OPIM 4050 Supply Chain Management – Homework 3 Solutions

1. Answer Exercise 2 from Chapter 6 about Unipart, a manufacturer of auto parts.

“so Year 1’s costs are incurred now and Year 2 costs are incurred in a year” means

No
Cashflo t = t=
w 0 1
Step 1. Draw the decision tree:
0.5 150
150
0.75 0.5 135

0.5 135
0.25
135
0.5 121.
No 5
Cashflow t=0 t=1

Step 2. Calculate the NPV (there are multiple ways to do this, one method is shown below)

For Parts4U
Scenario C0 + C1/(1+k) = NPV Prob NPV*Prob
150, 150 150*0.05 + (150*0.05)/1.2 = 13.75 0.375 5.15
150, 135 150*0.05 + (135*0.05)/1.2 = 13.125 0.375 4.92
135, 135 135*0.05 + (135*0.05)/1.2 = 12.375 0.125 1.55
135, 121.5 135*0.05 + (121.5*0.05)/1.2 = 11.8125 0.125 1.48
NPV for Parts4U 13.10 million

For AllMRO
Scenario C0 + C1/(1+k) = NPV Prob NPV*Prob
150, 150 10 + 150*0.01 + (150*0.01)/1.2 = 12.75 0.375 4.78
150, 135 10 + 150*0.01 + (135*0.01)/1.2 = 12.625 0.375 4.73
135, 135 10 + 135*0.01 + (135*0.01)/1.2 = 12.475 0.125 1.56
135, 121.5 10 + 135*0.01 + (121.5*0.01)/1.2 = 12.3625 0.125 1.55
NPV for AllMRO 12.62 million

The NPV of the commission is lower for AllMRO. Hence, choose AllMRO.
2. Use the following demand data for parts (a) and (b)

Period Demand

t Dt

1 1,019
2 979
3 897
4 911
5 1,128
6 987

a) What is the demand forecast for periods 7 and 8 when using the 3-period moving average
forecasting method?

The forecast for period 7 depends on the level for period 6

F 7 = L6
The level for period 6 is the average demand of periods 6, 5, and 4
L6 = (D6 + D5 + D4) / 3 = (987 + 1128 + 911) / 3 = 1008.67
Hence, F7 = 1008.67

The forecast for period 8 depends on the level for period 7 (we cannot calculate the level for
period 7, so we can use the level for period 6)
F 8 = L6
Hence, F8 = 1008.67

b) What is the demand forecast for periods 1 and 2 when using the simple exponential smoothing
forecasting method with smoothing parameter  = 0.2?

The forecast for period 1 depends on the level for period 0

F 1 = L0
The level for period 0 is the average demand over all periods
L0 = (D6 + D5 + D4 + D3 + D2 + D1) / 6 = (987 + 1128 + 911 + 897 + 979 + 1019) / 6 = 986.83
Hence, F1 = 986.83

The forecast for period 2 depends on the level for period 1

F 2 = L1
The level for period 1 can be calculated as follows
L1 = D1 + (1 – )L0 = 0.2*1019 + 0.8*986.83 = 993.26
Hence, F2 = 993.26
Use the following demand, level, and trend data for parts (c)

Period Demand Level Trend

t Dt Lt Tt
105 11
1 123
2 126
3 134
4 141
5 167
6 175

c) What is the demand forecast for periods 1 and 2 when using Holt’s method with smoothing
parameters  = 0.1 and  = 0.1?

The forecast for period 1 depends on the level and trend for period 0
F 1 = L0 + T0
The level and trend for period 0 are given
L0 + T0 = 105 + 11 = 116
Hence, F1 = 116

The forecast for period 2 depends on the level and trend for period 1
F 2 = L1 + T1
The level for period 1 can be calculated as follows
L1 = D1 + (1 – )(L0 + T0) = 0.1*123 + 0.9*(105 + 11) = 116.7
The trend for period 1 can be calculated as follows
T1 = (L1 – L0) + (1 – )T0 = 0.1*(116.7 – 105) + 0.9*11 = 11.07
Thus the sum of level and trend for period 1 is
L1 + T1 = 116.7 + 11.07 = 127.77
Hence, F2 = 127.77
Use the following demand and forecast data for parts (d) and (e)

Demand Forecast

t Dt Ft

1 213 203
2 246 254
3 276 290

d) For periods 1, 2, and 3, calculate the:

 Forecast Errors (Et)
 Absolute Deviation (At)
 Mean Absolute Percentage Error (MAPEt)
 Mean Squared Error (MSEt)

E1 = F1 – D1 = 203 – 213 = –10

E2 = F2 – D2 = 254 – 246 = 8
E3 = F3 – D3 = 290 – 276 = 14

A1 = |E1| = 10
A2 = |E2| = 8
A3 = |E3| = 14

Let us first calculate the Absolute Percentage Error (APE) before calculating the Mean Absolute
Percentage Error (basically, the average of Absolute Percentage Error)
APE1 = (A1/D1)*100 = (10/213)*100 = 4.69
APE2 = (A2/D2)*100 = (8/246)*100 = 3.25
APE3 = (A3/D3)*100 = (14/276)*100 = 5.07

MAPE1 = (APE1) / 1 = (4.69) / 1 = 4.69

MAPE2 = (APE1 + APE2) / 2 = (4.69 + 3.25) / 2 = 3.97
MAPE3 = (APE1 + APE2 + APE3) / 3 = (4.69 + 3.25 + 5.07) / 3 = 4.34

MSE1 = (E12) / 1 = (100) / 1 = 100

MSE2 = (E12 + E22) / 1 = (100 + 64) / 2 = 82
MSE3 = (E12 + E22 + E32) / 1 = (100 + 64 + 196) / 3 = 120

e) For period 3, calculate the mean absolute deviation (MADt) and provide an estimate for the
standard deviation of the forecast error for period 3.

MAD3 = (A1 + A2 + A3) / 3 = (10 + 8 + 14) / 3 = 10.67

To estimate the standard deviation of the forecast error for period 3 we take 1.25*MAD3
Hence, STDEV(Forecast Error) =1.25*10.67 = 13.34
3. Use the data in Exercise 1 from Chapter 7 about ABC Corporation (see also online
template).

a) Use the static forecasting method to forecast monthly demand for ABC Corporation for year 6.
See online Excel sheet

b) Evaluate the Forecast Errors (Et), Absolute Deviation (At), Bias (biast), Mean Absolute
Deviation (MADt), Tracking Signal (TSt), Mean Absolute Percentage Error (MAPEt), and the
Mean Squared Error (MSEt).
See online Excel sheet

c) Looking at the tracking signal only (see TrackingSignal tab), is the forecast considered to be
good or bad?
The forecast is mostly good, but it could be better as there are three tracking signal points
that fall below -6.