IOE 441: PRODUCTION AND INVENTORY CONTROL

WINTER 2011

HOMEWORK # 1
(Due at the beginning of class on Thursday, 1/13)

1. Suppose you are working for Forecasting Done Right (FDR), a company that specializes in
demand forecasting solutions for small business owners. The forecasting software sold by FDR
includes a module that lets the user choose from moving averages or exponential smoothing.
Your first assignment is to build functionality into this module that will quickly recalculate
forecasts when the user enters a corrected demand figure for a past period. For example, if the
user entered 100 units as the demand that was realized two periods ago, and now notices the data
was incorrect and should have been 150, she will enter the correction, and the software will
recalculate the forecast for the next period based on this correction.

a) Suppose the users preferred forecasting method is moving average of order N. Determine by
how much the forecast for the next period will change, when the user makes a correction to
increase the demand by x units for a past period within the last N periods? What if the correction
was made for the demand that occurred N + 1 periods ago?

b) Suppose the users preferred forecasting method is exponential smoothing with a smoothing
constant of . Determine by how much the forecast for the next period will change, when the user
makes a correction to increase the demand that occurred N periods ago by x units. What if the
correction was made for the demand that occurred N + 1 periods ago?

2. Wave of the Future, Inc. (WoF) has recently started offering a new product that functions as a
cellular phone, camera, MP3 player, web browser, GPS and umbrella, all in one. WoF sold 2000
units of the product in its first week of sales, and 3500 units in the second week. The third week
of sales is just about to start, and WoF is expecting the upward trend in demand to continue.
They decided to use double exponential smoothing with ==0.2 to forecast the future demand.

a) What would your initial estimates be for the intercept and slope at the beginning of the third
week? (Call these S0 and G0.) What is your forecast for the demand in the third week?

b) Suppose the demand in the third week turns out to be 4000. What are your forecasts at the end
of the third week for the fourth and fifth weeks of sale?