = Cost per unit

S = Storage and carrying cost (if it is given in % apply on cost of the material)

EoQ = ❑√ 2 x 8,000 x 50/(40 x 8 % ) = ❑√ 8,00,000/3.2 = 500 kgs

Number of orders to be placed in one quarter = Material consumption per quarter / EoQ per order

= 2000 kgs / 500

= 4 orders
3. Following information relating to a type of raw material is available:

Annual demand 2400 units

Unit Price Rs. 2.40 - C

Ordering cost per order Rs. 4.00 - B

Storage cost 2% per annum

Interest rate 10% per annum

Calculate Economic Order Quantity.

EoQ=❑√ 2 A B/C x S

A = Annual Consumption

B = Buying cost per order

C = Cost per unit

S = Storage and carrying cost (if it is given in % apply on cost of the material)

Interest rate is not considered and treated as non-storage cost

EoQ = ❑√ 2 x 2400 x 4 /(2.40 x 2% ) = ❑√ 19200/0.048 = 632 units

Note: Interest payment is considered as storage cost and in the storage and carrying cost and the loan is
taken for the purpose of capital expenditure on storage.

EoQ = ❑√ 2 x 2400 x 4 /(2.40 x 12% ) = ❑√ 19200/0.288 = 258 units

4. A Company manufactured 5000 units of a product per month. Cost of placing an order is Rs.
100. The purchase price of raw material is Rs. 10 per kg. The re-order period is 4 to 8 weeks.
The consumption of raw materials varies from 100 kg to 450 kg per week, the average
consumption being 275 kg; the carrying cost of inventory is 20% per annum. Calculate (a) Re-
order Quantity & (b) Re-order level.

EoQ=❑√ 2 A B/C x S

A = Normal consumption of material per week x 52 = 275 per week x 52 weeks

A= 14,300 units of materials

B = 100

C = 10 per unit

S = 20%

a. Re-order quantity or EoQ = ❑√ 2 x 14,300 x 100/(10 x 20 %) = ❑√ 2860000/2 = 1,196 units

b. Re-order Level = Max consumption x maximum re-order period
= 450 x 8
= 3,600 units.

5. A Company uses 2500 units of a material per month. Cost of placing an order is Rs. 150. The
cost per unit is Rs. 20. The re-order period is 4 to 8 weeks. The minimum consumption of raw
material is 100 units whereas the average consumption is 275 units. The carrying cost of
inventory is 20% per annum. Calculate (a) Re-order Quantity & (b) Re-order level.

A = 2500 x 12 (as it is given clearly, that’s why did not take the average consumption)

= 30,000

B = 150

C = 20

S = 20%
 a. Re-order quantity or EoQ = ❑√ 2 x 30000 x 150/(20 x 20 %) = ❑√ 90,00,000/4 = 1,500 units
b. Re-order Level = Max consumption x Max ordering period

= 450 x 8 weeks

= 3,600 units.

Average consumption =( Min consumption + max consumption) / 2

275 = (100 + Max cons) /2

275 x 2 = 100 + max consumption = 450 units.

6. XY Co. requires 1500 units of a material per month, each costing Rs. 27. Cost per order is Rs.
150 and the inventory carrying charges work out to 20% of the average inventory. Find out the
economic order quantity and the number of orders per year.

A = 1500 x 12 = 18,000 units

B = 150
C = 27
S = 20%

EoQ = ❑√ 2 x 18,000 x 150/(27 x 20 %) = ❑√ 54,00,000/5.4 = 1,000 units

No of orders per year = No of units required per year / eoq

= 18,000 / 1000 = 18 orders per year