Full file at http://AplusTestbank.

eu/Solution-Manual-for-Fundamentals-of-Production-
Planning-and-Control

DISCUSSION QUESTIONS

1. Think of some of the leading indicators that could be used as a major input to

causal forecasts in the economy. Discuss their use.

Oil and gasoline futures. Most of the commerce in the United States depends upon
petroleum. Whether in shipping costs or the use of petroleum distillates the price of oil
affects us. New housing starts – if people have the money they will want to improve their
standard of living. Interest rates – what the Federal Reserve charges other banks for
loans affects the consumer – housing loans, credit card rates and returns on money
market and savings accounts. Durable goods – washers, dryers, refrigerators and other
items that last more than three years. As people have more money to spend they will
purchase these long-term use items. There will be others mentioned – this is just a few.

2. Which type of forecasts would most likely be used for Sales and Operations

Planning (S&OP), and why are they the most appropriate?

Quantitative and qualitative forecasts are the general types of forecasting used. The
quantitative methods that seem to be the most appropriate are the time series and causal.
These forecasts take into account "hard" data, giving a much more reliable model to
predict. All forecasting methods contain errors, quantitative data tends to be more
reliable.

3. What value does it bring to an operation if a forecasting method is used that

only forecasts for families of products?

Forecasts that look only at a type of product tend to be less accurate than a generalized
forecast (convertibles vs. all cars) that looks at a family of products. To get a good look
at particular market, looking at the family of products is more accurate.

4. Think of at least three products recently introduced that would probably use

life-cycle analogy. What products would they “copy”? Why is life-cycle

appropriate for those products?

The list here will vary. One could look at the Apple I-pod or the Sony PSP. The Sony
product could be compared to other had-held video games (Nintendo Game Boys).
Automobiles can fit here with year model changes. It seems these particular markets
turnover about every 18 months to 24 months.

2-1
Full file at http://AplusTestbank.eu/Solution-Manual-for-Fundamentals-of-Production-
Planning-and-Control
5. How should a company include information for their forecast that indicates

the economy is headed for a recession? How, if at all, should that information

impact time-series forecasting information?

To include information that indicates a recession, I would use a seasonal or cyclical

adjustment to my forecast. If hard data is available from the last recession, incorporate
that data into the forecasting model. Opinion here may vary, using prime interest rates as
one mechanism to account for inflation.

6. Discuss the arguments for using a large smoothing constant for exponential

smoothing instead of a small one. Under what conditions would each be

better? Why?

The larger your smoothing constant, the more of the forecast error is accounted for. This
makes the model very responsive to market demands. However, this responsiveness can
also create havoc in the organization if the forecast changes dramatically and often. If I
want my product to be market driven, I would use the higher smoothing constant. If I
want to hold production somewhat steady then I use the lower constant. For example, if
my product has a high turnover or short shelf life - I would then use the higher constant.

7. Describe in your own words why using the MAD is better for describing the

forecast error than is the MFE. What is the major use of each? Should they

really be used together? Why or why not?

MAD measures the magnitude of the error regardless of which direction. This gives us a
good idea if our forecasts are anywhere near accurate. MFE can hide bad forecasts,
especially those that offset one another, ie a large negative and a large positive would
balance out. The MFE will tell us if we are over or under forecasting and MAD tells us
how accurate we may be. If I were to use either MAD or MFE, then I would use them
both to give a better idea of the market and my ability to predict.

EXERCISES

2-2
Full file at http://AplusTestbank.eu/Solution-Manual-for-Fundamentals-of-Production-
Planning-and-Control
1. Given the following data:

Period Demand

1 43

2 37

3 55

4 48

a. Calculate the three-period moving average for period five.

Period 5 = 46.67

b. Calculate the exponential smoothed forecast for period five using an

alpha value of 0.4. Assume the forecast for period four was the three-

period moving average of the first three periods.

Period 5 = 46.20 (assuming forecast for period 4 = 45.00)

c. Which method appeals the most for the data? Why?

At this point, both methods yield similar results. In the long term, the exponential
smoothing may yield better results. The forecasting errors are the same at this point.

Method 1 - Moving Average:

3-Period Moving Average

Forecast for Period 5 46.67

CFE 3.00
MAD 3.00
MSE 9.00
MAPE 6.25%
Method 2 - Exponential Smoothing:

 0.40
Initial Forecast 45.00

Forecast for Period 5 46.20

2-3
Full file at http://AplusTestbank.eu/Solution-Manual-for-Fundamentals-of-Production-
Planning-and-Control
CFE 3.00
MAD 3.00
MSE 9.00
MAPE 6.25%

2. Given the following demand data:

Period 1 2 3 4 5 6 7 8

Demand 17 22 18 27 14 18 20 25

a. Calculate the 4-period weighted moving average for period 9 using

weights of 0.1, 0.2, 0.3, and 0.4 where the 0.4 is the weight for the

most recent period.

Period 9 = 21.00

b. Calculate the forecast for the period 9 using a three-month moving

average forecasting method.

Period 9 = 21.00

c. Which method would you recommend using and why?

I would recommend using the 4-period weighted moving average. This method has
lower forecasting errors.

Method 1 - Weighted Moving Average:

4-Period Weighted Moving Average

Forecast for Period 9 21.00

CFE -2.30
MAD 4.33
MSE 27.58
MAPE 24.75%

Method 2 - Moving Average:

3-Period Moving Average

2-4
Full file at http://AplusTestbank.eu/Solution-Manual-for-Fundamentals-of-Production-
Planning-and-Control
Forecast for Period 9 21.00

CFE 6.00
MAD 5.20
MSE 39.02
MAPE 26.15%

3. Given the same data for the previous problem:

Period 1 2 3 4 5 6 7 8

Demand 17 22 18 27 14 18 20 25

a. Use Excel or some other statistical computer package to calculate the

regression equation for the data.

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.22
R Square 0.05
Adjusted R Square -0.11
Standard Error 4.55
Observations 8.00

Coefficients Standard Error

Intercept 18.36 3.55
X Variable 1 0.39 0.70

Y = 0.39 (Period) + 18.36

b. Use the regression equation to forecast the demand for period 9

Period 9 = 21.87

4. A forecasting method resulted in the following forecasts shown by the data in

the following table:

2-5
Full file at http://AplusTestbank.eu/Solution-Manual-for-Fundamentals-of-Production-
Planning-and-Control
Period Demand Forecast Deviation

1 132 127 5

2 141 130 11

3 137 133 4

4 159 135 24

5 146 139 7

6 162 144 18

7 166 149 17

8 175 155 20

9 194 161 33

10 181 169 12

a. Use the data to calculate the MAD.

MAD = (5+11+4+24+7+18+17+20+33+12)/10 = 151/10 = 15.1

b. Find a regression equation for the demand data

Y = 6.30 (Period) + 124.67

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.94
R Square 0.88
Adjusted R Square 0.86
Standard Error 7.56
Observations 10.00

Coefficients Standard Error

Intercept 124.67 5.16

2-6
Full file at http://AplusTestbank.eu/Solution-Manual-for-Fundamentals-of-Production-
Planning-and-Control
Period 6.30 0.83

c. Use the regression equation to forecast demand for period 11

Period 11 = 193.97

d. Is the regression method preferred over the method used? Why or why

not?

The regression method is preferred in this instance to the forecasting method currently
used. The current method may be off an average of 15 while the regression method is off
an average of 7.5.
Period Line Fit Plot

250
200
Demand

Demand
150
100
50 y = 6.30(period) + 124.67 Predicted Demand
0
0 5 10 15 Linear (Demand)
Period

5. The following demand data was collected over a three year period for one

product:

Month Demand, year 1 Demand, year 2 Demand, year 3

1 72 84 97

2 67 98 119

3 85 86 138

2-7
Full file at http://AplusTestbank.eu/Solution-Manual-for-Fundamentals-of-Production-
Planning-and-Control
4 99 113 124

5 87 121 143

6 135 140 162

7 127 133 157

8 131 156 178

9 102 125 136

10 96 134 141

11 88 118 122

12 79 102 120

Use the data to develop a regression-based forecast. Be sure to note that there is

a seasonal factor to the demand.

Initial Regression Equation: y = 1.68 (month) + 85.96

Month Demand Regression Demand/ Seasonal Seasonally adjusted

forecast Forecast Multipliers regression forecast
1 72 87.64 0.82 0.79 68.89
2 67 89.33 0.75 0.85 76.30
3 85 91.01 0.93 0.92 83.66
4 99 92.69 1.07 1.00 92.72
5 87 94.37 0.92 1.01 95.61
6 135 96.06 1.41 1.27 121.58
7 127 97.74 1.30 1.19 116.11
8 131 99.42 1.32 1.30 129.09
9 102 101.10 1.01 1.00 101.13
10 96 102.78 0.93 1.00 103.08
11 88 104.47 0.84 0.88 91.63
12 79 106.15 0.74 0.79 83.88
13 84 107.83 0.78 0.79 84.76
14 98 109.51 0.89 0.85 93.54
15 86 111.20 0.77 0.92 102.22

2-8
Full file at http://AplusTestbank.eu/Solution-Manual-for-Fundamentals-of-Production-
Planning-and-Control
16 113 112.88 1.00 1.00 112.92
17 121 114.56 1.06 1.01 116.06
18 140 116.24 1.20 1.27 147.13
19 133 117.92 1.13 1.19 140.09
20 156 119.61 1.30 1.30 155.30
21 125 121.29 1.03 1.00 121.32
22 134 122.97 1.09 1.00 123.32
23 118 124.65 0.95 0.88 109.33
24 102 126.34 0.81 0.79 99.83
25 97 128.02 0.76 0.79 100.63
26 119 129.70 0.92 0.85 110.78
27 138 131.38 1.05 0.92 120.77
28 124 133.06 0.93 1.00 133.11
29 143 134.75 1.06 1.01 136.51
30 162 136.43 1.19 1.27 172.69
31 157 138.11 1.14 1.19 164.08
32 178 139.79 1.27 1.30 181.51
33 136 141.48 0.96 1.00 141.51
34 141 143.16 0.98 1.00 143.57
35 122 144.84 0.84 0.88 127.04
36 120 146.52 0.82 0.79 115.78
37 148.12 0.76 0.79 117.01

6. The following information is presented for a product:

1998 1999

Forecast Demand Forecast Demand

Quarter I 212 232 222 245

Quarter II 341 318 316 351

Quarter III 157 169 160 145

Quarter IV 263 214 251 242

2-9
Full file at http://AplusTestbank.eu/Solution-Manual-for-Fundamentals-of-Production-
Planning-and-Control
a) What is the MAD for the data above?

Absolute
Year Forecast Demand Deviation Deviation
1998 Quarter I 212 232 20 20
1998 Quarter II 341 318 -23 23
1998 Quarter III 157 169 12 12
1998 Quarter IV 263 214 -49 49
1999 Quarter I 222 245 23 23
1999 Quarter II 316 351 35 35
1999 Quarter III 160 145 -15 15
1999 Quarter IV 251 242 -9 9
MAD = 23.25
b) Given the information above, what should the forecast be for

the first quarter of 2000 if the company switches to exponential smoothing

with an alpha value of 0.3?

220.75 (Assuming the first 3 periods average make the initial forecast of 240)

7. The following information is presented for a product:

2001 2002

Forecast Demand Forecast Demand

Quarter I 200 226 210 218

Quarter II 320 310 315 333

Quarter III 145 153 140 122

Quarter IV 230 212 240 231

a) What are the seasonal indices that should be used for each

quarter?

Absolute Demand / Seasonal Seasonally

Forecast Demand Error Deviation Forecast Multipliers adjusted forecast

2-10
 Full file at http://AplusTestbank.eu/Solution-Manual-for-Fundamentals-of-Production-
Planning-and-Control

2001 Quarter I 200 226 26 26 1.13 1.08 216.81

2001 Quarter II 320 310 -10 10 0.97 1.01 324.14
2001 Quarter III 145 153 8 8 1.06 0.96 139.68
2001 Quarter IV 230 212 -18 18 0.92 0.94 216.69
2002 Quarter I 210 218 8 8 1.04 1.08 226.80
2002 Quarter II 315 333 18 18 1.06 1.01 318.15
2002 Quarter III 140 122 -18 18 0.87 0.96 134.40
2002 Quarter IV 240 231 -9 9 0.96 0.94 225.60

b) What is the MAD for the data above?

MAD = 14.375

8. Consider the forecast results shown below. Calculate MAD and MFE using the
data for months January through June. Does the forecast model under- or over-
forecast?

Month Actual Demand Forecast

January 1040 1055

February 990 1052

March 980 900

April 1060 1025

May 1080 1100

June 1000 1050

Absolute
Month Actual Demand Forecast Deviation Deviation
January 1040 1055 -15 15
February 990 1052 -62 62
March 980 900 80 80
April 1060 1025 35 35

2-11
Full file at http://AplusTestbank.eu/Solution-Manual-for-Fundamentals-of-Production-
Planning-and-Control

May 1080 1100 -20 20

June 1000 1050 -50 50
-32 262
MFE = -5.33 MAD = 43.67

This model over forecasts (MFE is a negative number - demand is lower than forecast)

2-12