OPERATIONS MANAGEMENT (MGCR-472-061) Practice Problems for Forecasting

1. Hospitality Hotels forecasts monthly labor needs. a) Given the following monthly labor figures, make a forecast for June using a three-period moving average and a five-period moving average. Month January February March April May Actual Values 32 41 38 39 43

b) What would be the forecast for June using the nave method? c) If the actual labor figure for June turns out to be 41, what would be the forecast for July using each of these models? d) Compare the accuracy of these models using the mean absolute deviation (MAD), mean squared error (MSE). 2. The manager of a small health clinic would like to use exponential smoothing to forecast demand for laboratory services in their facility. However, she is not sure whether to use a high or low value of . To make her decision, she would like to compare the forecast accuracy of a high and low on historical data. She has decided to use an = .7 for the high value and = .1 for the low value. Given the following historical data, which do you think would be better to use? Week 1 2 3 4 5 6 Demand (labor requirement) 330 350 320 370 368 343

3. A company uses exponential smoothing with trend to forecast monthly sales of its products, which show a trend pattern. At the end of week 5, the company wants to forecast sales for week 6. The trend through week 4 has been 20 additional cases sold per week. Average sales have been 85 cases per week. The demand for week 5 was 90 cases. The company uses = .20 and = .10. Make a forecast including trend for week 6.

Solutions Practice Problems for Forecasting

1. a. 3-Period Moving Average: FJune = (AMarch +AApril+AMay)/3 = (38+39+43)/3 = 40 5-Period Moving Average: FJune = (AJanuary+AFebruary+AMarch +AApril+AMay)/5 =(32+41+38+39+43)/5 = 38.6

b. Nave: FJune= AMay = 43 c. 3-Period Moving Average: FJuly = (AApril +AMay+AJune)/3 = (39+43+41)/3 = 41 5-Period Moving Average: FJuly = (AFebruary+AMarch +AApril+AMay +AJune)/5 = (41+38+39+43+41)/5 = 40.4 Nave: FJuly=AJune= 41 d.
Month Actual 3-Period Absolute 5-Period Absolute Moving Error Moving Error Average Average Nave Absolute Error

January February March April May June

32 41 38 39 43 41

37 39.33 40

2 3.67 1

38.6

2.4

32 41 38 39 43

9 3 1 4 2

MAD(3-period moving average) = MAD(5-period moving average)= MAD(Nave) =

Actual Forecast
n Actual Forecast n

= (2+3.67+1)/3 = 2.22 = 2.4/1 = 2.4

Actual Forecast
n

= (9+3+1+4+2)/5 = 3.8

The 3-period moving average provides the best historical fit using the MAD criterion and would be better to use.

e.
Month Actual 3-Period Moving Average Squared Error 5-Period Moving Average Squared Error Nave Squared Error

January February March April May June

32 41 38 39 43 41

37 39.33 40

4 13.47 1

38.6

5.76
2

32 41 38 39 43

81 9 1 16 4

MSE(3-period moving average) = MSE(5-period moving average)=

: Not possible to compute n 1 since there are not enough observations (i.e., n = 1). ( Actual Forecast ) 2 = (81+9+1+16+4)/4 = 111/4 = 27.75 MSE(Nave) = n 1 The 3-period moving average provides the best historical fit using the MSE criterion. 2. Forecasts using = 0.1:
Week 1 2 3 4 5 6 Demand 330 350 320 370 368 343 Exponential Smoothing 330 330 332 330.8 334.72 338.048 MAD: Absolute Error 20 12 39.2 33.28 4.952 21.89

n 1 ( Actual Forecast ) 2

( Actual Forecast )

= (4+13.47+1)/2 = 9.24

Forecasts using = 0.7:

Week 1 2 3 4 5 6 Demand 330 350 320 370 368 343 Exponential Smoothing 330 330 344 327.2 357.16 364.748 MAD: Absolute Error 20 24 42.8 10.84 21.748 23.88

Using = 0.1 provides a better historical fit based on the MAD criterion.

3. Given: T4 = 20, A5 = 90, S4 = 85 Step 1: Smoothing the level of the series: S5 = A5 + (1 - )(S4 + T4) = 0.20(90) + 0.80(85 + 20) = 102 Step 2: Smoothing the trend: T5 = (S5-S4) + (1 - )T4 = 0.10(102 85) + 0.90(20) = 19.7 Step 3: Forecast Including Trend FIT6 = S5 + T5 = 102 + 19.7 = 121.7