Exam 1 Solutions

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Question 1

Longer term forecasts are generally more accurate than shorter term forecasts because more data is available to forecast with.

False. It is generally harder to predict things farther off in the future.

Question 1

Aggregate forecasts are generally more accurate than detailed forecasts because there is less to forecast.

True. Aggregating information tends to reduce variation relatively.

Question 1 Cont’d

Exponential smoothing is the best and most accurate forecasting method.

False. Sometimes it’s good. Sometimes it is overly simplistic.

Question 1 Cont’d

A 5-week moving average can never provide a better forecast than a 10-week moving average because it uses less information.

False. It depends on what you are trying to forecast and why.

Question 1 Cont’d

Shorter term forecasts are generally more accurate than longer term forecasts because the near future generally resembles the recent past more than the distant future does.

True. Exactly.

Question 2An International Paper Company uses simple

exponential smoothing with alpha = 0.1 to forecast future market prices for its goods. Over the past few weeks it has seen the following prices:

Week Price1 $1.002 $1.103 $1.214 $1.33

After observing the $1.33 price from week 4, the company updates its forecast to $1.06.

Question 2 Cont’d

Before it sees the price for week 5, what is the company's forecast for prices in week 6?

$1.06 Until the company gets more

information that’s its forecast for all future weeks.

Question 2 Cont’d

After the company sees a price of $1.46 in week 5, what will its forecast for day 6 be?

Alpha * 1.46 + (1- Alpha)*1.06 = 0.1*1.46 + 0.9*1.06 = 0.1*(1.46-1.06) + 1.06 = 1.10

Question 2 Cont’d

Have the company's forecasts been improving or getting worse with time?

Getting Worse

$1.00

$1.05

$1.10

$1.15

$1.20

$1.25

$1.30

$1.35

1 2 3 4

Question 2 Cont’d

From this limited data, what problems do you see with the company's forecasting methods?

They should consider a model with trend though with so little data we can’t be certain.

Prices are growing at 10% per week.

Question 3What SPECIFIC initiatives described in your

text is BMW taking to prepare for the new take-back legislation in the EU?

BMW, for example, now has a disassembly line on which old BMWs are taken apart and studied to determine what can be reused and what design changes will give future models more reusable components. "The car of the future will not be measured alone by its motoring comfort, safety, economy, and ease of service. Rather, designers are not also required to build cars which can be

recycled as completely and economically as possible"

Question 4.

You are a supplier to Motorola's cell phone manufacturing operations. Your competitor sells a similar product at a higher price, but offers a shorter order to delivery cycle. All other factors being equal, explain why Motorola might purchase from your competitor.

Question 5. Each part costs $1,000 we use approximately 12,000 annually.

We own the reusable racks the parts are shipped in. Rail: 4 days each way, 2 days float

86 foot car 8 foot long racks that cost about $1000 each. racks hold 10 units each. We pay roughly $1,000 per railcar in freight charges

Truck: 1 day each way 53' trailer 6 foot long racks that cost about $900 each hold roughly 8 units We pay roughly $1,700 per trailer in freight

inventory holding cost of 25%

depreciate our rack investment over 5 years.

Question 5 Cont’dProvide an estimate of the time a rack will spend at

our facility after it's delivered if we deliver the product by truck.

A rail rack holds 10 units. A rail car holds 10 racks. So, a rail car carries 100 parts or 2 days worth. Float time has reflected this: Deliver a rail car of parts and 2 days later the racks are full and ready to ship.

A truck rack holds 8 units. A truck holds 8 racks. So, a truck carries 64 parts or 1.28 days worth. Based on our rail experience, this is probably a good estimate for the float time.

Question 5 Cont’d

What will the total annual cost be if we use rail?

Freight: 12,000 parts/100 parts/car * $1000/car = $120,000

Inventory: 25%*(4 days transit + 1 day at our fac + 1 day at

customer)*50 parts/day*$1,000/part = $75,000

Rack Depreciation: (4 days + 4 days + 2 days + 2days)*50 parts/day /10

parts/rack *$1000/rack /5 = $12,000

Question 5 Cont’d

What will the total annual cost be if we use truck?

Freight: 12,000 parts/64 parts/truck * $1700/truck = $318,750

Inventory: 25%*(1 days transit + .64 day at our fac + .64 day at

customer)*50 parts/day*$1,000/part = $28,500

Rack Depreciation: (1 days + 1 days + 1.28 days + 1.28days)*50 parts/day /8

parts/rack *$900/rack /5 = $5,130

Question 6

Calculate the cost to ship 15,000 lbs of shoes in boxes from St. Francis, KS to Green Bay, Wisconsin by rail if no exceptions are in effect.

406 pennies per cwt of $4.60/cwt. With 150 cwt the total comes to $690.

Question 6 Cont’d

The customer pays 30 days after receipt of the goods, which are valued at $200,000. Your company's inventory holding cost is 10% per year. If you ship LCL, delivery will take 15 days. If you pay the freight for 24,000 pounds and send the shipment CL, it will be delivered in 6 days. Which mode should you use?

Question 6 Cont’d

LCL: Freight $690 Interest 45/365*.10*200,000 = $2,465.75 Total: $3155

CL: Rate = 322 pennies per cwt. With 240 cwt the

total comes to $772.80 Interest 36/365*.1*200000 = $1972.60 Total: $2745.40

Use CL!