we are interested in developing a forecast for the inventory for period 11 1. a

Question

we are interested in developing a forecast for the inventory for period 11

1. a develop a 5-period moving average

b. 3 -period wighted moving average forecast (the weights should be 0.7 and 0.2 for the most recent and next most recent periods.

2. out of the three forecasting methods which appears to be the best method based on the forecasting results per periods 6 through 10?

Period1 Inventory Level (millions of dollars Damage (Thousands of dollars Average Age of Inventory (Days) 1 $11 $80 31 2 $15 $90 45 3 $13 $70 98 4 $10 $60 15 5 $7 $50 25 6 $9 $70 31 7 $13 $80 82 8 $14 $65 72 9 $10 $70 50 10 $12 $60 45

Explanation / Answer

1. 5 period moving average:

Forecast for the period 11 is the moving average of the 10th period = 11.60

b. 3 period moving average: weight of 0.7 for the recent month (nth month), weight of 0.2 for the next recent month (n-1) and balance weight = 1- (0.7+0.2) = 0.1 for the (n-2) month.

formula = sum of (weights * inventory levels) for 3 months:

Thus forecast for period 11 is 11.80

c.

formula for forecast of period n = alpha*actuals of the period n +(1-alpha)*forecast for period (n-1)

forecast of period 2 = 14. we will start from period 3:

forecast for period 11 = $11.62

2. Exponential smoothing method seems to be a better method for forecasting for period 6 to 10. This is because this method strikes a balance between the mean and random walk models. High frequency noise is eliminated in this method.

Period1 Inventory Level (millions of dollars 5 period moving total 5 period moving average 1 $11 2 $15 3 $13 4 $10 5 $7 $56 $11.20 6 $9 $54 $10.80 7 $13 $52 $10.40 8 $14 $53 $10.60 9 $10 $53 $10.60 10 $12 $58 $11.60

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