Question

Franklin Tooling, Inc., manufactures specialty tooling for firms in the paper-making industry. All of their products are engineer-to-order and so the company never knows exactly what components to purchase for a tool until a customer places an order. However, the company believes that weekly demand for a few components is fairly stable. Component 135.AG is one such item. The last 26 weeks of historical use of component 135.AG is recorded below.

Week	Demand	Week	Demand
1	137	14	131
2	136	15	132
3	143	16	124
4	136	17	121
5	141	18	127
6	128	19	118
7	149	20	120
8	138	21	115
9	134	22	106
10	142	23	120
11	125	24	113
12	134	25	121
13	118	26	119

Use OM Explorer’s Time Series Forecasting Solver to evaluate the following forecasting methods. Start error measurement in the fifth week, so all methods are evaluated over the same time interval. Use the default settings for initial forecasts.

1. 3-Period Moving Average
2. 3-Period Weighted Moving Average forecast with weights of 0.7, 0.2, and 0.1
3. An Exponential Smoothing forecast using a starting forecast of 140 for week one and an α=0.25
4. Which forecasting method should management use, if the performance criterion it chooses is:
   1. MSE
   2. MAD
   3. MAPE

Answer 1

Soln

i)

3-Period Moving Average = (Sum of Previous 3 Periods Value)/3

MAD = Average of Absolute Deviation = 5.88

MSE = Mean of Error² = 56.05

MAPE = Mean of (Abs(Error/Demand)) * 100 = 4.74%

ii)

3-Period Weighted Moving Average forecast with weights of 0.7, 0.2, and 0.1

MAD = Average of Absolute Deviation = 6.02

MSE = Mean of Error² = 66.26

MAPE = Mean of (Abs(Error/Demand)) * 100 = 4.88%

iii)

Simple Exponential Smoothing

Exponential Smoothing (F_t+1) = αY_t + (1-α) F_t

MAD = Average of Absolute Deviation = 6.25

MSE = Mean of Error² = 64.19

MAPE = Mean of (Abs(Error/Demand)) * 100 = 5.09%

iv)

a)

If we choose MSE as performance criteria, then we should use 3-Period Moving Average as it has the lowest MSE value

b)

If we choose MAD as performance criteria, then we should use 3-Period Moving Average as it has the lowest MAD value

c)

If we choose MAPE as performance criteria, then we should use 3-Period Moving Average as it has the lowest MAPE value

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