Question

Decision Making Questions Please return answers before Oct. 30th. 1. A selected Forecast Model showed the lowest MAD at the beginning of the year with $60.5. If the following three quarters reflected the following MAD: Q2: $60.2 Q3: $75.4 Q4: $78.9 Would you stay using this model for the next year? Explain your answer. 2. The EOQ of the product you are purchasing is 20,350units. The supplier runs 40,000units per lot. He wants you to buy all of them since you are the only buyer of this product. What will you do and explain? 3. A six sigma project was done and it was found that the temperature was affecting the production rate. The initial project measured the production rate trend to identify the potential reasons of concern. If you has to decide which parameter you need to control,(Temperature or the production rate), explain which one and why?

PLEASE ANSWER USING INSTRUCTION GIVEN

Answer 1

1. MAD stands for Mean Absolute Deviation. It is the difference between the actual values/observations and the average values. Formula for MAD can be written as:

MAD = (Summation of Xi - Mean) / n     where i = 1 to n.

Any increase inthe value of MAD will reduce the credibility of the model. Here, we can see that there is an increasing trend of MAD on a quarterly basis from 60.5 in Q1 to 78.9 in Q4. Hence, we can not use the same forecast model going forward. The problem can be solved by looking into the model parameters and do the hypothesis testing based on the creator's needs. Also, it needs to be tested using scenario testing.

2. EOQ stands for Economic Order Quantity. It refers to the most cost effective level of ordering which gives the lowest ordering cost and holding cost.

EOQ of the product which we are puchasing is 20,350 units which is the optimum level of ordering. But the supplier is asking to purchase 40,000 units per lot. So, two things can be done here:

(a) Reduce holding cost - Here, we have an advantage of being the only buyer. It is easier to negotiate with the seller to reduce the units per lot to get to the EOQ level.

(b) Reduce ordering cost - If the seller cannot reduce the units, one can take the discount on the huge order in comparison to the actual needs of the business. This additional discount can counter the additional costs incurred on additional stock holding.

3. As per my knowledge, parameter that needs to be controlled should be Temperature. First, the initial project measured that the production rate os the potential cause of concern. After that, detailed analysis using the six sigma was done which insisted on the Temparature as the parameter affecting the production rate.

Six sigma is a method to improve efficiency in the current process in pace. It uses different techniques like statistical techniques in order to identify and remove the causes of defects. Here, temperature has been identified by the six sigma project as the key defect in the current process, it needs to corrected in order to increase efficiency.

If the temperature can be controlled, it will automatically increase the production rate and remove any concerns from the business model.