Q1) Below are the number of cars, which are still under warranty, that show up for

repairs with engine problems at authorized car repair shops for XYZ brand model 3.
The XYZ company executives are worried what is going to happen with the number of
cars with engine problem, not only it is possibly going to ruin their brands
reputation but also they have to pay the repair cost since the cars are under
manufacturers warranty. They provided us with real data for the months 1 through 7
of the year. Also they provided the forecasts they made using an exponential
smoothing with = 0.2. (they used D1 for D0 and F0 values in calculating for ES
forecast.)
Month (t)
Actual # of cars with Engine problems (Dt)
ES Forecast (Ft)
120
120,00
1
120
120,00
2
163
120,00
3
170
128,60
4
181
136,88
5
195
145,70
6
212
155,56
7
220
166,85
a. How good is this forecast? Why do you think so? (5 points)
There are a number of ways for quantitavely measuring how good is a forecast. Main three of
them are MAD(Mean Absolute Deviation), MAPE (Mean Absolute Percentage Deviation) and MSE
(Mean Square Error). You can use any of them but it is always better to check at least two
and see if they agree. For our problem,
Month
Actual # of cars with ES Forecast
(t)
Engine problems (Dt)
(Ft)
Error
|Error| |Error|/Dt (Error)^2

0
1
2
3
4
5
6
7

120
120
163
170
181
195
212
220

120,00
120,00
120,00
128,60
136,88
145,70
155,56
166,85

0,00
-43,00
-41,40
-44,12
-49,30
-56,44
-53,15

0,00
43,00
41,40
44,12
49,30
56,44
53,15

0,00
0,26
0,24
0,24
0,25
0,27
0,24

0,00
1849,00
1713,96
1946,57
2430,10
3185,11
2824,86
MAD
MSE
MAPE

134,8214
149,9286
165,0357
180,1429
195,25
210,3571
225,4643
41,06
1992,80
0,22

It seems like, based on errors, we are constantly underestimating and deviations seem to
grow in one direction. This cannot be a good forecast. Also MAPE tells us that on the
average we are 22% (or 25% if you do not include period 1) away from the true value.

b. The management seems to think that a double exponential smoothing method

applied to this data will give much better results? Do you agree, why? (5
points)Using S0 = 120 and G0 = 60 calculate double exponential smoothing
forecast for periods 1-3 using alpha=0.4 and beta =0.5
(10 points)
Double Exponential Smoothing should give much better results. If you plot the data, you will
see that there is a positive linear trend, and Double ES is a good method for this kind of
data, whereas ES is not because ES is used with stationary data. When the double ES method
with given parameters are applied. Alpha=0.4, beta=0.5, G0=60, S0=120.
Actual # of cars with Engine
Month(t) problems(Dt)
St
Gt
Ft
Error
120
60
120
1
120
156
33
180
60
2
163
178,6
27,8
189
26
3
170
191,84
20,52
206,4
36,4
4
181
199,816
14,248
212,36
31,36
5
195
206,4384
10,4352
214,064
19,064
6
212 214,92416
9,46048
216,8736
4,8736
7
220 222,630784
8,583552
224,3846
4,38464

Q2) Izmir Brass Ornaments (IBO) Company produces special handmade ornaments
made out of brass. They are in the process of planning labor force
requirements and production levels for the next 4 quarters. The marketing
department of IBO provided following forecasts
Quarter
1
2
3
4

Demand
380
630
220
160

Assume 280 initial employees. Employees are hired for at least 1 full
quarter. Hiring cost is 1200TL/employee, Firing cost is 2500 TL/employee,
Inventory Cost is 1000TL/unit/quarter. One worker produces 1
ornament/quarter. IBO has currently 80 in stock and would like to end with
20 in inventory at the end of the year.
a. Determine a constant workforce plan and cost of this plan (no stockouts
are allowed) (10 points)
Unit/Worker
Net Cum Net
(000)
Demand
Dem.

Quarter
1
2
3
4

1
1
1
1

300
630
220
180

Min.
Work Force

300
930
1150
1330

300
465
384
333

Hence the min. constant workforce is 465 workers.

The cost of the resulting plan is:
Cum
Production

Quarter
1
2
3
4

465
930
1395
1860

Cum
Net Demand

Ending
Inventory

300
930
1150
1330
Total

165
0
245
530
940

We must also add back in the 20 required to be on hand in the fourth

quarter. Hence the total cost of this plan is:
(1,200)(465

280)

(1000)(940 + 20)

$1,182,000.

b. If IBO company can backorder excess demand at 2000TL/unit/quarter,

determine the minimum number of workers needed so that only a stockout
occurs in period 2. What is the cost of the new plan? (10 points)
If we use the minimum number of workers required
1150/3=384, it will satisfy the conditions stated.
Quarter
1
2
3
4

through

Cum Prod

Cum Net Dem.

Ending Inv.

384
768
1152
1536

300
930
1150
1330

84
-162
2
206

period

of

Total cost = (1,200)(384-280)+(1,000)(312)+(2,000)(162) =

$760,800.

Q3) Karelik A.. for a particular type of compressor used in the production
of refrigerator must decide among three suppliers. Source 1 will sell the
compressors for $3.0 per compressor, independently of the number of
compressors ordered. Source B will sell the compressors for $2.80 each but
will not consider an order for fewer than 2500 compressors, and Source C
will sell the compressors for $2.40 each but will not accept an order for
fewer than 3000 compressors. Assume an order setup cost of $100 independent
of the source selected and an annual requirement of 20000 compressors which
is uniformly distributed throughout the year. Assume a 20 percent annual
interest rate for holding cost calculations.
a) Which source should be used, and what is the size of the standing
order? (8 points)
b) What is the optimal value of the holding and setup costs for
compressors when the optimal source is used? (7 points)
c) If the replenishment lead time for compressors is two months,
determine the reorder point based on the on-hand level of inventory
of compressors. (5 points)
Q5) The inventory of a purchased item is under continuous review. The fixed
cost of an order is $100, the cost per unit is $5, the annual inventory
carrying cost rate, is 20 percent, and the expected annual demand is 10000
units. There is a cost of not satisfying demand, which is $10/unit. Lead
time demand is uniformly distributed between 300 and 500. The managers are
interested in finding an inventory system, that will minimize the expected
total cost of inventory, shortage and setup.
a) What kind of an inventory system would you recommend, and why? (6
points)
b) Find the reorder point if the probability of a shortage during any
lead time is to be 0,05. (6 points)
c) For optimal total expected cost, as mentioned above, how many would you
order (4 points), when would you reorder (4 points)and how often (time
between two consecutive reorders) (3 points) would you order?

Q4) Billys Bakery bakes fresh bagels each morning. The daily demand for
bagels is a random variable with a distribution estimated from prior
experience given by;
Number of Bagels Sold in One Day
0
5
10
15
20
25
30
35

Probability

0.05
0.10
0.15
0.20
0.20
0.15
0.10
0.05

The bagels cost Billys 8 cents to make, and they are sold for 35 cents
each. Bagels unsold at the end of the day are purchased by a nearby charity
soup kitchen for 3 cents each.
a) Based on the discrete distribution above, how many bagels should
Billys bake at the start of each day? (Answer should be a multiple
of 5.) (8 points)
c0
cu

= .08 - .03 = .05

= .35 - .08 = .27
.27
Criticalratio =
= .84375
.05 .27

Fromthegivendistribution,wehave:
Q
0
5
10
15
20

f(Q)
.05
.10
.10
.20
.25

25
30
35

.15
.10
.05

F(Q)
.05
.15
.25
.45
.70
- - - - .84375
.85
.95
1.00

Sincethecriticalratiofallsbetween20and25theoptimalisQ=25bagels.
b) Determine the optimal number of bagels to bake each day using normal
approximation. (Hint: You must compute the mean and the variance of the
demand from the discrete distribution above.) (8 points)
= xf(x) = (0)(.05) + (5)(.10) +...+(35)(.05) = 18
2 = x2f(x) - 2 = 402.5 - (18)2 = 78.5

(2)(32)(1032)
= 8.86
.36
Thezvaluecorrespondingtoacriticalratioof.84375is1.01.Hence,
Q*=z+=(8.86)(1.01)+18=26.95~27.
=

c) What is the type 2 service level (fill rate) for the solution in
part (a)? (6 points)
%85