Question 1

DistCo, a large warehouse service company in the San Francisco Bay Area, stores pharmaceutical products for customers while they are in transit to local retailers. DistCo can store a maximum of 280,000 cases of products at its present facility. Because their business has been growing, the company's management wonders if they should acquire other warehouses in 2006. The materials specialist has accumulated the following inventory data:

Inventory

YearQuarterPeriod(1000 ofcases)

______________________________________

200111176

22134

33186

44195

200215189

26157

37195

48211

200319205

210180

311212

412229

2004113223

214192

315234

416248

2005117239

218217

319271

420284

_______________________________________

(a)Briefly introduce each time-series method (e.g., moving average, exponential smoothing, linear trend, trend with seasonal factors) used in your forecasting.

Hint: Please refer to the following textbook materials and then form your answer.

Moving average: Moving Average section

Exponential smoothing: Exponential Smoothing section

Linear Regression (Trend) Analysis: Linear Regression section

Trend with seasonal index: Decomposition of a Time Series

(b)Explain how you select the best time-series forecasting model and why it is better than the others are. What is the forecast performance? What quarterly inventory is to be expected in each quarter of 2006?

Hint: You may include the following elements in your answer

Explain how to measure forecast accuracy using MSE: Feel free to use the language enclosed (MSE is not covered in textbook)

oThe MSE (mean squared error) is a measure of the quality of an estimatorit is always non-negative, and values closer to zero are better. In statistics, the mean squared error (MSE) measures the average of the squares of the errorsthat is, the average squared difference between the estimated values and what is estimated.

oMore details please refer to https://en.wikipedia.org/wiki/Mean_squared_error

Compare MSE of different methods.

Explain which method is best and why (by observing patterns in actual data).

Conclude with your forecast results in 2006

(c)Should DistCo acquire more warehouse capacity in 2006? Please explain and justify your opinion.

Hint: Either to acquire or not to acquire more warehouse may be correct. The key is to justify and explain clearly your recommendation.

(d)What are the potential factors that may affect the forecast accuracy of the model you have selected?

Hint: There are always some factors not be able to consider in time-series analysis. For examples, interest rate, GDP, political event, natural event, etc.