Question

In: Operations Management

The management of an insurance company monitors the number of mistakes made by telephone service representatives...

The management of an insurance company monitors the number of mistakes made by telephone service representatives for a company they have subcontracted with. The number of mistakes for the past several months appears in this table along with forecasts for errors made with three different forecasting techniques. The column labelled Exponential was created using exponential smoothing with an alpha of 0.30. The column labelled MA is forecast using a moving average of three periods. The column labelled WMA uses a 3-month weighted moving average with weights of 0.65, 0.25, and 0.10 for the most-to-least recent months.

Using the following table, determine the CFE for months 4-10 for each forecasting technique. According to the CFE, which technique worked best? (Note: be sure to base your answer on the resulting CFE at the end of period 10, which should incorporate errors in periods 4-10).

Month

Mistakes

Exponential

SMA

WMA

1

121

2

128

121

3

119

123.1

4

117

121.9

122.7

121.5

5

125

120.4

121.3

118.6

6

118

121.8

120.3

122.4

7

123

120.7

120.0

119.7

8

116

121.4

122.0

122.0

9

122

119.7

119.0

118.0

10

134

120.4

120.3

120.6

a.

Exponential Smoothing

b.

Simple Moving Average

c.

Weighted Moving Average

Solutions

Expert Solution

Solution:

CFE stands for Cumulative forecast error. This is the sum of differences between the actual value and the forecast value.

Hence, we calculate the Cumulative forecast error for all of the 3 methods mentioned above,

  • Exponential Smoothing:

    CFE = 4.9 + 4.6 + 3.8 + 2.3 + 5.4+ 2.3 +13.6 = 36.9
  • Simple Moving Average:

    CFE = 5.7 + 3.7 + 2.3 + 3 + 6 + 3 + 13.7 = 37.4
  • Weighted Moving Average:

    CFE = 4.5 + 6.4 + 4.4 + 3.3 + 6 + 4 + 13.4 = 41.9

Hence, According to the cumulative forecast error, the best forecast is for the Exponential Smoothing method which has the lowest CFE among all the 3 methods mentioned above.

Option A.


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