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Purchasing Strategy:
Answering Questions of Future
Question 1:
Question 2:
Vertical Integration
Choosing between making or buying an item
integration
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RAW MATERIAL
CURRENT PRODUCTION
BUYERS
STEEL
AUTOMOBILE
DEALERS
SILICON
CURCUIT BOARDS
COMPUTERS
Selecting the best suppliers, Working closely with them, and Entering into long-term relationship based on mutual need and trust.
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Forecasting
When demand is uncertain, Someone should forecast the
quantity to be purchased.
A forecast is an Inference of what is likely to happen in
future.
Forecast can be wrong. Businesses may use Forecasts in several subjects. Some of the major forecasting areas are
(1) Economic Forecasting, (2) Technological Forecasting, and (3) Demand Forecasting.
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Economic forecast
Economic forecast is a prediction of what general
rates, gross national product, personal income, tax revenues, level of employment, and so on.
Economic forecast is usually made by government
Technological forecast
Technological forecast predicts the probability and
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Technological forecast
For example, development
The forward-thinking 2005 gas/electric Prius with Hybrid Synergy Drive offers fuel economy and cutting-edge available features like Bluetooth technology -- all with the performance of a conventional car. Plus, you never need to plug-in for recharging.
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Demand Forecast
Demand Forecast predicts the quantity and
Status of the general economy, Time of the year, Competitors actions, Advertising and sales promotions, New product entries to the market, etc.
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Forecasting Methods
A forecast can be developed through either a
they are usually based on the opinions of people (that is why they are subjective).
Objective approaches involve quantitative methods
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knowledgeable executives to discuss their opinions regarding the future values of the items being forecasted.
It provides forecast in a relatively short time. But, presence of a powerful member in the group
2) Delphi Method
The delphi method also involves a group of experts
2) Delphi Method
There is one coordinator who knows all the
2) Delphi Method
The participants review this report and they
reached.
The quality of the consensus and final
and inexpensively.
Each sales representative is asked to
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caused a change in demand should be removed from the data (such as natural disasters, or Olympics).
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models:
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time scale.
A time series is a sequence of chronologically arranged
series.
Time series are frequently analyzed to identify any
Exponential Smoothing
Exponential smoothing is an averaging
technique that inherently assigns the highest weights to the most recent observation.
It successively assigns lower weights to older
observations.
The value of the weights decreases
exponentially.
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Exponential Smoothing
Basically, The forecast for the next period (Ft+1) is set equal to the Forecast for the current period (Ft) + a percentage of the forecast error in the current period, which is E(At Ft):
Example
We will calculate The monthly demand
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Example
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Example
For E = 0.2; FMar = FFeb + 0.2 (AFeb FFeb) FMar = 1004 + 0.2 (920 1004) = 987.2 Note that; the first forecast value for January in Year 5 is chosen by substituting simply the Actual value in previous month (FJan = ADec = 1020). Exponential Smoothing method ASSUMES an Initial Value for the first forecast period is given by the user.
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Example
For E = 0.8; FMar = FFeb + 0.8 (AFeb FFeb) FMar = 956 + 0.8 (920 956) = 927.2 Determination of An Alpha value is a critical issue in Exponential Smoothing. The weights given to the data will be a function of alpha
E =0.6
E =0.4 E =0.2
Age of data
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Example
Lets recalculate the demand forecast for our regular example by using exponential smoothing method with trend values. Assume that E = 0.8 and F = 0.5 Before beginning, we should set the initial values of SFDec and TDec.
Lets assume SFDec = Actual demand in December = 1020 and TDec = 0.
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Example
Now we can continue by calculating the forecast values in January: SFJan = (0.8) (ADec) + (1 0.8) (TAFDec) Since, TAFDec = SFDec + TDec ; Then, TAFDec = 1020 + 0 = 1020. Therefore, SFJan = (0.8) (1020) + (0.2) (1020) = 1020
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Example
Now, we should calculate the trend estimate in January: TJan = (0.5) (SFJan SFDec) + (1 0.5) (TDec) = (0.5) (1020 1020) + (0.5) (0) = 0
Therefore, trend-adjusted forecast for January is: TAFJan = SFJan + TJan = 1020 + 0 = 1020
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Example
Now we can continue by calculating the forecast values in February: SFFeb = (0.8) (AJan) + (1 0.8) (TAFJan) TAFJan = SFJan + TJan = 1020 + 0 = 1020. SFFeb = (0.8) (940) + (0.2) (1020) = 956 Now, we should calculate the trend estimate in February: TFeb = (0.5) (SFFeb SFJan) + (1 0.5) (TJan) = (0.5) (956 1020) + (0.5) (0) = - 32 (Negative Trend) Trend-adjusted forecast for February is: TAFFeb = SFFeb + TFeb = 956 - 32 = 924
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Example
Now we can continue by calculating the forecast values in March: SFMar = (0.8) (AFeb) + (1 0.8) (TAFFeb) TAFFeb = 924 SFMar = (0.8) (920) + (0.2) (924) = 920.8 Now, we calculate the trend estimate in March: TMar = (0.5) (SFMar SFFeb) + (1 0.5) (TFeb) = (0.5) (920.8 956) + (0.5) (-32) = -33.6 Trend-adjusted forecast for March is: TAFMar = SFMar + TMar = 920.8 33.6 = 887.2
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Example(forecast results)
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Actual Forecast
Time
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Actual Forecast
Time
Since alpha is higher, forecast follows the actual more closely. But since beta is lower, trend had not been corrected at the end of the actual values.
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Actual Forecast
Time
We can see a better estimate than the previous trials. Therefore, these values of alpha and beta are the best for this particular demand data. But, dont forget that, the best values of alpha and beta will be different for every other application.
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