CHAPTER 1

Operations management (OM)

The business function responsible for
planning, coordinating, and controlling
the resources needed to produce a
companys goods and services.
Three major business functions;
(1) Marketing; (2) Operations; (3)
Finance
Role of operations management
To transform organizational inputs into
outputs
Efficiency
Performing activities at the lowest
possible cost.
Manufacturing organizations
Organizations that primarily produce a
tangible product and typically have low
customer contact.
Service organizations
Organizations that primarily produce
an intangible product, such as ideas,
assistance, or information, and
typically have high customer contact.
Strategic decisions
Decisions that set the direction for the
entire company; they are broad in
scope and long-term in nature.
Tactical decisions
Decisions that are specific and shortterm in nature and are bound by
strategic decisions.
Industrial Revolution
An industry movement that changed
production by substituting machine
power for labor power.
Scientific management
An approach to management that
focused on improving output by
redesigning jobs and determining
acceptable levels of worker output.
Hawthorne studies
The studies responsible for creating
the human relations movement, which
focused on giving more consideration
to workers needs.
Human relations movement
A philosophy based on the recognition
that factors other than money can
contribute to worker productivity.
Management science
A field of study that focuses on the
development of quantitative
techniques to solve operations
problems.

Just-in-time (JIT)
A philosophy designed to achieve
high-volume production through
elimination of waste and continuous
improvement.
Total quality management (TQM)
Philosophy that seeks to improve
quality by eliminating causes of
product defects and by making quality
the responsibility of everyone in the
organization.
Reengineering
Redesigning a companys processes
to make them more efficient.
Flexibility
An organizational strategy in which the
company attempts to offer a greater
variety of product choices to its
customers.
Time-based competition
An organizational strategy focusing on
efforts to develop new products and
deliver them to customers faster than
competitors.
Supply chain management (SCM)
Management of the flow of materials
from suppliers to customers in order to
reduce overall cost and increase
responsiveness to customers.
Global marketplace
A trend in business focusing on
customers, suppliers, and competitors
from a global perspective.
Sustainability
A trend in business to consciously
reduce waste, recycle, and reuse
products and parts.
Lean systems
A concept that takes a total system
approach to creating efficient
operations.
Enterprise resource planning (ERP)
Large, sophisticated software systems
used for identifying and planning the
enterprise-wide resources needed to
coordinate all activities involved in
producing and delivering products.
Customer relationship management
(CRM)
Software solutions that enable the firm
to collect customer-specific data.
Cross-functional decision making
The coordinated interaction and
decision making that occur among the
different functions of the organization.

CHAPTER 2
Business strategy
A long-range plan for a business.
Operations strategy
A long-range plan for the operations
function that specifies the design and
use of resources to support the
business strategy.
Mission
A statement defining what business an
organization is in, who its customers
are, and how its core beliefs shape its
business.
Environmental scanning
Monitoring the external environment
for changes and trends to determine
business opportunities and threats.
Core competencies
The unique strengths of a business
Organizational Core Competencies.
(1) Workforce; (2) Facilities; (3)
Market Understanding; (4) Financial
Know-how; (5) Technology
Competitive priorities
Capabilities that the operations
function can develop in order to give a
company a competitive advantage in
its market.
(1) Cost a competitive priority
focusing on low cost
(2) Quality a competitive priority
focusing on the quality of goods
and services

High-performance design
focus on aspects of quality

Goods and services

consistency how often goods
or services meet the exact
design specification
(3) Time a competitive priority
focusing on speed and on-time
delivery

Rapid delivery refers to how

quickly an order is received

On-time delivery refers to

how often deliveries are made
on time
(4) Flexibility a competitive priority
focusing on offering a wide variety
of goods or services
Product flexibility - ability to
offer a wide variety of goods or
services and customize them to
the unique needs of clients
Volume flexibility - ability to
rapidly increase or decrease the
amount produced in order to
accommodate changes in the
demand

Trade-off
The need to focus more on one
competitive priority than on others.
Order qualifiers
Competitive priorities that must be met
for a company to qualify as a
competitor in the marketplace.
Order winners
Competitive priorities that win orders in
the marketplace.
Operations Strategy
1. Structure operations decisions
related to the design of the
production process such as
facilities technology, and flow of
gods and services through the
facility
2.

CHAPTER 3
Manufacturability
The ease with which a product can be
made.
Product design
The process of defining all of the
products characteristics.
Service design
The process of establishing all the
characteristics of the service, including
physical, sensual, and psychological
benefits.
Steps in the product design process
1. Idea development product idea
developed; sources can be
customers, etc

2. Design standardization the use

of common and interchangeable
parts. By using interchangeable
parts, we can make a greater variety
of products with less inventory and
significantly lower cost and provide
greater flexibility.
DFM Guidelines
1. Minimize parts
2. Design parts for different products
3. Use modular design
4. Avoid tools
5. Simplify operations
Product life cycle
A series of stages that products pass
through in their lifetime, characterized
by changing product demands over
time.

Infrastructure operations
decisions related to the planning
and control systems of the
operation, such as organization of
operations, skills and pay of
workers, and quality measures.

Benchmarking
The process of studying the practices
of companies considered best-inclass and comparing your companys
performance against theirs.

Concurrent engineering
An approach that brings together
multifunction teams in the early phase

Primary types of technologies

1. Product technology which is any
new technology developed by a firm

Reverse engineering
The process of disassembling a
product to analyze its design features.

2. Process technology It is the

technology used to improve the
process of creating goods and
services.

Early supplier involvement (ESI)

Involving suppliers in the early stages
of product design.

Remanufacturing
The concept of using components of
old products in the production of new
ones.

3. Information technology which

enables communication, processing,
and storage of information.
Productivity
A measure of how efficiently an
organization converts inputs into
outputs.
Total productivity
Productivity computed as a ratio of
output to all organizational inputs.
Partial productivity
Productivity computed as a ratio of
output to only one input (e.g., labor,
materials, machines).
Multifactor productivity
Productivity computed as a ratio of
output to several, but not all, inputs.

2.

Product screening product

idea evaluated; need to consider
operations, marketing and
financial requirements

Break-even analysis
A technique used to compute the
amount of goods a company would
need to sell to cover its costs.

of product design in order to simultaneously

design the product and the process.

TYPES OF PROCESSES
Intermittent operations
Processes used to produce a variety of
products with different processing
requirements in lower volumes.

Project process
A type of process used to make a
one-at-a-time product exactly to
customer specifications.

Batch process
A type of process used to produce a
small quantity of products in groups
or batches based on customer orders
or specifications.

Fixed costs
Costs a company incurs regardless of
how much it produces.
Variable costs
Costs that vary directly with the
amount of units produced.
3.

Preliminary design & testing

product prototypes, built, tested,
and refined
Final design final product
specifications completed

Repetitive operations
Processes used to produce
one or a few standardized
products in high volume.

Line process
A type of process used to produce a
large volume of a standardized
product.

Design for manufacture (DFM)

A series of guidelines to follow in order
to produce a product easily and
profitably. DFM guidelines focuses on
two issues

Continuous process
A type of process that operates
continually to produce a high volume
of a fully standardized product.

1. Design simplification means

reducing the number of parts and
features of the product whenever
possible. A simpler product is easier
to make, costs less, and gives
higher quality.

Process flow analysis

A technique used for evaluating a
process in terms of the sequence of
steps from inputs to outputs with the
goal of improving its design.

4.

to the customer.
Process flowchart
A chart showing the sequence of steps
in producing the product or service.
Bottleneck
Longest task in the process.

Flexible manufacturing
system (FMS)
A type of automated system that
combines the flexibility of intermittent
operations with the efficiency of
continuous operations.

Bullwhip effect
Inaccurate or distorted
demand information created
in the supply chain.
Causes of Bullwhip effect

Make-to-stock strategy
Produces standard products and
services for immediate sale or delivery.
Assemble-to-order strategy
Produces standard components that
can be combined to customer
specifications.
Make-to-order strategy
Produces products to customer
specifications after an order has been
received.
Process performance metrics
Measurements of different process
characteristics that tell how a process
is performing.
1.

Throughput time average

amount of time it takes a product
to move through the system.

2.

Process velocity ratio of

throughput time to value-added
time

3.

Productivity ratio of outputs

over inputs

4.

Utilization ratio of time a

resource is used to time it is
available for use

5.

Efficiency ratio of actual output

to standard output

Information technology (IT)

Technology that enables storage,
processing, and communication of
information within and between firms.
Enterprise resource planning (ERP)
Large software programs used for
planning and coordinating all
resources throughout the entire
enterprise.
Global positioning systems (GPS)
A type of wireless technology that uses
satellite transmission to communicate
exact locations.
Radio frequency
identification (RFID)
A wireless technology that uses
memory chips equipped with radio
antennas attached to objects used to
transmit streams of data.
Automation
Using machinery to perform work
without human operators.

Numerically controlled
(NC) machine
A machine controlled by a computer
that can perform a variety of tasks.
Computer-aided design (CAD)
A system that uses computer graphics
to design new products.
Computer-integrated
manufacturing (CIM)
A term used to describe the integration
of product design, process planning,
and manufacturing using an integrated
computer system.
Service package
A grouping of physical, sensual, and
psychological benefits that are
purchased together as part of the
service.

CHAPTER 4
Supply chain
A network of all the activities involved
in delivering a finished product or
service to the customer.
Supply chain management
Coordinates and manages all the
activities of the supply chain.
Tier one supplier
Supplies materials or services directly
to the processing facility.
Tier two supplier
Directly supplies materials or services
to a tier one supplier in the supply
chain.
Tier three supplier
Directly supplies materials or services
to a tier two supplier in the supply
chain.
Logistics
Activities involved in obtaining,
producing, and distributing materials
and products in the proper place and
in proper quantities.
Traffic management
Responsible for arranging
the method of shipment for
both incoming and outgoing
products or materials.
Distribution
management
Responsible for movement
of material from the manufacturer

1.
2.

3.
4.

Demand forecast updating

Order batching instead of
placing replenishment orders right
after each unit is sold, it waits
some period of time, sums up the
number of units sold, and then
places the order
Price fluctuations cause
companies to buy products before
they need them
Rationing and gaming result
when demand exceeds supply
and products are rationed to
members of the supply chain.

Counteracting the Bullwhip Effect

1. Change the way suppliers forecast
product demand by making this
information from the final-seller
level available to all levels of the
supply chain.
2. Eliminate order batching
3. Stabilize prices
4. Eliminate gaming
Automated order entry system
A method using telephone models to
send digital orders to suppliers.
Electronic data interchange (EDI)
A form of computer-to-computer
communications that enables sharing
business documents.
Electronic storefronts
On-line catalogs of products made
available to the general public by a
single supplier.
Net marketplaces
Suppliers and buyers conduct trade in
a single Internet-based environment.
Electronic request for
quote (eRFQs)
An electronic request for a quote on
goods and services.
Virtual private network (VPN)
A private Internet-based
communications environment that is
used by the company, its suppliers,
and its customers for day-today
activities.
Benefits of B2B E-Commerce
1. Lower procurement admin cost
2. Low-cost access to global
suppliers
3. Lower inventory investment
4. Better product quality

Business-to-consumer
e-commerce (B2C)
On-line businesses sell to individual
consumers.

Processes or activities that are

completed by suppliers.
Backward integration
Owning or controlling sources of raw
materials and components.

Advertising revenue model

Provides users with information on
services and products and provides an
opportunity for suppliers to advertise.

Forward integration
Owning or controlling the channels of
distribution.

Subscription revenue model

A Web site that charges a subscription
fee for access to its contents and
services.

Partnering
A process of developing a long-term
relationship with a supplier based on
mutual trust, shared vision, shared
information, and shared risks.

Transaction fee model

A company receives a fee for
executing a transaction.
Sales revenue model
A means of selling goods, information,
or services directly to customers.
Affiliate revenue model
Companies receive a referral fee for
directing business to an affiliate.
Intranets
Networks that are internal to an
organization.
Extranets
Intranets that are linked to the Internet
so that suppliers and customers can
be included in the system.
Green supply chain management
Focuses on the role of the supply
chain with regard to its impact on the
environment.
Requisition request
Request indicating the need for an
item.
Price and availability
The current price of the item and
whether the quantity is available when
needed.
Purchase order
A legal document committing the
company to buy the goods and
providing details of the purchase.
Incoming inspection
Verifies the quality of incoming goods.
Sourcing strategy
A plan indicating suppliers to be used
when making purchases
Vertical integration
A measure of how much of the supply
chain is actually owned or operated by
the manufacturing company. MKT
Insource
Processes or activities that are
completed in-house.
Outsource

ISM Principles and Standards of

Ethical Supply Management Conduct
1.
2.
3.
4.
5.

Impropriety.
Conflicts of interest.
Influence.
Responsibilities to your employees
Promote positive supplier and
customer relationships
6. Sustainability and social
responsibility
7. Confidential and proprietary
information
8. Reciprocity
9. Applicable law, regulations, and
trade agreements
10. Professional competence
General warehouse
Used for long-term storage.
Distribution warehouse
Used for short-term storage,
consolidation, and product mixing.
Postponement
A strategy that shifts production
differentiation closer to the consumer
by postponing final configuration.
Crossdocking
Eliminates the storage and orderpicking functions of a distribution
warehouse.
TYPES OF CROSS DOCKING
1.

Manufacturing crossdocking
The receiving and consolidating of
inbound supplies and materials to
support just-in-time manufacturing.

2.

Distributor crossdocking
The receiving and consolidating of
inbound products from different
vendors into a multi-SKU pallet.

3.

Transportation crossdocking
Consolidation of LTL shipments to
gain economies of scale.

4.

Retail crossdocking
Sorting product from multiple
vendors onto outbound trucks
headed for specific stores.

Strategies for Leveraging Supply

Chain Management
1.
2.
3.
4.
5.
6.
7.
8.

Regularly assess supply chain

network
Have a global view of demand
Decide how to get products to
your customers
Improve asset productivity
Expand visibility
Know what happens, when it
happens
Design to deliver
Track performance to allow for
continuous improvement

E-distributors
Independently owned net marketplaces
having catalogs representing thousands
of suppliers and designed for spot
purchases.
E-purchasing
Companies that connect on-line MRO
suppliers to businesses that pay fees
to join the market, usually for long-term
contractual purchasing.
Value chain management (VCM)
Automation of a firms purchasing or
selling processes.
Exchanges
A marketplace that focuses on spot
requirements of large firms in a single
industry.
Industry consortia Industry-owned
markets that enable buyers to purchase
direct inputs from a limited set of
invited suppliers.
Supply chain velocity
The speed at which product moves
through a pipeline from the
manufacturer to the customer.

CHAPTER 5
Total quality management (TQM)
An integrated effort designed to
improve quality performance at every
level of the organization.
Customer-defined quality
The meaning of quality as defined by
the customer.
DEFINITIONS OF QUALITY
Conformance to specifications
How well a product or service meets
the targets and tolerances determined
by its designers.
Fitness for use

A definition of quality that evaluates

how well the product performs for its
intended use.
Value for price paid
Quality defined in terms of product or
service usefulness for the price paid.
Support services
Quality defined in terms of the support
provided after the product or service is
purchased.
Psychological criteria
A way of defining quality that focuses
on judgmental evaluations of what
constitutes product or service
excellence.

striving to be better through learning

and problem solving.

The probability that a product, service,

or part will perform as intended.

Plandostudyact (PDSA) cycle

A diagram that describes the activities
that need to be performed to incorporate
continuous improvement into the
operation. The specific steps in the
cycle:
(1) Plan (2) Do (3) Study (4) Act

6.

Benchmarking
Studying the business practices of
other companies for purposes of
comparison.
3.

Most common Quality definition

Conformance the degree to

which a product characteristic
meets preset standards
Performance
Reliability product will function
as expected without failure
Durability expected operational
life of the product
Serviceability how readily a
product can be repaired

Prevention costs
Costs incurred in the process of
preventing poor quality from occurring.
Appraisal costs
Costs incurred in the process of
uncovering defects.
Internal failure costs
Costs associated with discovering poor
product quality before the product
reaches the customer.
External failure costs
Costs associated with quality problems
that occur at the customer site.
Robust design
A design that results in a product that
can perform over a wide range of
conditions.

Employee Empowerment seek

out, identify, and correct quality
problems

Quality circle
A team of volunteer production
employees and their supervisors who
meet regularly to solve quality
problems.
4.

Use of quality tools ongoing

employee training in the use of
quality of tools

Cause-and-effect diagram
A chart that identifies potential causes
of particular quality problems.
Flowchart
A schematic of the sequence of steps
involved in an operation or process.
Checklist
A list of common defects and the
number of observed occurrences of
these defects.
Control charts
Charts used to evaluate whether a
process is operating within set
expectations.
Scatter diagrams
Graphs that show how two variables
are related to each other.
Pareto analysis
A technique used to identify quality
problems based on their degree of
importance.

Taguchi loss function

Costs of quality increase as a
quadratic function as conformance
values move away from the target.

Histogram
A chart that shows the frequency
distribution of observed values of a
variable.

CONCEPTS of the TQM PHILOSOPHY

5.

1.

Customer focus goal is to

identify and meet customer needs

2.

Continuous improvement a
philosophy of never-ending
improvement

Kaizen
A Japanese term that describes the
notion of a company continually

Product design products need

to be designed to meet customer
expectations

Quality function deployment (QFD)

A tool used to translate the preferences
of the customer into specific technical
requirements.
Reliability

Process management quality

should be built into the process;
sources of quality problems
should be identified and corrected

Quality at the source

The belief that it is best to uncover the
source of quality problems and
eliminate it.
7.

Managing supplier quality

quality concepts must extend to a
companys suppliers

Malcolm Baldrige
National Quality Award
An award given annually to companies
that demonstrate quality excellence
and establish best practice standards
in industry.
Deming Prize
A Japanese award given to companies
to recognize efforts in quality
improvement.
ISO 9000
A set of international quality standards
and a certification demonstrating that
companies have met all the standards
specified. Three new standards

ISO 9000:2000, Quality

Management Systems
Fundamentals and Standards:
Provides the terminology and
definitions used in the standards.

ISO 9001:2000, Quality

Management Systems
Requirements: This is the
standard for the certification of a
firms quality management system.

ISO 9004:2000, Quality

Management Systems
Guidelines for Performance:
Provides guidelines for
establishing a quality
management system

ISO 14000
A set of international standards and a
certification focusing on a companys
environmental responsibility, focus on
three major areas:
Management systems
standards measure systems
development and integration
of environmental
responsibility into the overall
business
Operations standards
include the measurement of
consumption of natural
resources and energy

 Environmental systems
standards measure
emissions, effluents, and other
waste systems.

CHAPTER 6
Statistical quality control (SQC)
The general category of statistical
tools used to evaluate organizational
quality. Three broad categories:
1. Descriptive statistics
Statistics used to describe quality
characteristics and relationships.
2. Statistical process control (SPC)
A statistical tool that involves
inspecting a random sample of the
output from a process and deciding
whether the process is producing
products with characteristics that fall
within a predetermined range.
3. Acceptance sampling
The process of randomly
inspecting a sample of goods
and deciding whether to
accept the entire lot based on
the results.
Common causes of variation
Random causes that cannot be
identified
Assignable causes of variation
Causes that can be identified and
eliminated.
Mean (average)
A statistic that measures the central
tendency of a set of data.
Range
The difference between the largest and
smallest observations in a set of data.
Standard deviation
A statistic that measures the amount of
data dispersion around the mean.
Control chart
A graph that shows whether a sample
of data falls within the common or
normal range of variation.
Out of control
The situation in which a plot of data
falls outside preset control limits.
Types of Control Charts

Variable a product characteristic

that can be measured and has a
continuum of values (e.g., height,
weight, or volume).
Attribute a product characteristic
that has a discrete value and can
be counted.
x-bar chart
A control chart used to
monitor changes in the mean
value of a process.

Range (R) chart

A control chart that monitors changes
in the dispersion or variability of a
process.

Defining beliefs of JIT

Broad view of operations, simplicity,
continuous improvement, visibility, and
flexibility.

P-chart
A control chart that monitors the
proportion of defects in a sample.

Types of waste
Material, energy, time, and space.

C-chart
A control chart used to monitor the
number of defects per unit.

Broad view of the organization

Tasks and procedures are important
only if they meet the companys overall
goals.

Process capability
The ability of a production process to
meet or exceed preset specifications.

Simplicity
The simpler a solution, the better it is.

Product specifications
Preset ranges of acceptable quality
characteristics.

Continuous improvement
(kaizen)
A philosophy of never-ending
improvement.

Process capability index

An index used to measure process
capability.

Visibility
Problems must be visible to
be identified and solved.

Six Sigma quality

A high level of quality associated with
approximately 3.4 defective parts per
million.

Flexibility
A company can quickly adapt
to the changing needs of its
customers.

Operating characteristic (OC) curve

A graph that shows the probability or
chance of accepting a lot given various
proportions of defects in the lot.

JIT system
The three elements are just-intime manufacturing, total
quality management, and
respect for people.

Acceptable quality level (AQL)

The small percentage of defects that
consumers are willing to accept.
Lot tolerance percent
defective (LTPD)
The upper limit of the percentage of
defective items consumers are willing
to tolerate.

Three basic elements work together to

complete a JIT system

Just-in-time manufacturing
The element of JIT that focuses on the
production system to achieve value
added manufacturing.

Consumers risk
The chance of accepting a lot that
contains a greater number of defects
than the LTPD limit.

Total quality management (TQM)

An integrated effort designed to
improve quality performance at every
level of the organization.

Producers risk
The chance that a lot containing an
acceptable quality level will be rejected

Respect for people

An element of JIT that considers
human resources as an essential part
of the JIT philosophy.

Average outgoing quality (AOQ)

The expected proportion of defective
items that will be passed to the
customer under the sampling plan.

CHAPTER 7
Just-in-time (JIT) philosophy
Getting the right quantity of goods at
the right place at the right time.
Waste
Anything that does not add value.
A broad view of JIT
A philosophy that encompasses the
entire organization.

Setup cost
Cost incurred when setting up
equipment for a production run.
Quality at the source
Uncovering the root cause of a quality
problem.
Pull system
JIT is based on a pull system rather
than a push system.
Kanban card
A card that specifies the exact quantity
of product that needs to be produced.

Production card
A kanban card that authorizes
production of material.
Withdrawal card
A kanban card that authorizes
withdrawal of material.

Small-lot production
The ability to produce small quantities
of products.

Suppliers that supply an entire family

of parts for one manufacturer.
Key Elements of JIT Supplier
Relationship
Suppliers viewed as external factory.
Use of single-source suppliers.
Long-term supplier relationships
developed.
Suppliers locate near customer.
Stable delivery schedules.
Cost and information sharing.

Benefits of JIT
Reduction in inventory
Improved quality
Reduced space requirements
Shorter lead times
Lower production costs
Increased productivity
Increased machine utilization
Greater flexibility

Internal setup
Requires the machine to be stopped in
order to be performed.
External setup
Can be performed while the machine
is still running.
Uniform plant loading
A constant production plan for a facility
with a given planning horizon.

Implementing JIT
1. Make quality improvements.
2. Reorganize workplace
3. Reduce setup times
4. Reduce lot sizes and lead times
5. Implement layout changes
6. Switch to pull production
7. Develop relationship with
suppliers

Multifunction workers
Capable of performing more than one
job.
Cell manufacturing
Placement of dissimilar machines and
equipment together to produce a family
of products with similar processing
requirements.
Jidoka
Authority given to workers to stop the
production line if a quality problem is
detected.
Poka-yoke
Foolproof devices or mechanisms that
prevent defects from occurring.
Bottom-round management
Consensus management by
committees or teams.
Quality circles
Small teams of employees that
volunteer to solve quality problems.
Role of Production Employees in JIT
Have cross-functional skills
Actively engaged in solving production
and quality problems
Empowered to make production and
quality decisions
Quality is everyones responsibility
Responsible for recording and visually
displaying performance data
Work in teams to solve problems
Decisions made through bottom-round
management
Responsible for preventive
maintenance
Single-source suppliers

Examples of JIT concepts seen in

service firms
Improved quality
Uniform facility loading
Use of multifunction workers
Reductions in cycle time
Minimizing setup times and parallel
processing
Workplace organization

Quantitative forecasting methods

Forecast is based on mathematical
modeling.
Types of Forecasting Methods

**QUALITATIVE METHODS**
Executive opinion
Forecasting method in which a group
of managers collectively develop a
forecast.
Market research
Approach to forecasting that relies on
surveys and interviews to determine
customer preferences.
Delphi method
Approach to forecasting in which a
forecast is the product of a consensus
among a group of experts.
Qualitative Forecasting method

CHAPTER 8
Forecasting
Predicting future events.
Features Common to all Forecasting
Models
1. Forecasts are rarely perfect
2. Forecasts are more accurate for
groups or families of items
rather than for individual items
3. Forecasts are more accurate for
shorter than longer than horizons
Steps in the Forecasting Process
1. Decide what to forecast
2. Evaluate and analyze
appropriate data
3. Select and test the forecasting
model
4. Generate the forecast
5. Monitor forecast accuracy
Qualitative forecasting methods
Forecast is made subjectively by the
forecaster.

**QUANTITATIVE METHODS**
1. Time series models based on
the assumption that a forecast can
be generated from the information
contained in a time series of data.

Time series a series of

observations taken over time.
2.

Causal models based on the

assumption that the variable being
forecast is related to other variables
in the environment.

TIME SERIES MODELS

Types of data patterns:
1. Level or horizontal data values
fluctuate around a constant mean
2. Trend data exhibit increasing or
decreasing values over time
3. Seasonality regularly repeats
itself and is constant in length
4. Cycles data patterns created by
economic fluctuations

Unexplained variation that cannot be

predicted.

Random variation

Quantitative Forecasting Models

Type
Time Series Models

Description

Strength

Weaknesses

Nave

Uses last periods actual value

as a forecast

Simple and easy to

use

Only good if data change little

from period to period

Simple mean

Uses an average of past data

as a forecast

Good for level pattern

Requires carrying a lot of

data

Simple
moving
average

A forecasting method in which

only n of the most recent
observations are averaged

Only good for level

pattern

Important to select the proper

moving average

Weighted
moving
average

A forecasting method where n

of the most recent observations
may have different weights

Good for level pattern;

allows placing different
weights on past
demands

Selection of weights requires

good judgment

Exponential
smoothing

A weighted average procedure

with weights declining
exponentially as data become
older

Provides excellent
forecast results for
short-to mediumlength forecasts.

Trend-adjusted

An exponential smoothing
model with separate equations
for forecasting the level and
trend

Provides good results

for trend data

Should only be used for data

with trend

Technique uses the leastsquares method to fit a straight

line to past data over time

Easy to use and

understand

Data should display a clear

trend over time

Computes the percentage

amount by which data for each
season are above or below the
mean.
Causal (Associative) Models

Simple and logical

procedure for
computing seasonality.

Make sure seasonality is

actually present

Linear
regression

Uses the least-squares

method to model a linear
relationship between two
variables.

Easy to understand;
provides good forecast
accuracy

Make sure a linear

relationship is present

Multiple
regression

Similar to linear regression,

but models the relationship of
multiple variables with the
variable being forecast.

A powerful tool in
forecasting when
multiple variables are
being considered.

Significantly increases data

and computational
requirements

Choice of alpha is critical

exponential
smoothing
Linear trend
line

Seasonal
indexes

MEASURING FORECAST ACCURACY

Forecast error
Difference between forecast and actual
value for a given period.
Mean absolute deviation (MAD)
Measure of forecast error that computes
error as the average of the sum of the
absolute errors.
Mean squared error (MSE)
Measure of forecast error that computes
error as the average of the squared error.
Forecast bias
A persistent tendency for a forecast to be
over or under the actual value of the data.

Factors that influencing selection of a

forecasting model
1.
2.
3.
4.

Amount and type of available data

Degree of accuracy required
Length of forecast horizon
Data patterns present

Forecasting software packages

1. Spreadsheets
2. Statistical packages
3. Specialty forecasting packages
Guidelines in selecting forecasting software
1. Does the package have the facilities
you want?
2. What platform is the package

4.
5.
6.
7.
8.

Is it possible to implement new

methods?
Do you require interactive or repetitive
forecasting?
Do you have a very large data sets?
Is there any local support?
Does the package give the right
answers?

Collaborative
Tracking
signal
planning, forecasting,
Tool replenishment
and
used to monitor(CPFR)
the quality
nine-step
of a
forecast.
process
1.
2.
3.
4.
5.
6.
7.
8.
9.

Establish collaborative
relationships
Create a joint business plan
Create a sales forecast
Identify exceptions for sales
forecasts
Resolve/collaborate on
exceptions to sales forecasts
Create order forecast
Identify exceptions for order
forecast
Resolve/collaborate on
exceptions to order forecast
Generate order

Economies
available for?
of scale
3.A condition
How easyiniswhich
the package
the average
to learn
costand
of ause?
unit produced is reduced as
the amount of output is increased.
Diseconomies of scale
A condition in which the cost of each
additional unit made increases.
Focused factories
Facilities that are small, specialized,
and focused on a narrow set of
objectives.
Three-step procedure for making
capacity planning decisions
1. Identify capacity requirements
Capacity cushion additional
capacity added to regular
capacity requirements to
provide greater flexibility.

CHAPTER 9
Capacity
The maximum output rate that can be
achieved by a facility.

2.

Capacity planning
The process of establishing the output
rate that can be achieved by a facility.
Two (2) Measures of Capacity
1. Design capacity the maximum
output rate that can be achieved by
a facility under ideal conditions.
2.

Effective capacity the maximum

output rate that can be sustained
under normal conditions.

Capacity utilization
Percentage measure of how well
available capacity is being used.
Best operating level
The volume of output that results in the
lowest average unit cost.

3.

Develop capacity alternatives

(1) Do nothing, (2) Expand

large now, and (3) Expand
small now, with option to add
later
Evaluate capacity alternatives

Decision tree
Modeling tool used to evaluate
independent decisions that must be
made in sequence. It contains the
following information:
Decision points represented by
squares, called nodes
Decision alternatives represented by
branches or arrows leaving a
decision point
Chance events events that could
affect the value of a decision
Outcomes

Expected value (EV)

A weighted average of chance events,
where each chance event is given a
probability of occurrence.
Location analysis
Techniques for determining location
decisions.
Factors Affecting Location Decisions
1. Proximity to sources of supply
2. Proximity to customers
3. Proximity to Source of Labor
4. Community considerations
5. Site considerations
6. Quality-of-life issues
7. Other considerations
Globalization
The process of locating facilities
around the world.
Procedures for Evaluating Location
Alternatives
Factor rating
A procedure that can be used to
evaluate multiple alternative locations
based on a number of selected factors.
Loaddistance model
A procedure for evaluating location
alternatives based on distance.
Rectilinear distance
The shortest distance between two
points measured by using only north
south and eastwest movements.
Break-even analysis
Technique used to compute the
amount of goods that must be sold just
to cover costs.