Activity in Class 01 – Operations II

Basic Concepts Review

Solve the following problems in groups of three students and discuss the results in class:

Problem. A chemical manufacturer wants to forecast the demand of the single product that it offers for
each of the next 12 months of year 2016 in order to establish an aggregate plan. The historical demand is
summarized in the table below.

Demand Demand Demand

Month (tons) Month (tons) Month (tons)
2013/01 171 2014/01 266 2015/01 187
2013/02 220 2014/02 368 2015/02 180
2013/03 254 2014/03 338 2015/03 265
2013/04 282 2014/04 368 2015/04 326
2013/05 185 2014/05 438 2015/05 219
2013/06 443 2014/06 647 2015/06 488
2013/07 348 2014/07 495 2015/07 283
2013/08 170 2014/08 311 2015/08 258
2013/09 501 2014/09 464 2015/09 502
2013/10 385 2014/10 289 2015/10 460
2013/11 444 2014/11 409 2015/11 565
2013/12 525 2014/12 264 2015/12 415

(1) Use Minitab to forecast demand using the multiplicative Winter’s method with parameters α=0.30,
β=0.10 and γ=0.35.

(2) Based on the MAD criterion, estimate monthly forecast error.

(3) Based on the MSE criterion, estimate monthly forecast error.

(4) The mean lead time for this product (production and transportation time to the main warehouse) is 10
days. If the company wants to set the safety stock for this product using a cycle service level of 95%, how
much inventory should the company hold as safety stock? Assume 360 days per year. Use the MSE
criterion to estimate forecast error, and Excel to calculate safety stock.

(5) The manager wants to define the optimal production lot-size for 2016 using the EPQ model. The fixed
cost of preparing the process for production is $10,500, the unit cost is $2,600 per ton, the annual inventory
holding cost rate is 20% and the cost of capital 18%, and the plant can produce 8,000 tons per year. What
is the optimal lot-size? If the optimal lot size is implemented, what would be the average inventory? On
average, how many days of inventory would the company hold?

(6) On average, how much money must the company invest in inventory of finished goods, considering
the safety stock defined previously on question #4 and the inventory policy defined on question #5.