CA5103: Management Science

1st Departmental Examination

LECTURE

MODULE 1: Introduction to Management Science

Management Science
→ A body of knowledge that uses quantitative approaches to decision making (Anderson et al.,
2019)
→ Simply, management science is being able to perform decision-making and arriving at an
optimum solution using quantitative values.
→ It is also known as Operations Research, Decision Science, Quantitative Analysis, and
Business Analytics. (Taylor, 2006)
→ Management Science as a science is ever evolving.

Frederick W. Taylor (1856-1915)

→ Founder of Management Science
→ A psychologist specializing in problem-solving.

Historical Development of Management Science

→ Management Science started during the World War II period, wherein:
♦ This is flourishing in business and industry due to:
• Numerous methodological developments:
▪ Eg. Simplex Method for solving linear programming problems.
• A virtual explosion in computing power

7 Steps of Problem Solving

STEP 3:
STEP 2:
STEP 1: Determine the
Determine the set
Define the criteria for
of alternative
problem. evaluating
solutions.
alternatives.

STEP 4: STEP 5: STEP 6:

Evaluate the Choose an Implement the
alternatives. alternative. decision.

STEP 7:
Evaluate the
results.

Note: Only the first five (5) steps are the process of decision-making.

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Example:
Step 1. How to have a satisfying career position?

Step 2. There are different offers from companies in Taguig, Makati, QC, and Manila.
Option 1: Accept the position in Taguig
Option 2: Accept the position in Makati
Option 3: Accept the position in QC
Option 4: Accept the position in Manila

Step 3. The four options are evaluated in terms of:

• Salary
• Potential for Advancement
• Job Location

Step 4. Rate each criterion (e.g. poor, fair, average, good, and excellent)
Option Starting Salary Potential for Job Location
Advancement
Taguig PHP 38,500 Average Average
Makati PHP 36,000 Excellent Good
Q.C. PHP 36,000 Good Excellent
Manila PHP 37,000 Average Good

Step 5. After careful evaluation of the data, option 3 is selected.

Step 6. To have a satisfying career position, take the offer in Q.C. Now, think of ways of how to
sustain it. (e.g. engage in professional development, research and training, participate in the
Corporate Social Responsibility (CSR), etc.)

Step 7. Does option 3 (having a starting salary of PHP 36,000; a good potential for advancement
and an excellent job location) ensure a satisfying career position?

*Note that steps 1 to 5 are decision-making process while steps 1 to 7 are for problem solving.

An Alternate Classification of the Decision-making Process

STRUCTURING THE PROBLEM ANALYZING THE PROBLEM

Define
Identify the Determine Evaluate the Choose an
the
Alternatives the Criteria Alternatives Alternative
Problem

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→ Single-criterion Decision Problems
♦ Problems in which the objective is to find the best solution with respect to one criterion.
→ Multicriteria Decision Problems
♦ Problems that involve more than one criterion.

Analysis Phase of Decision Making

QUALITATIVE ANALYSIS QUANTITATIVE ANALYSIS

• Subjective
• Based largely on the manager’s
judgment and experience.
• Includes the manager’s intuitive
“feel” for the problem.
• More of an art than science.
• Objective
• Analysts concentrate on the
quantitative facts or that are related
to the problem, then develop
mathematical expressions that
describe the objectives, constraints,
and other relationships that exist in
the problem, and use one or more
quantitative methods to make a
recommendation.

The Role of Qualitative and Quantitative Analysis

ANALYZING THE PROBLEM

Qualitative
Analysis

STRUCTURING THE PROBLEM

Evaluate the Choose an
Alternatives Alternative
Define the Identify the Determine
Problem Alternatives the Criteria Quantitative
Analysis

Quantitative Analysis and Decision-Making

→ Potential Reasons for a Quantitative Analysis Approach to Decision-Making
♦ The Problem is…
• Complex.
• Very important.
• New.
• Repetitive.

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Quantitative Analysis Process
→ Procedures for finding the “best” or optimal solution/s. (Anderson et al., 2019)
♦ Model Development
♦ Data Preparation
♦ Model Solution
♦ Report Generation

Model Development
→ Models are representations of real objects or situations.
→ Three forms of Models are:
♦ Iconic Models
• Physical Replicas (Scalar representations) of real objects.
♦ Analog Models
• Physical in form
• Do not physically resemble the object being modelled.
♦ Mathematical Models
• Represent real world problems through a system of mathematical formulas and
expressions based on key assumptions, estimates, or statistical analyses.

Formulas for Mathematical Models

TREND PROJECTION EQUATION: LINEAR PROGRAMMING MODEL

Ŷ0 = b0 + b1t

∑n
t=1(t−t)(Ŷt−Ȳ) MaxZ = 5x1 + 7x2
b1 = 2
∑n
t=1(t−t)

s.t.
b0 = Ȳ – b1t
x1 ≤ 6
where: 2x1 + 3x2 ≤ 19
Ŷt = actual value of the time series in period t
n = number of periods in the time series
x1 + x2 ≤ 8
Ȳ = average values of the time series x1 ≥ 0 and x2 ≥ 0
t = mean value of t

→ Generally, experimenting with models (compared to experimenting with the real situation):
♦ Requires less time.
♦ Is less expensive.
♦ Involves less risk.
→ The more closely the model represents the real situation, the more accurate the conclusion and
predictions will be.

Mathematical Models
→ Objective Function
♦ A mathematical expression that describes the problem’s objective, such as
maximizing profit or minimizing cost.

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 Suppose that x denotes the number of units produced and sold each week, and the firm’s
objective is to maximize total weekly profit.

With a profit of PHP 500 per unit, the objective function is 500x.

→ Constraints
♦ A set of restrictions or limitations, such as production capacities.

For this, a production capacity constraint would be necessary if for instance, six (6) hours
are required to produce each unit and only 48 hours are available per week.

With this, we can infer that the production capacity constraint is given by 6x ≤ 48.

The value of 6x is the total time required to produce x units; the symbol indicates that the
production time required must be less than or equal to the 48 hours available.

→ Uncontrollable Inputs
♦ Environmental factors that are not under the control of the decision maker.

The profit per unit (PHP 500), the production time per unit (6 hours), and the production
capacity (48 hours) are environmental factors that are not under the control of the manager
or the decision maker.

→ Decision Variables
♦ Controllable inputs
♦ Decision alternatives specified by the decision maker, such as the number of units of
a product to produce.

In the preceding mathematical model, the production quantity x is the controllable input to
the model.

Full Sample Production Problem:

A complete mathematical model for our simple production problem is:

Maximize: 500x (objective function)

Subject to: 6x ≤ 48 (constraint)

x ≥ 0 (constraint)

The second constraint reflects the fact that it is not possible to manufacture a negative number
of units.

→ Deterministic Model
♦ If all controllable inputs to the model are known and cannot vary.

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 → Stochastic (Probabilistic) Model
♦ If any uncontrollable inputs are uncertain and subject to variation.
♦ These are often more difficult to analyze.

In the simple production problem example, if the number of hours of production time per
unit could vary from three (3) to six (6) hours depending on the quality of the raw material,
the model will be stochastic.

→ Cost / Benefit Considerations

♦ Must be made in selecting an appropriate mathematical model.

Frequently, a less complicated (and perhaps less precise) model is more appropriate than
a more complex and accurate one, due to cost and ease of solution considerations.

Flowchart of the Process of Transforming Model Inputs to Outputs

Uncontrollable Inputs
(Environmental Factors)

Controllable Inputs Output

Mathematical Model
(Decision Variables) (Projected Results)

Data Preparation
→ Not a trivial step due to time required and the possibility of data collection errors.
♦ Ex. A model with 50 decision variable and 25 constraints could have over 1300 data
elements.
→ Often, a large database and information systems specialists might be needed.

Model Solution
→ Analyst attempts to identify the alternative on the set of decision variable values that provides
the “best” output for the model.
♦ The best output is considered as the optimal solution.

→ Provided that the alternative can satisfy all the model constraints, it is deemed as feasible and a
candidate for the best solution.
♦ However, the alternative is rejected and deemed as being infeasible if it does not satisfy
all the model constraints.

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Trial-and-Error Solution for Production Problem

Total Hours of
Production Quantity Projected Profit Feasible Solution
Production
0 0 0 Yes
2 1000 12 Yes
4 2000 24 Yes
6 3000 36 Yes
8 4000 48 Yes
10 5000 60 No
12 6000 72 No

Note: Software packages like Microsoft Excel and Lingo are available for solving mathematical models.

Model Testing and Validation

→ Until there are solutions generated, the goodness or accuracy of a model cannot be assessed.
→ Small test problems having known and/or solutions can be used for model testing and validation.
→ If the model generates expected solutions, the model is used on the full-scale problem.
♦ Corrective Actions (in cases of inaccuracies or potential shortcomings in the model)
• Collection of More Accurate Input Data
• Modification of the Model

Report Generation
→ A managerial report that can be easily understood by the decision maker should be prepared
based on the results of the model. It should include:
♦ The recommended decision
♦ Other pertinent information about the results (Ex. Sensitivity of model solution to
assumptions and data used.)

Management Science Techniques

→ Analytic Hierarchy Process
♦ Multi-criteria decision-making technique that permits the inclusion of subjective factors
in arriving at a recommended decision.

→ Decision Analysis
♦ Used in determining the optimal strategies in situations involving several decision
alternatives and an uncertain pattern of future events.

→ Forecasting Methods
♦ Techniques that can be used to predict future aspects of a business operation.

→ Goal Programming
♦ Technique for solving multi-criteria decision problems, usually with the framework of
linear programming.

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 → Integer Linear Programming
♦ An approach used for problems that can be set up as linear programs with additional
requirement that some or all the decision recommendations be integer values.

→ Inventory Models
♦ Used by managers that are faced with the problems of maintaining sufficient
inventories to meet demand for goods and, incurring the lowest possible inventory
holding costs at the same time.

→ Linear Programming
♦ Problem-solving approach that is developed for situations involving maximizing or
minimizing a linear function subject to linear constraints that limit the degree to which
the objective can be pursued.

→ Markov-Process Models
♦ Useful in studying the evolution of certain systems over repeated trials (Ex.
Describing the probability that a machine, functioning in one period, will function or break
down in another period).

→ Network Models
♦ Specialized solution procedures for problems in transportation system design,
information system design, and project scheduling.

→ Project Scheduling: PERT (Program Evaluation and Review Techniques / CPM (Critical
Path Method)
♦ Helps managers responsible for planning, scheduling, and controlling projects that
consist of numerous separate jobs or tasks performed by a variety of departments,
individuals, etc.

→ Simulation
♦ Uses a computer program to model the operation of a system and perform simulation
computations.

→ Waiting Line (Queueing Models)

♦ Helps managers in understanding and making better decisions concerning the
operation of systems involving queueing or waiting lines.

Methods Used Most Frequently

→ Linear Programming
→ Integer Programming
→ Network Models (Transportation and Transshipment Models)
→ Simulation

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Sample Problems on Management Science Techniques

→ Linear Programming Problem (Maximization)

♦ Production must be scheduled in two types of machines: machine 1 and machine 2.
♦ One hundred twenty (120) hours of time can be scheduled for machine 1 and eighty (80)
for machine 2.
♦ Production during the scheduling period is limited to two products: A and B.
♦ Each unit of product A requires two (2) hours of process time on each machine.
♦ Each unit of product B requires three (3) hours on machine 1 and one and a half (1.5)
hours on machine 2.
♦ The profit is PHP 200 per unit of product A and PHP 250 per unit of product B.
♦ Both types of products can be readily marketed; consequently, production should be
scheduled with the objective of maximizing profit.

→ Linear Programming Problem (Maximization)

♦ A feed supplier mixes feed for pigs which requires at least 80 kg of nutrient A, at least 12
kg of nutrient B, and at least 14 kg of nutrient C.
♦ Mico, the supplier, has available soybean meal which costs PHP 150 per 50-kg sack and
contains 20 kg of nutrient A, 2 kg of nutrient B, and 2 kg of nutrient C.
♦ He can also supply enriched darak which costs PHP 140 per 50-kg sack and contains 10
kg, 2 kg, and 3 kg of nutrients A, B, and C respectively.
♦ How many sacks of each ingredient should be used to mix animal feed which satisfies the
minimum requirements at minimum cost?

→ Network Models (Transportation Problem)

♦ A national firm has three factories and four warehouses.
♦ The cost of manufacturing a given product is the same at each of the factories, the cost of
shipping the product from the different factories to the warehouses varies. The
transportation costs, factory capacities, and warehouse requirements are given in the
table.

Warehouse Factory
Factory
W1 W2 W3 W4 Capacity

F1 15 24 11 12 5000

F2 25 20 14 16 4000

F3 12 16 22 13 7000
Warehouse
3000 2500 3500 4000
Requirement

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 → Network Models (Assignment Problem)
♦ A firm has five jobs that must be assigned to five work crews.
♦ The cost of each work crew to do each job is given by the cost matrix shown:

I/J 1 2 3 4 5

1 41 72 39 52 25

2 22 29 49 65 81

3 27 39 60 51 40

4 45 50 48 52 37

5 29 40 45 26 30

→ Project Scheduling (PERT / CPM)

♦ A social project manager is faced with a project with the following activities:

Activity Description Duration

Social work team to live in the village. 5 weeks

Social research team to do surveys. 12 weeks

Analyze results of surveys. 5 weeks

Establish mother and child health programs. 14 weeks

Establish a rural credit programme. 15 weeks

Carry out immunization of under-fives. 4 weeks

MODULE 2: Forecasting Techniques

Forecasts
→ These are basic inputs in decision processes because they provide information on future
sales, demand, etc. (Stevenson, 2012).
→ A prediction of what will happen in the future. (Anderson, et al., 2019)
♦ There is no such thing as a perfect prediction. (Anderson, et al., 2019)
→ Main purpose is to have a better estimate of the future and in doing so be able to reduce the
risks of uncertainties (Render, et al., 2016).

→ Forecasting Methods:
 Qualitative
▪ Involves the use of expert judgment to develop forecasts.

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  Quantitative
▪ Can be used when:
o Past information about the variable being forecast is available.
o The information can be quantified.
o It is reasonable to assume that past is the prologue, or the past will continue
to the future.
Types of Forecasting Models and Simple Linear Regression Analysis
→ Associative Forecasting
♦ termed as simple linear regression (SLR).

→ Assumptions
♦ conditions that must be met
♦ Violations occur when they are not met, hence, the simple linear regression cannot be
performed for prediction.

Types of Forecasting Techniques (Render, et al., 2016)

→ Qualitative Models
♦ Based on judgmental or subjective factors
• Unavailable o unapplicable historical data
• Relies on expert opinion and individual experiences.
▪ Ex. Introducing a New Product
o Forecasting Demand is difficult due to lack of any historical sales
data.

♦ Types of Qualitative Models:

• This iterative group process allows experts in
different places to make forecasts.
• Often involves three types of participants:
- decision makers (usually five (5) to ten (10)
experts)
- staff personnel (assists decision makers)
Delphi Method - respondents (people whose judgments are
valued and being sought).
• Data or answers that were gathered from the
respondents by distributing an initial questionnaire
are used to modify new questionnaires. This
process, then, repeats until a consensus is reached.

• An approach where each salesperson estimates

what sales will be in his/her region.
• To reach an overall forecast, gathered forecasts
Sales Force Composite from different regions are reviewed and combined at
the district and national levels. Data starts from an
inner circle to a larger one, then reaches an overall
forecast.

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Jury of Executive Opinion
Consumer Market Survey
• In this method, there is a group of experts (high level
managers who are equipped quantitatively and
qualitatively) who make decisions. Their opinions
are, then, taken, often a combination with statistical
models, and results in a group estimate or
demand.
• A method that solicits ideas from customers or
potential customers about their future purchasing
plans.
• Assists in forecast preparation, product design
improvement, and new product planning, and uses
input from customers to modify or create
products.

→ Time-Series Models
♦ Quantitative forecasting models / techniques that attempt to predict the future values
of a variable by using only historical data (element of time) on that one variable.
• These are extrapolations of past values of that series.
• Extends the data grounded on the historical data.
▪ Ex. Using the past weekly sales for lawn mowers in making the forecast
for future sales.

♦ Time-Series Analysis and Forecasting Components:

Trend • Overall long-term direction of the series.

• Occurs when there is repeated behavior in the

Seasonality data happening at regular intervals.
• Related to seasonal, natural, or human behavior.

• Occurs when the series follows an up-and-down

Cycles movement with no regular intervals.
• More difficult to detect than seasonality.

Variation • Regular with the little random variation

• There are strange dips and jumps that may occur

Irregularities
due to a one-off event.

→ Causal Models
♦ Quantitative forecasting models wherein the variable to be forecasted is influenced
by or correlated with other variables included in the model.
• Includes regression models and other more complex models.
• Establishes a connection between variables.
▪ Ex. Daily Sales of bottled water might depend on the average
temperature and humidity, among others.

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Simple Linear Regression

x = independent variable y = dependent variable

Regression Analysis (Render, et al., 2016)

→ Has two purposes:
♦ Understanding the relationship between two variables.
♦ Predicting the value of one variable based on the other.
→ Has virtually limitless applicability
♦ Ex. Level of Education, Income, Price of a House, etc.
→ Hypothesized relationship may be linear, quadratic, or some other form.
→ Two types of variables:
♦ Dependent Variable
• Also known as the predicted variable or response variable.

♦ Independent Variable
• Also known as the explanatory variable or predictor variable.

Correlation Analysis
→ Analysis of bivariate data typically begins with a scatter plot that displays each observed pair of
data (x,y).
♦ Can be done by a scatter plot or scattergram.
→ Used to measure the strength of the linear relationship between two variables.
♦ Correlation is only concerned with the strength of the linear relationship.
♦ No causal effect is implied with the correlation.

→ The sample correlation coefficient (like Pearson’s r and Spearman’s rho) measures the degree of
linearity in the relationship between two random variables X and Y, with the value in the internal
(-1,1).
♦ If the slope is leaning to the right = perfect positive
♦ If it is leaning towards the left = perfect negative
♦ 0 = no linear relationship
♦ The nearer the result is to 1, the stronger the relationship.

Tests for Significant Correlation using Student’s t

→ The sample correlation coefficient r is an estimate of the population correlation coefficient p.
♦ Also called the slope test.
♦ There is no flat rule for a high correlation because sample size must be taken into
consideration.

To test the hypothesis Ho: 𝜌 = 0, where there is no linear relationships, the test statistic is:

𝑛−2
tcomputed = √
1−𝑟 2

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 H1: 𝜌 ≠ 0, where there is a linear relationship.

After calculating this value, we can find its p-value by using Excel’s function =
T.DIST.2T(t,deg_freedom).

If the result is <0.05, reject the Ho and accept the H1.

Types of Relationships in Regression Analysis

→ Simple Linear Regression Model

♦ It has only one independent variable, X.
♦ The relationship between X and Y is described by the linear function.
♦ The changes in Y are related to changes in X.

Overview on Time Series and Forecasting

PAST PRESENT FUTURE

It is considered as historical Analysis of the past Forecasting or predicting
information. information that is used to possible emerging events in
uncover design, pattern, or the future based on the model
model. made at present based on the
analyzed past information.

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Major Areas of Forecasting

TECHNOLOGY
DEMAND FORECASTING ECONOMIC FORECASTING
FORECASTING
It predicts the timing and It predicts future business It predicts possible
quantity of demand of a firm’s conditions with reference to the technological advancement in
commodities. underlying economic factors the future (Ex. Latest digital
such as inflation, GDP, GNP, etc. devices and systems)

Uses of Time Series

→ To compare the changes in the values of different phenomena at different times.
→ To formulate policy decisions and planning of future operations.
→ To predict, estimate, or forecast the behavior of the phenomenon in the future which is
essential in business planning.
→ To study the past behavior of the variable.

Time Series Patterns (Anderson, et al., 2016)

→ Time Series
♦ Sequence of observations on a variable measured at successive points in time or
over successive periods of time.
• Measurements may be taken every hour, day, week, month, year, or at any other
regular intervals.
♦ Data pattern is an important factor in understanding how the time series has behaved in
the past.
• If this behavior can be expected to continue in the future, it can be used in selecting
an appropriate forecasting method.
▪ Ex. Stock price, Sensex, exchange rate, interest rate, inflation rate, national
GDP, retail sales, electric power consumption, and number of accident
fatalities.

Patterns and Trends in Time Series Plots (Anderson, et al., 2018)

→ The common types of data patterns that can be identified when examining a time series plot
include:
♦ Horizontal
♦ Trend
♦ Seasonal
♦ Trend & Seasonal
♦ Cyclical

Horizontal Pattern
→ When the data fluctuates randomly around a constant mean over time.
→ Stationary Time Series
♦ Refers to a time series whose statistical properties are independent of time.
• This means that the process generating data has a constant mean and the
variability of the time series is constant over time.

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Example of Stationary Time Series

GASOLINE TIME SERIES

WEEK SALES (1000s OF GALLONS)
1 17
2 21
3 19
4 23
5 18
6 16
7 20
8 18
9 22
10 20
11 15
12 22

GASOLINE SALES TIME SERIES PLOT

→ A time series plot for a stationary time series will always exhibit a horizontal pattern with
random fluctuations.

GASOLINE SALE TIME SERIES PLOT

Series 1
SALES (1000s OF GALLONS)

25
20
15
10
5
0
1 2 3 4 5 6 7 8 9 10 11 12
WEEK NUMBER

Trend Pattern
→ This time series shows gradual shifts or movements to relatively higher or lower values over
a longer period.
→ A trend is usually the result of long-term factors such as:
♦ Population increases or decreases.
♦ Shifting demographic characteristics of the population.
♦ Improving technology.
♦ Changes in consumer preferences.

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 → Trends may be steady and predictable, increasing, decreasing, or staying the same. (Doane
and Seward, 2016)

Example of Time Series with Linear Trend Pattern

BICYCLE SALES TIME SERIES

YEAR SALES (1000s IN UNITS)
1 21.6
2 22.9
3 25.5
4 21.9
5 23.9
6 27.5
7 31.5
8 29.7
9 28.6
10 31.4

BICYCLE SALES TIME SERIES PLOT

BICYCLE SALE TIME SERIES PLOT

Series 1
SALES (1000s OF UNITS)

35
30
25
20
15
10
5
0
1 2 3 4 5 6 7 8 9 10
YEAR NUMBER

Seasonal Pattern
→ They are recognized by observing recurring patterns over successive periods of time.
→ Refers to a pattern that is influenced by seasonal factors or in regular interval (Ex. quarterly,
monthly, or daily).
→ Time series of less than one year can also exhibit seasonal patterns of less than one year in
duration, time series data can also exhibit seasonal patterns of less than one year in duration.
♦ Examples: Daily traffic volume shows within-the-day “seasonal” behavior, with peak
levels occurring during rush hours.

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 •
Business in the restaurant industry also experience within-the-day “seasonal”
behavior, with peak levels occurring at lunch time or dinner time.
→ It occurs when there is repeated behavior in the data that occurs at regular intervals; related
to seasonal, natural, or human behavior.

Example of Time Series with a Seasonal Pattern

UMBRELLA SALES TIME SERIES
YEAR QUARTER SALES
1 125
2 153
1
3 106
4 88
1 118
2 161
2
3 133
4 102
1 138
2 144
3
3 118
4 80
1 109
2 137
4
3 125
4 109
1 130
2 165
5
3 128
4 96

UMBRELLA SALES TIME SERIES PLOT

UMBRELLA SALE TIME SERIES PLOT

Series 1
NUMBER OF UMBRELLAS

200

150

100

50

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
QUARTER

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Trend & Seasonal Pattern
→ This pattern occurs in a time series that includes both a trend and a seasonal pattern.
→ In such cases we need to use a forecasting method that has the capability to deal with both
trend and seasonality.
→ Time series decomposition can be used to separate or decompose a time series into trend
and seasonal components.

Cyclical Pattern
→ It exists if the time series plot shows an alternating sequence of points below and above the
trend line that lasts for more than a year or when the data exhibit rises and falls that are not of a
fixed period.
♦ Many economic time series exhibit cyclical behavior with regular runs of observations
below and above the trend line.
→ Often, the cyclical component of a time series is due to multiyear business cycles, such as periods
of moderate inflation followed by periods of rapid inflation.
♦ Since business cycles are extremely difficult to forecast, cyclical effects are often
combined with long-term trend effects and are referred to as trend-cycle effects.
→ It occurs when the series follows an up and down movement with no regular intervals.
♦ More difficult to detect than seasonality.

Selecting a Forecasting Method (Anderson, et al., 2016)

→ The underlying pattern in the time series is an important factor in selecting a forecasting method.
♦ Thus, a time series plot should be one of the first analytic tools employed when trying
to determine which forecasting method to use.
→ The objective of forecasting is for the error to be as slight as possible.
→ One way of determining if a forecasting technique chosen is appropriate is through the forecast
accuracy.

Forecast Accuracy (Anderson, et al., 2016)

→ Naïve Forecasting Method
♦ Simplest of all forecasting methods
♦ Uses the most recent observation in the time series as the forecast for the next time
period.
→ The key concept associated with measuring forecast accuracy is forecast error.
♦ It is defined as the difference between the forecast and actual demand at the same
time period.
• ACTUAL VALUE – FORECAST = FORECAST ERROR

NEGATIVE FORECAST
POSITIVE FORECAST ERROR FORECAST BIAS
ERROR
It indicates that the forecasting It indicates that the forecasting The persistent tendency for
method underestimated the method overestimates the forecasts to be greater or less
actual value. actual value. than the actual values of a time
series.

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Some Measures of Forecast Accuracy
→ Mean Absolute Deviation (MAD)
♦ A MAD of 0 indicates that the forecast has exactly predicted demand.

→ Mean Absolute Percentage Error (MAPE)

♦ Provides a perspective of the true magnitude of the forecast error.

→ Mean Squared Error (MSE)

♦ Analogous to variance; large forecast errors are heavily penalized.

Comparison of the Three Measures

→ The MAPE and the MSE are measures that avoid the problem of positive and negative
forecasting errors offsetting one another.
♦ The size of these depends upon the scale of the data.
♦ As a result, it is difficult to make comparisons of different time intervals or to make
comparisons across different time series.
→ To make comparisons across different time series, the MAPE offers the advantage.
♦ These three simply measure how well the forecasting method can forecast historical
values of the time series.
→ In general, the smaller the value of the forecast accuracy, the more accurate the forecast.

Some Notes about Measures in Forecast Accuracy

→ Forecast accuracy may not assure good forecasts.
→ Forecast accuracy gives an idea of how close the forecasted values, predicted by the
estimated model, or be alike with the actual values of the corresponding historical past data.
→ MAD computes absolute difference.
→ MAPE computes relative to the totality of the data and commonly used when comparing cases
of different size or degree/amount (e.g case 1 in millions; case 2 in tens or units).
→ The lower the value of any of the 3 measures, the better quality of forecast accuracy.

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 PRACTICE EXERCISE: THEORETICAL

Instructions: This practice exercise is sectioned into two parts: (a) True or False, and (b) Multiple Choice. Read
each statement and question carefully and choose the best answer for each question. Good luck!

A. True or False. Analyze the statements listed below carefully. Write “TRUE” if the statement is correct;
otherwise, write “FALSE.”

1. In the regression analysis, there are three (3) types of variables, namely: dependent,
independent, and co-dependent variables.
2. Uncontrollable inputs refer to the factors that are not under the control of the decision maker.
3. Violations occur when assumptions are met, making the simple linear progression feasible for
prediction.
4. Cyclical pattern refers to a time series whose statistical properties are independent of time.
5. The accuracy of a model cannot be assessed until the solutions are generated.
6. Cost or Benefit Considerations must be made in choosing the appropriate mathematical
model.
7. Stochastic or Probabilistic Model can be used if all the controllable to the model are known.
8. The accuracy of the conclusions and predictions are dependent to how similar the model is to
a real situation.
9. There are five (5) steps to problem solving and seven (7) steps in decision making.
10. In Goal Programming, a computer program is employed to model the operation of a system
and perform computations.

B. Multiple Choice. Read each statement carefully and choose the letter of the best answer.

1. This procedure is considered to not be a trivial step due to the time required in accomplishing
it. Furthermore, it often needs a fairly large database.
a. Model Development
b. Data Preparation
c. Model Solution
d. Report Generation

2. These refer to controllable inputs or alternatives that are specified by the decision maker.
a. Objective Function
b. Constraints
c. Decision Variables
d. Uncontrollable Inputs

3. This can be used to determine optimal strategies in situations involving decision alternatives
and an uncertain pattern of future events.
a. Decision Analysis
b. Project Scheduling: PERT/CPM
c. Simulation
d. Forecasting Methods

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4. Its main purpose is to have a better estimate of the future and in doing so, be able to reduce
the risks of uncertainties.
a. Report Generation
b. Forecast
c. Data Preparation
d. Data Analysis

5. What is the correct formula for the trend projection equation?

a. Ŷ1 = b1 - b0t
b. Ŷ1 = b1 + b0t
c. Ŷ0 = b0 - b1t
d. Ŷ0 = b0 + b1t

6. Analyze the figure below: what type of pattern is shown?

ALBUM SALE TIME SERIES PLOT

35
30
SALES (1000s OF UNITS)

25
20
15
10
5
0
1 2 3 4 5 6 7 8 9 10
YEAR NUMBER

Series 1

a. Horizontal Pattern
b. Trend Pattern
c. Seasonal Pattern
d. Cyclical Pattern

7. This type of analysis can be done by a scatter plot wherein the analysis of bivariate data
typically begins.
a. Data Analysis
b. Regression Analysis
c. Correlation Analysis
d. Decision Analysis

8. Which of the following statements refer to the forecast error?

a. Difference between the forecast and actual demand at the same period of time.
b. Persistent tendency for forecasts to be greater or less than the actual values.
c. Forecasting method has underestimated the actual value.
d. Forecasting method has overestimated the actual value.

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9. Which of the following statements is true about forecasting?
a. Forecast accuracies always assures good forecast.
b. Its main objective is for the error to not exist at all.
c. It is described as the means towards perfect prediction.
d. It is simply a prediction of what will happen in the future.

10. This method takes the opinions of a small group of high-level managers, often a combination
with statistical models, and results in a group estimate or demand.
a. Delphi Method
b. Sales Force Composite
c. Jury of Executive Opinion
d. Consumer Market Survey

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 ANSWER KEY
THEORETICAL: TRUE OR FALSE THEORETICAL: MULTIPLE CHOICE

1. FALSE 1. B.

2. TRUE 2. C.

3. FALSE 3. A.

4. FALSE 4. B.

5. TRUE 5. D.

6. TRUE 6. B.

7. FALSE 7. C.

8. TRUE 8. A.

9. FALSE 9. D.

10. FALSE 10. C.

REFERENCES

Anderson, D.R., Sweeney, D.J., Williams T.A., Camm, J.D. Cochran, J.J., & Ohlmann, J.W. (2019). An
Introduction to Management Science: Quantitative Approaches to Decision Making. Singapore: Cengage
Learning Asia Pte Ltd.

Doane, D.P., & Seward, L.W. (2016). Applied Statistics in Business and Economics. New York: McGraw-Hill
Irwin.

Hillier, F.A. (2008). Introduction to Management Science: A Modeling and Case Studies Approach with
Spreadsheets. New York: McGraw-Hill Irwin.

Reid, R.D., & Sanders, N.R. (2019). Operations Management: An Integrated Approach. John Wiley & Sons.

Ross, D.F. (2015). Forecasting in the Supply Chain Environment. In Distribution Planning and Control (pp. 191-
244). Springer, New York.

Taylor, B.W. (2007). Introduction to Management Science, 9th Edition. Singapore: Pearson Education South
Asia.

Prepared by:
TOLENTINO, Margarita Alessandra

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