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Practice Problem 1: Shah Alam Palm Oil Company | Week 2 Practice Problems | CTL.SC1x Courseware | edX

MITx: CTL.SC1x Supply Chain Fundamentals

Week 2: Forecasting I - Introduction > Week 2 Practice Problems > Practice Problem 1:
Shah Alam Palm Oil Company

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Forecasting I Introduction
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Lesson 1: Demand
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Assignment
Homework due Mar
02, 2016 at 15:00 UTC

Week 3:
Forecasting II -

PRACTICE PROBLEM 1: SHAH ALAM PALM OIL COMPANY

Palm oil is harvested from the fruit of oil palm trees and is widely used as
a cooking oil throughout Africa, Southeast Asia, and parts of Brazil. It is
becoming widely used throughout the world as it is a lower cost
alternative to other vegetable oils and has other attractive properties.
You are working for the Shah Alam Palm Oil Company (SAPOC) that
harvests, processes, and sells palm oil throughout the region. You are
asked to review the sales volume (in pounds) of your premium palm oil by
one of your customers, a local grocery store in the region.
Download the spreadsheets with the monthly sales volume of palm oil
here:
In Excel format (link to ShahAlamPalmOil_Data.xlsx)
In LibreOffice format (link ShahAlamPalmOil_Data.ods)

Part 1
Take a look at the data and chart or plot the demand (vertical axis) against
the months (horizontal axis). Do you detect any type of trend over the last
three years?
Yes, there appears to be a POSITIVE trend

No, the demand appears to STATIONARY with no trend

Yes, there appears to be a NEGATIVE trend

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Practice Problem 1: Shah Alam Palm Oil Company | Week 2 Practice Problems | CTL.SC1x Courseware | edX

Exponential
Smoothing

Week 4:
Forecasting III Special Cases &
Extensions
Week 5:
Inventory
Management I
- Deterministic
Demand

It cannot be deciphered with this data

EXPLANATION

Plotting the data clearly shows that there is a general positive trend. A
quick trendline estimate shows that the trend, or slope, is about 24
additional pounds of palm oil per month, over the 3 year period.

You have used 3 of 3 submissions

Part 2
Does there appear to be any seasonality in the demand pattern?
No, there does not appear to be any seasonality
There is not enough data to infer any seasonality
Yes, there appears to be some sort of seasonality

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Practice Problem 1: Shah Alam Palm Oil Company | Week 2 Practice Problems | CTL.SC1x Courseware | edX

EXPLANATION

Plotting the data by month so that each year is its own line helps to
identify any seasonality. It appears that there is some sort of
seasonality. For example, there appears to be a "low-demand" period
from January through May and two "high-demand" periods from July
to August and then October through December.

You have used 3 of 3 submissions

Part 3
What is the forecast for demand in January 2015 . . .
using a naive model?

Answer: 1512

using a cumulative model?

Answer: 957.94

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Practice Problem 1: Shah Alam Palm Oil Company | Week 2 Practice Problems | CTL.SC1x Courseware | edX

using a 12 Period Moving Average model?

Answer: 1173.66

EXPLANATION

The naive forecast for January 2015 is simply the actual demand for
December 2014, which is 1512.
The cumulative forecast for January 2015 is the average of the
previous 36 time periods, which is 957.94.
The 12 Period Moving Average (M=12) forecast for January 2015 is the
average of the actual demand for all months in 2014, which is
1173.67.

You have used 3 of 3 submissions

Part 4
What is the root mean square error (RMSE) for a next period forecast for
these three years of demand . . .
using a Naive model?

Answer: 383.73

using a Cumulative model?

Answer: 419.89

using a 12 Period Moving Average model?

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Practice Problem 1: Shah Alam Palm Oil Company | Week 2 Practice Problems | CTL.SC1x Courseware | edX

Answer: 423.33

EXPLANATION

To find these, you need to calculate the squared error term for each
observation. Taking the square root of the average of all of these
values gives you the RMSE.
Download the spreadsheets with the monthly sales volume of palm oil
here:
In Excel format (link to ShahAlamPalmOil_Solution.xlsx)
In LibreOffice format (link ShahAlamPalmOil_Solution.ods)

You have used 3 of 3 submissions

Part 5
Which of the three models, if any, do you think is most appropriate for
forecasting the demand in January 2015?
The most appropriate model to use is:
The Naive Model
The Cumulative Model
The 12 Period Moving Average Model
None of these models are appropriate

EXPLANATION

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Practice Problem 1: Shah Alam Palm Oil Company | Week 2 Practice Problems | CTL.SC1x Courseware | edX

None of these models are appropriate for this demand data. The
main reason is that the palm oil demand displayed both a positive
trend and seasonality. All three of these models assume stationary
demand. The naive model makes no sense since we can clearly see
that demand in January looks nothing like demand in December. And
the cumulative and moving average models assume that the demand
will be close to the average. We will learn about other forecasting
models that handle demand with these other patterns next week.

You have used 3 of 3 submissions

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