Industrial Management and Engineering Economy

Individual ASSIGNMENT 1 (15% marks)

Due Date: 18/04/2022

Forecasting examples

Problem 1
The demand for a product in each of the last five months is shown below.
Month 1 2 3 4 5
Demand ('00s) 13 17 19 23 24

• Use a two-month moving average to generate a forecast for demand in month 6.

• Apply exponential smoothing with a smoothing constant of 0.9 to generate a forecast for demand for
demand in month 6.
• Which of these two forecasts do you prefer and why?

Solution

The two month moving average for months two to five is given by:

m2 = (13 + 17)/2 =
15.0 m3 = (17 + 19)/2
= 18.0 m4 = (19 +
23)/2 = 21.0 m5 = (23
+ 24)/2 = 23.5

The forecast for month six is just the moving average for the month before that i.e. the moving average
for month 5= m5 = 2350.

Applying exponential smoothing with a smoothing constant of 0.9 we get:

M i'= Yi =13
M2 = 0.9Y2 + 0.1M1 = 0.9(17) + 0.1(13) = 16.60
M3 = 0.9Y3 + 0.1M2 = 0.9(19) + 0.1(16.60) = 18.76
M4 = 0.9Y4 + 0.1M3 0.9(23) + 0.1(18.76) = 22.58
M5 = 0.9Y5 + 0.1M4 = 0.9(24) + 0.1(22.58) = 23.86

As before the forecast for month six is just the average for month 5= M 5 2386

To compare the two forecasts we calculate the mean squared deviation (MSD). If we do this we find that
for the moving average

• MSD = [(15 - 19)2 + (18 - 23)2+ (21 - 24)2 ]/3 = 16.67

and for the exponentially smoothed average with a smoothing

constant of 0.9
3/29/22, 12:36 AM

• MSD = [(13 - 17)2 + (16.60 - 19)2 +(18.76 - 23)2+ (22.58 - 24)2]/4 = 10.44

Overall then we see that exponential smoothing appears to give the best one month ahead forecasts as it
has a lower MSD. Hence we prefer the forecast of 2386 that has been produced by exponential
smoothing.

Forecasting example 2

The table below shows the demand for a new aftershave in a shop for each of the last 7 months.
Month 1 2 3 4 5 6 7
Demand 23 29 33 40 41 43 49

• Calculate a two month moving average for months two to seven. What would be your forecast for
the demand in month eight?
• Apply exponential smoothing with a smoothing constant of 0.1 to derive a forecast for the demand
in month eight.
• Which of the two forecasts for month eight do you prefer and why?

Solution

The two month moving average for months two to seven is given by:

m2 = (23 + 29)/2 =
26.0 m3 = (29 + 33)/2
= 31.0 m4 = (33 +
40)/2 = 36.5 m5 = (40
+ 41)/2 = 40.5

m6 = (41 + 43)/2 =
42.0 m7 = (43 + 49)/2
= 46.0

The forecast for month eight is just the moving average for the month before that i.e. the moving average
for month 7 = m7 = 46.

Applying exponential smoothing with a smoothing constant of 0.1 we get:

Mi'= Y1= 23
M2 = 0.1Y2 + 0.9M1 = 0.1(29) + 0.9(23) = 23.60
M3 = 0.1Y3 + 0.9M2 = 0.1(33) + 0.9(23.60) = 24.54
M4 = 0.1Y4 + 0.9M3 0.1(40) + 0.9(24.54) =
26.09 M5 = 0.1Y5 + 0.9M4 = 0.1(41) + 0.9(26.09)
= 27.58 M6 = 0.1Y6 + 0.9M5 = 0.1(43) +
0.9(27.58) = 29.12
M7 = 0.1Y7 + 0.9M6 = 0.1(49) + 0.9(29.12) = 31.11
3/29/22, 12:36 AM Forecasting examples
As before the forecast for month eight is just the average for month 7 = M 7 = 31.11 which is = 31 (as we
cannot have fractional demand).

To compare the two forecasts we calculate the mean squared deviation (MSD). If we do this we find that
for the moving average

• MSD = [(26.0 - 33)2 + ... + (42.0 - 49)2]/5 = 41.1 and for the exponentially

smoothed average with a smoothing constant of 0.1

• MSD = [(23 - 29)2 + ... + (29.12 - 49)2]/6 = 203.15

Overall then we see that the two month moving average appears to give the best one month ahead
forecasts as it has a lower MSD. Hence we prefer the forecast of 46 that has been produced by the two
month moving average.

Forecasting example 3

The table below shows the demand for a particular brand of razor in a shop for each of the last nine
months.
Month 1 2 3 4 5 6 7 8 9
Demand 10 12 13 17 15 19 20 21 20

• Calculate a three month moving average for months three to nine. What would be your forecast for
the demand in month ten?
• Apply exponential smoothing with a smoothing constant of 0.3 to derive a forecast for the demand
in month ten.
• Which of the two forecasts for month ten do you prefer and why?

Solution

The three month moving average for months 3 to 9 is given by:

M3 (10 + 12 + 13) 3 = 11.67

m4 = (12 + 13 + 17)/3 = 14.00
m5 = (13 + 17 + 15)/3 = 15.00
m6 = (17 + 15 + 19)/3 = 17.00
m7 = (15 + 19 + 20)/3 = 18.00
m8 = (19 + 20 + 21)/3 = 20.00
m9 = (20 + 21 + 20)/3 = 20.33

The forecast for month 10 is just the moving average for the month before that i.e. the moving average
for month 9 = m9 = 20.33.
3/29/22, 12:36 AM
Hence (as we cannot have fractional demand) the forecast for month 10 is 20.

Applying exponential smoothing with a smoothing constant of 0.3 we get:

Mi = 10
M2 = 0.3Y2 + 0.7Mi 0.3(12) + 0.7(10) = 10.60
M3' 0.3Y3 + 0.7M2 = 0.3(13) + 0.7(10.60) = 11.32
M4 = 0.3Y4 + 0.7M3' 0.3(17) + 0.7(11.32) = 13.02
M5 = 0.3Y + 0.7M4 = 0.3(15) + 0.7(13.02) = 13.61
M6 = 0.3Y6 + 0.7M5 = 0.3(19) + 0.7(13.61) = 15.23
M7 = 0.3Y 7 + 0.7M6 = 0.3(20) + 0.7(15.23) = 16.66
M8 = 0.3Y8 + 0.7M7 = 0.3(21) + 0.7(16.66) = 17.96
M9 = 0.3Y9 + 0.7M8 = 0.3(20) + 0.7(17.96) = 18.57

As before the forecast for month 10 is just the average for month 9 = M 9 = 18.57 = 19 (as we cannot have
fractional demand).

To compare the two forecasts we calculate the mean squared deviation (MSD). If we do this we find that
for the moving average

• MSD = [(11.67 - 17)2 + ... + (20.00 - 20)2]/6 = 10.57 and for the

exponentially smoothed average with a smoothing constant of 0.3

• MSD = [(10 - 12)2 + ... + (17.96 - 20)2]/8 = 15.08

3/29/22, 12:36 AM Forecasting examples
Overall then we see that the three month moving average appears to give the best one month ahead forecasts as it has a
lower
MSD. Hence we prefer the forecast of 20 that has been produced by the three month moving average

Forecasting example 4

The table below shows the demand for a particular brand of fax machine in a department store in each
of the last twelve months.

Month 1 2 3 4 5 6 7 8 9 10 11 12
Demand 12 15 19 23 27 30 32 33 37 41 49 58

• Calculate the four month moving average for months 4 to 12. What would be your forecast for the
demand in month 13?
• Apply exponential smoothing with a smoothing constant of 0.2 to derive a forecast for the
demand in month 13.
• Which of the two forecasts for month 13 do you prefer and why?
• What other factors, not considered in the above calculations, might influence demand for the fax
machine in month 13?

Solution

The four month moving average for months 4 to 12 is given by:

m4 = (23 + 19 + 15 + 12)/4 =
17.25 m5 = (27 + 23 + 19 + 15)/4
= 21 m6 = (30 + 27 + 23 + 19)/4 =
24.75 m7 = (32 + 30 + 27 + 23)/4
= 28 m8 = (33 + 32 + 30 + 27)/4 =
30.5 m9 = (37 + 33 + 32 + 30)/4 =
33 ml = (41 + 37 + 33 + 32)/4 =
35.75 m1 = (49 + 41 + 37 + 33)/4
= 40 m12 = (58 + 49 + 41 + 37)/4 =
46.25

The forecast for month 13 is just the moving average for the month before that i.e. the moving average
for month 12 = ml2 = 46.25.

Hence (as we cannot have fractional demand) the forecast for month 13 is 46.

Applying exponential smoothing with a smoothing constant of 0.2 we get:

Mi' =Yi = 12
M2 = 0.2Y2 + 0.8M1 = 0.2(15) + 0.8(12) = 12.600
M3 = 0.2Y3 + 0.8M2 = 0.2(19) + 0.8(12.600) = 13.880
M4 = 0.2Y4 + 0.8M3 = 0.2(23) + 0.8(13.880) = 15.704
M5 = 0.2Y5 + 0.8M4 = 0.2(27) + 0.8(15.704) = 17.963
M$ = 0.2Y6 + 0.8M5 = 0.2(30) + 0.8(17.963) = 20.370
M7 = 0.2Y7 + 0.8M6 = 0.2(32) + 0.8(20.370) = 22.696
3/29/22, 12:36 AM Forecasting examples
Mg 0.2Yg + 0.8M7 0.2(33) + 0.8(22.696) = 24.757 M 9
= 0.2Y9 + 0.8Mg 0.2(37) + 0.8(24.757) = 27.206
M10' 0.2 10 + 0.8M9 = 0.2(41) + 0.8(27.206) = 29.965
Mii 0.2Yl 1 + 0.8Ml 0' 0.2(49) + 0.8(29.965) = 33.772
M12 0.2Y12 + 0.8M11 0.2(58) + 0.8(33.772) = 38.618
As before the forecast for month 13 is just the average for month 12 = M l 2 = 38.618 = 39 (as we cannot
have fractional demand).
To compare the two forecasts we calculate the mean squared deviation (MSD). If we do this we find
that for the moving average

• MSD = [(17.25 - 27)2 + ... + (40 - 58)2]/8 = 107.43 and for the exponentially smoothed

average with a smoothing constant of 0.2

• MSD = [(12 - 15)2 + ... + (33.772 - 58)2]/11 = 176.05

Overall then we see that the four month moving average appears to give the best one month ahead
forecasts as it has a lower MSD. Hence we prefer the forecast of 46 that has been produced by the four
month moving average.

Other factors:

• seasonal demand
• advertising
• price changes, both this brand and other brands
• general economic situation
• new technology

Forecasting example 5

The table below shows the demand for a particular brand of microwave oven in a department store in
each of the last twelve months.
Month 1 2 3 4 5 6 7 8 9 10 11 12
Demand 27 31 29 30 32 34 36 35 37 39 40 42

• Calculate a six month moving average for each month. What would be your forecast for the
demand in month 13?
• Apply exponential smoothing with a smoothing constant of 0.7 to derive a forecast for the
demand in month 13.
• Which of the two forecasts for month 13 do you prefer and why?

Solution

Now we cannot calculate a six month moving average until we have at least 6 observations - i.e. we can
only calculate such an average from month 6 onward. Hence we have:

m6 = (34 + 32 + 30 + 29 + 31 + 27)/6 = 30.50

3/29/22, 12:36 AM Forecasting examples
m7 = (36 + 34 + 32 + 30 + 29 + 31)/6 =

32.00 m8 = (35 + 36 + 34 + 32 + 30 + 29)/6

= 32.67 m9 = (37 + 35 + 36 + 34 + 32 +

30)/6 = 34.00 ml = (39 + 37 + 35 + 36 + 34

+ 32)/6 = 35.50 ml = (40 + 39 + 37 + 35 +

36 + 34)/6 = 36.83 m12 = (42 + 40 + 39 + 37

+ 35 + 36)/6 = 38.17 The forecast for month

13 is just the moving average for the month

before that i.e. the moving average for

month 12 = m12 = 38.17.

Hence (as we cannot have fractional demand) the forecast for month 13 is 38.

Applying exponential smoothing with a smoothing constant of 0.7 we get:

Mi'= Yi= 27
M2 = 0.7Y2 + 0.3M1 = 0.7(31) + 0.3(27) = 29.80

M3 = 0.7Y3 + 0.3M2 = 0.7(29) + 0.3(29.80) 29.24

M4 = 0.7Y4 + 0.3M3' 0.7(30) + 0.3(29.24) = 29.77

M5 = 0.7Y5 + 0.3M4 = 0.7(32) + 0.3(29.77) = 31.33

M6 = 0.7Y6 + 0.3M5 = 0.7(34) + 0.3(31.33) = 33.20

M7 = 0.7Y7 + 0.3M6 = 0.7(36) + 0.3(33.20) = 35.16

Mg 0.7Yg + 0.3M7 0.7(35) + 0.3(35.16) = 35.05

M9 = 0.7Y9 + 0.3Mg 0.7(37) + 0.3(35.05) = 36.42

Ml0' 0.7 10 + 0.3M9 = 0.7(39) + 0.3(36.42) = 38.23

Mii 0.7Y ii + 0.3Ml0' 0.7(40) + 0.3(38.23) 39.47

Ml 2 0.7Yl 2 + 0.3Mii' 0.7(42) + 0.3(39.47) = 41.24

As before the forecast for month 13 is just the average for month 12 = M l 2 = 41.24 = 41 (as we cannot
have fractional demand).
3/29/22, 12:36 AM Forecasting examples
To compare the two forecasts we calculate the mean squared deviation (MSD). If we do this we find
that for the moving average

• MSD = [(30.50 - 36)2 + ... + (36.83 - 42)2]/6 = 21.66 and for the exponentially

smoothed average with a smoothing constant of 0.7

• MSD = [(27 - 31)2 + ... + (39.47 - 42)2]/11 = 5.25

a smoothing constant of 0.7 appears to give the best one month ahead forecasts as it has a lower MSD.
Hence we prefer the forecast of 41 that has been produced by exponential smoothing with a smoothing
constant of 0.7.

Forecasting Problems to solve Problem 1

The table below shows the temperature (degrees C), at 11 p.m., over the last ten days:
Day 1 2 3 4 5 6 7 8 9 10
Temperature 1.5 2.3 3.7 3.0 1.4 -1.3 -2.4 -3.7 -0.5 1.3

• Calculate a three day moving average for each day.

• What would be your forecast for the temperature at 11 p.m. on day 11?
• Apply exponential smoothing with a smoothing constant of 0.8 to derive a forecast for the
temperature at 11 p.m. on day 11.
• Which of the two forecasts for the temperature at 11 p.m. on day 11 do you prefer and why?

Problem 2

The table below shows the sales of a toy robot over the last 11 months.
Month 1 2 3 4 5 6 7 8 9 10 11
Sales 3651 4015 3874 3501 3307 3105 2986 3100 3209 3450 3507
3/29/22, 12:36 AM Forecasting examples

• Calculate a four month moving average for each month. What would be your forecast for the sales
in month 12?
• Apply exponential smoothing with a smoothing constant of 0.9 to derive a forecast for the sales in
month 12.
• Which of the two forecasts for month 12 do you prefer and why?

Problem 3

The table below shows the movement of the price of a commodity over 12 months.
Month 1 2 3 4 5 6 7 8 9 10 11 12
Price 25 30 32 33 32 31 30 29 28 28 29 31

• Calculate a 6 month moving average for each month. What is the forecast for month 13?
• Apply exponential smoothing with smoothing constants of 0.7 and 0.8 to derive forecasts for
month
13.
• Which of the two forecasts based on exponential smoothing for month 13 do you prefer and why?

• Problem 4

• The Instant Paper Clip Office Supply Company sells and delivers office supplies to companies, schools, and agencies
within a 50-mile radius of its warehouse. The office supply business is competitive, and the ability to deliver orders
promptly is a big factor in getting new customers and maintaining old ones. (Offices typically order not when they run low
on supplies, but when they completely run out. As a result, they need their orders immediately.) The manager of the
company wants to be certain that enough drivers and vehicles are available to deliver orders promptly and that they have
adequate inventory in stock. Therefore, the manager wants to be able to forecast the demand for deliveries during the next
month. From the records of previous orders, management has accumulated the following data for the past 10 months:

Month Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct.
Orders 120 90 100 75 110 50 75 130 110 90

• Compute the monthly demand forecast for February through November using the naive method.

• Compute the monthly demand forecast for April through November using a 3-month moving average.

• Compute the monthly demand forecast for June through November using a 5-month moving average.

• Compute the monthly demand forecast for April through November using a 3-month weighted moving average. Use
weights of 0.5, 0.33, and 0.17, with the heavier weights on the more recent months.

• Compute the mean absolute deviation for June through October for each of the methods used. Which method would you
use to forecast demand for November?