Professional Documents
Culture Documents
Session Speaker
Prof.P.S.Satish
M.S Ramaiah School of Advanced Studies - Bangalore
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Introduction
Forecasting provides an estimate of future demand
Factors that influence demand and whether these factors will
continue to influence demand must be considered when
forecasting.
Improved forecasts benefit all trading partners in the supply
chain.
Better forecasts result in lower inventories,
reduced stock-outs,
smoother production plans,
reduced costs,
and improved customer service.
Walmarts Strategy
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Classification of Forecasting
Short range ( up to 1 year )
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Forecasting Types
Economic Forecast IMF
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Forecasting Techniques
Qualitative forecasting is based on opinion and intuition.
Quantitative forecasting uses mathematical models and
historical data to make forecasts.
Time series models are the most frequently used among all
the forecasting models.
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Quantitative Methods
Moving Average Method
Exponential Smoothing
Trend Projection
Linear Regression
Causal model
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= 2/(N+1)
Where N=
period of
moving
average ;
Typically 0.1
to 0.4
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Trend Projections
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An Example
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Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Sale
1999
80
75
80
90
115
110
100
90
85
75
75
80
Demand
2000
100
85
90
110
131
120
110
110
95
85
85
80
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Sale
1999
Demand
2000
Avg.
1999-2000
Avg.
Monthly
Demand
Avg.
Seasonal
Index
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Scatter Diagram
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Forecast Accuracy
The formula for forecast error, defined as the difference between
actual demand and the forecast, follows:
Forecast error, et = At - Ft
where
et = forecast error for Period t
At = actual demand for Period t
Ft = forecast for Period t
Several measures of forecasting accuracy follow:
Mean absolute deviation (MAD)- a MAD of 0 indicates
the forecast = predicted demand.
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Aggregate Planning
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Introduction
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Aggregate Planning
What is it?
Once long term decisions are made, it is necessary to make intermediate
range plans that are consistent with long-range policies
Management must work within the resources allocated by long-range
decisions
Given the sales forecasts, the factory capacity, aggregate inventory levels,
and the size of the workforce, the manager must decide at what rate of
production to operate the plant over the intermediate term
This intermediate-range planning is generally known as aggregate
planning
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Aggregate Planning
Purpose
Aggregate plans and master schedules provide common points at which
capacity and inventories are considered jointly in the light of firms longrange plans, and they provide inputs to the financial plan, the marketing
plan, and requirements planning and detailed scheduling decisions
Several crucial decisions have to be made while generating an aggregate
plan
Management may ask many inventory- and workforce- related questions
To what extent should inventories be used for absorbing changes in demand
that might occur during the intermediate term?
Should we absorb the fluctuations by varying the size of the workforce*
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Aggregate Planning
Purpose
Products or services can be aggregated into a set of relatively
broad product families without getting into too much of detail
A company can organize labour in various ways based on
flexibility to handle different products/services, or, based on
product lines
When time is considered, the planning horizon is an important
aspect. It is the length of time covered by an aggregate plan. A
company will usually look at time in the aggregate months,
quarters, or seasons (rather than days or hours)
Some companies use monthly planning periods for the near portion
of the planning horizon and quarterly periods for the later portion
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Aggregate Planning
Purpose
In practice, planning periods reflect a balance between the needs for
a limited number of decision points to reduce planning complexity
flexibility to adjust output rates and the workforce levels when
demand forecasts exhibit seasonal variations
Relationship of aggregate to other plans is in figure below
Business or
Annual plan
Aggregate
plan
MPS or
Workforce schedule
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Aggregate Planning
Managerial inputs from various functional areas to aggregate
plans
Operations
Current, future
& workforce
capacities
Materials
Supplier capabilities
Storage capacity
Materials availability
Distribution and
Marketing
Customer needs,
Demand, Competition
Aggregate plan
Accounting and
Finance
Cost data, financial
Condition of firm
Human resources
Labour market
Conditions, training
capacity
Engineering
New products, design changes
machine standards
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Identify
alternatives,
constraints and
costs
Prepare
prospective plan
for planning
horizon
No
Move ahead to
Next
planning session
Implement and
update the plan
Is the plan
acceptable?
Yes
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Aggregate planning
Details
A manufacturing firms aggregate plan, called a production plan
focusses on production rates and inventory holdings
A service firms aggregate plan, called a staffing plan, centers on
staffing and other labour related factors
Based on the long-term goals of a company, the aggregate plan
specifies how the company will work for the next year or so
toward these goals within existing equipment and facility capacity
constraints
For manufacturing companies, the aggregate plan links strategic
goals and objectives with production plans for individual products
and the specific components that go into them
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Aggregate Planning
Details
For service firms the aggregate plan links strategic goals with detailed
workforce schedules
When we say aggregate, the sense is that the planning activities at this
early stage are concerned with homogeneous categories, such as gross
volumes of products or number of customers served
Illustration below gives the aggregate plan of a motor manufacturer
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Aggregate planning
Strategies
Many aggregate planning strategies are available to the
manager
The many functional areas in an organization that give input
to the aggregate plan typically have conflicting objectives for
the use of the organizations resources
The objectives could be:
Minimize costs/maximize profits If customer demand is not affected
by the plan, minimizing costs will also maximize profits
Maximize customer service Improving delivery time and on-time
delivery may require additional workforce, machine capacity, or
inventory resources
Minimize inventory investment Inventory accumulations are
expensive because the money could be used for more productive
investments
Maximize utilization of plant and equipment Processes based on a
line flow strategy require uniformly high utilization of plant and
equipment
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Aggregate planning
Strategies
The objectives (contd):
Minimize changes in production rates Frequent changes in
production rates can cause difficulties in coordinating the
supplies of materials and require production line rebalancing
Minimize changes in workforce levels Fluctuating workforce
levels may cause lower productivity because new employees
typically need time to become fully productive
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. . . more
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Subcontract
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Yield Management
It is a process of allocating right type of
capacity to the right type of customer at the
right price and time to maximize revenue or
yield
E.g. :- Airlines booking in advance at
cheaper prices
- Hotel booking in advance
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Yield Management
Yield Management is most effective when :
Demand can be segmented by customer
Fixed costs are high and variable costs are
low
Inventory is perishable
Product can be sold in advance
Demand is highly variable
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Session Summary
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