In: Operations Management
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 |
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,
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.