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Forecasting & Inventory Model

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1. The healthcare environment would be advised to use the MAD, MSE, and the MAPE as measures of forecasting accuracy. Describe how these techniques could aid managers in the projections of cost and assist in inventory control.

2. Summarize the factors involved with seasonal variations. Provide examples.

3. An essential part of cost control in any healthcare organization is staffing levels, maintaining the right mix of professional individuals at any given time. Inventory and production control models are designed for static environments. Would such models work in healthcare to adjust for staffing needs? Explain your rationale.

4. Our basis EOQ inventory model makes five assumptions. For each of these assumptions, explain the assumption, give an example of when the assumption is false, and describe what options are available when the assumption is false.

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1. The healthcare environment would be advised to use the MAD, MSE, and the MAPE as measures of forecasting accuracy. Describe how these techniques could aid managers in the projections of cost and assist in inventory control.

Mean Absolute Deviation (MAD)
MAD = ∑ |At - Ft| / T
Where T = the number of time periods
MAD measures absolute error. It should be as small as possible. One problem with MAD is that there is no way of knowing if MAD is small or large in relation to the actual data.

Mean Absolute Percent Error (MAPE) Measure error as a percent of actual values
MAPE = 100 ∑ [ |At - Ft| / At ] / T

MAPE is same as MAD except that it measures deviation as a percentage of actual data.
MAPE and MAD are easy to interpret.

Mean Squared Error (MSE)
MSE = ∑ (At - Ft)2 / T

MSE measures error variance.
Recognizes that large errors are disproportionately more "expensive" than small errors

A low value of MAD/MAPE/MSE signifies that the errors made while making forecast about demand/inventory/cost is minimal and thus the forecast is accurate. This will help the managers in being confident about their forecast and thus facilitate in projections of cost and inventory.

2. Summarize the factors involved with seasonal variations. Provide examples.

The factors involved with seasonal variations are:
? Consumer Behavior: Consumer's preferences towards certain products are based on weather conditions.
o For example: Consumers prefer to have ice-cream ...

Solution Summary

This posting provides answers to questions on forecasting including forecasting accuracy and seasonal indexes and inventory modeling questions on EOQ assumptions & Production control models.

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Forecasting Modeling Budgeting

Note: This modeling is completely separate from the prior budgeting tasks; no numbers from the scenario or from the budgeting process are to be used, although the scenario itself should be used as background information.

Individual:

- In the Financial Planning Model Excel file, familiarize yourself with the Financial Planning Model and the Instructions for Model to learn how the model works.
- In the Financial Planning Model worksheet, try changing each of the following 8 variables: sales growth percentage rate, percentage of sales from international, percentage sales from strength products, inventory turn, fixed portion of SG&A, variable portion of SG&A, payment terms to vendors, and payment terms from customers.
- When you change each variable, observe what happens to the profit as a percentage of sales, gross profit as a percentage of sales, worst case single period cash flow, and worse case cumulative cash flow.
Examples:

- go from 0% CV to 25% CV
- go from 0% international sales to 10% international
- go from 30 days A/R terms to 60 days A/R terms
- go from 60 days A/P terms to 30 days A/P terms
For each, explain:

- Profit as percentage of sales goes from _____to______
- Gross profit goes from _____to______.
- Worst case single period cash flow goes from _____to______.
- Worst case cumulative cash flow goes from _____to______.
- Then change 2â?"3 variables at a time; like growth rate and percentage of sales from international sales; or payment terms to vendors and payments from customers. Make the same observations.
- Summarize your observations in a 300â?"word paper containing a list of variable changes and the subsequent effects.

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