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Question 1

The forecasting accuracy measures for the various forecasting techniques used by Throx are:
Weighted moving average forecast
Year
FY
2014
FY
2015

Actual

Forecast Error

Absolute
Deviation

Percentage
error

15000

12450

2550

2550

17%

22000

14550

7450

7450

33.86%

MFE = (2550 + 7450)/2 = 5000


MAD = (2550 + 7450)/2 = 5000
MAPE = (17% + 33.86%)/2 = 25.43%

Exponential smoothing forecast


Year
FY
2014
FY
2015

Actual

Forecast Error

Absolute
Deviation

Percentage
error

15000

13150

1850

1850

12.33%

22000

14815

7185

7185

32.66%

MFE = (1850 + 7185)/2 = 4517.5


MAD = (1850 + 7185)/2 = 4517.5
MAPE = (12.33% + 32.66%)/2 = 23%

Even though, exponential smoothing is slightly better than moving average method as the
forecasting error values are lower for exponential smoothing. The current forecasting
techniques do not seem adequate for the purpose of decision making as the forecasting error
values are large. MAPE is 23%, which is not a good sign.

Question 2
For forecast values
Annual demand, D = 14815 (using exponential smoothing forecast)
Weekly demand, d = 14815/50 = 296.3

Standard deviation of demand, sd = sqrt(150)


Lead time, L = 4+ 2 = 6 weeks
Standard deviation of lead time, sL = 1 week
Order cost, S = $500, Holding cost, H = $5, Price of socks = $4

EOQ = sqrt (2*DS/H) = sqrt(2*14815*500/5) = 1721 sets


ROP = d*L + z*sqrt(L*sd2 + sL2*d2) = 296.3*6 + 1.65*sqrt(6*150 + 12*296.32) = 2269 units
Annual inventory cost = Annual holding cost + annual ordering cost + annual purchasing cost
= 5*(1721/2) + (14815/1721)*500 + 14815*4 = $67,866.68

For actual demand


Annual demand, D = 22000
Weekly demand, d = 22000/50 = 440
EOQ = sqrt (2*DS/H) = sqrt(2*22000*500/5) = 2098 sets
ROP = d*L + z*sqrt(L*sd2 + sL2*d2) = 440*6 + 1.65*sqrt(6*150 + 12*4402) = 3368 units
Annual inventory cost = Annual holding cost + annual ordering cost + annual purchasing cost
= 5*(2098/2) + (22000/2098)*500 + 22000*4 = $98,488.09

The difference in EOQ and ROP values means that the service level decreases as the
companys has to make sudden planning for excess demand. The actual cost is also more than
the budgeted cost, which increases the capital cost of inventory. We notice that the costs for
actual demand is more than that of forecasted value.

Question 3
Currently the company used a Q of 4000 units with ROP of 1750 units
Annual inventory cost = Annual holding cost + annual ordering cost + annual purchasing cost
= 5*(4000/2) + (22000/4000)*500 + 22000*4 = $100,750

When the company used EOQ and ROP values based on forecast
Annual inventory cost = Annual holding cost + annual ordering cost + annual purchasing cost
= 5*(1721/2) + (22000/1721)*500 + 22000*4 = $98694.13
So, we see that had the company used EOQ and ROP values based on FY 2015 forecast, it
would have saved around $2056 ($100,750 - $98694.13).

Question 4
Weighted moving average forecast = 0.7*14550 + 0.3*12450 = 13920
Exponential smoothing forecast = 14815 + 0.9*(22000 14815) = 21281.5 or 21282 approx.
Exponential smoothing forecast would be more appropriate as we saw that the forecast
accuracy is more for exponential smoothing (MFE, MAD and MAPE is lower for exponential
smoothing than weighted moving average method)

Question 5
a) The supplier scorecard is given as
Supplier Characteristics
Unit price
Order cost
Defect rate
Financial condition of
firm
Total

Alternative
Current A
Alternative B
1
2
3
1
2
3
2
3
1
3
7

1
8

2
9

As, supplier score for Alternative B is highest, Thorx should use Alternative B as its
supplier.

b) The transportation mode scorecard is given as


Transportation
characteristics
Unit cost
Damage Rate
Average Transit time
Total

Maersk Ocean
Freight

UPS
AirExpress
2
1
1
4

1
2
2
5

Transportation cost for Maersk (FY 2015 demand) = 1.5*22000 = $33000


Transportation cost for UPS AirExpress (FY 2015 demand) = 2.75*22000 = $60500
The transportation cost UPS AirExpress is almost double that of Maersk. However,
the damage rate for UPS is much lower than Maersk and the transit time is also 0.5
weeks as compared to 4 weeks of Maersk. This results in lower ROP when using
UPS, which results in lower costs for keeping the safety stock. The required inventory
level would be lower for UPS, which is also beneficial. Moreover, sudden surges in

demand can also be easily managed as lead time is low, thereby increasing the service
level. Also, the score for UPS AirExpress is more, Throx should change its current
transportation supplier to UPS AirExpress.
c) X coordinate of warehouse = (34*14000000 + 47*5000000 + 33*3000000 +
39*1800000)/ (14000000+5000000+3000000+1800000) = 36.98
Y coordinate of warehouse = (118*14000000 + 122*5000000 + 117*3000000 +
121*1800000)/ (14000000+5000000+3000000+1800000) = 118.94
The warehouse coordinates are (36.98, 118.94). However, some other factors which
would influence the choice of specific location are
Rent of location
Capacity of warehouse
Resources and labor availability, etc
d) Demand, D = 21282
Weekly demand, d = 21282/50 = 425.64
EOQ = sqrt (2*DS/H) = sqrt(2*21282*500/5) = 2063 sets approx..
ROP = d*L + z*sqrt(L*sd2 + sL2*d2) = 425.64*6 + 1.65*sqrt(6*150 + 12*425.642) =
3258 units approx..
Annual inventory cost = Annual holding cost + annual ordering cost + annual
purchasing cost = 5*(2063/2) + 21282/2063)*500 + 19572*4 = $88603.52

The expected annual inventory cost is lower than what has been observed in FY 2015.

Question 5
Based on detailed analysis, we suggest changing the supplier to Alternative B, changing the
transportation supplier to UPS AirExpress, keeping the warehouse at (36.98, 118.94) and
having an EOQ of 2063 sets with ROP of 3258 sets.
Potential issues with implementation are

Labor issues Changing location of warehouse might create a labor problem from
unions
For change of supplier, negotiations with the supplier needs to be done along with
supplier evaluations
For change of transportation method, logistics need to be arranged from receivable
point to warehouse.

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