PRODUCTION PRODUCTION OPERATIONS OPERATIONS MANAGEMENT MANAGEMENT

Operations Management
Forecasting

4-2

 WHAT IS FORECASTING?

Outline

TYPES OF FORECASTS THE STRATEGIC IMPORTANCE OF FORECASTING

Human Resources Capacity Supply-Chain Management

Forecasting Time Horizons The Influence of Product Life Cycle

SEVEN STEPS IN THE FORECASTING SYSTEM

4-3

Outline - Continued
FORECASTING APPROACHES TIME-SERIES FORECASTING
Overview of Qualitative Methods Overview of Quantitative Methods Decomposition of Time Series Nave Approach Moving Averages Exponential Smoothing Exponential Smoothing with Trend Adjustment Trend Projections Seasonal Variations in Data in Cyclic Variations 4-4 Data

Outline - Continued
ASSOCIATIVE FORECASTING METHODS: REGRESSION AND CORRELATION ANALYSIS

MONITORING AND CONTROLLING FORECASTS

Adaptive Smoothing 4-5 Focus Forecasting

Using Regression Analysis to Forecast Standard Error of the Estimate Correlation Coefficients for Regression Lines Multiple-Regression Analysis

Learning Objectives
When you complete this chapter, you should be able to : Identify or Define:

Forecasting Types of forecasts Time horizons Approaches to forecasts

4-6

Learning Objectives continued When you complete this chapter, you

should be able to : Describe or Explain:
Moving averages Exponential smoothing Trend projections Regression and correlation analysis Measures of forecast accuracy
4-7

What is Forecasting?
Process of predicting a future event Underlying basis of all business decisions

Sales will be Rs. 200 Crores!

Production Inventory Personnel

4-8

Types of Forecasts by Time Horizon

Short-range forecast
usually less than 3 months Job scheduling, worker assignments 3 months to 3 years Sales & production planning, budgeting 3+ years New product planning, facility location
4-9

Medium-range forecast Long-range forecast

Short-term vs. Longer-term Forecasting Medium/long range forecasts deal with

more comprehensive issues and support management decisions regarding planning and products, plants and processes. Short-term forecasting usually employs different methodologies than longer-term forecasting Short-term forecasts tend to be more accurate than longer-term forecasts. 4-10

Influence of Product Life Growth, Maturity, Cycle Introduction,

Decline
Stages of introduction and growth require longer forecasts than maturity and decline Forecasts useful in projecting
staffing levels, inventory levels, and factory capacity

as product passes through life cycle 4-11

Strategy and Issues During a Products Life

Best period to increase market share Company Strategy/Issues R&D product engineering critical

Introduction

Practical to change price or quality image Strengthen niche Drive-thru restaurants CDROM

Growth

Maturity

Decline

Poor time to change image, price, or quality Competitive costs become critical Defend market Fax position machines

Cost control critical

Sales
Color copiers HDTV Product design and development critical

Internet

3 1/2 Floppy disks Station wagons

Forecasting critical Product and process reliability Competitive product improvements and options Increase capacity Shift toward product focused Enhance distribution

Standardization Less rapid product changes - more minor changes Optimum capacity Increasing stability of process Long production runs Product improvement and cost cutting

Little product differentiation Cost minimization Over capacity in the industry Prune line to eliminate items not returning good margin Reduce capacity

OM Strategy/Issue s

Frequent product and process design changes Short production runs High production costs Limited models Attention to quality

4-12

Types of Forecasts
Economic forecasts
Address business cycle, e.g., inflation rate, money supply etc. Predict rate of technological progress Predict acceptance of new product Predict sales of existing product
4-13

Technological forecasts Demand forecasts

Seven Steps in Forecasting forecast Determine the use of the

Select the items to be forecasted Determine the time horizon of the forecast Select the forecasting model(s) Gather the data Make the forecast Validate and implement results
4-14

Demand for product or service

Product Demand Charted over 4 Years with Trend and Seasonality

Seasonal peaks Trend component

Actual demand line Average demand over four years

Year 3 Year 4

Year 1

Rando m variati Year on 2

4-15

Actual Demand, Moving Average, Weighted Moving Average

3 5 3 0 Sales Demand 2 5 2 0 1 5 1 0 5 0 Ja F b M r A r M y Ju Ju A g S p O N v D c n e a p a n l u e ct o e Month
4-16

Weighted moving average Actual sales

Moving average

Realities of Forecasting
Forecasts are seldom perfect Most forecasting methods assume that there is some underlying stability in the system Both product family and aggregated product forecasts are more accurate than individual product forecasts
4-17

Forecasting Approaches
Qualitative Methods Quantitative Methods
Used when situation is vague & little data exist
New products New technology

Used when situation is stable & historical data exist

Existing products Current technology

Involves intuition, experience

e.g., forecasting sales on Internet

Involves mathematical techniques

e.g., forecasting sales of color

4-18

Overview of Qualitative Methods Jury of executive opinion

Pool opinions of high-level executives, sometimes augment by statistical models

Delphi method
Panel of experts, queried iteratively

Sales force composite

Estimates from individual salespersons are reviewed for reasonableness, then aggregated

Survey Consumer Market4-19

Jury of Executive Opinion

Involves small group of high-level managers

Group estimates demand by working together

Combines managerial experience with statistical models Relatively quick Group-think disadvantage
4-20
1995 Corel Corp.

Sales Force Composite

Each salesperson projects his or her sales Combined at district & national levels Sales reps know customers wants Tends to be overly optimistic
Sales

1995 Corel Corp.

4-21

Delphi Method
Iterative group process 3 types of people
Decision makers Staff Respondents
(Sales?) (Sales will be 50!)

Decision Makers

Staff (What
will sales be? survey )

Reduces groupthink

(Sales will be 45, 50, 55)

Respondents

4-22

Consumer Market Survey

Ask customers about purchasing plans What consumers say, and what they actually do are often different Sometimes
How many hours will you use the Internet next week?

1995 Corel Corp.

4-23

Overview of Quantitative Approaches

Nave approach Moving averages Exponential smoothing Trend projection Linear regression
4-24

Time-series Models

Associati ve models

Quantitative Forecasting Methods

(Non-Naive) Quantitative
Forecasting Time Series Models Associative Models

Moving Average

Exponential Smoothing

Trend Projection
4-25

Linear Regression

What is a Time Series?

Set of evenly spaced numerical data Forecast based only on past values Example
Year: Sales: Obtained by observing response variable at regular time periods Assumes that factors influencing past and present will continue influence in future 1998 78.7 1999 2000 63.5 89.7
4-26

2001 2002 93.2 92.1

General Time Series Models

Any observed value in a time series is the product (or sum) of time series components Multiplicative model
Yi = Ti Si Ci Ri (if quarterly or mo. data)
4-27 Yi = Ti + Si + Ci + Ri (if quarterly or mo.

Additive model

Moving Average Method

MA is a series of arithmetic means Used if little or no trend Used often for smoothing
Provides overall impression of data over time

Equation Demand in Previous n Periods MA = n

4-28

Moving Average Example

Youre manager of a museum store that sells historical replicas. You want to forecast sales (000) for 2003 using a 3-period moving average. 1998 4 1999 6 2000 5 2001 3 2002 7
4-29

1995 Corel Corp.

Moving Average Solution

Tim e 1 98 9 1 99 9 20 00 20 01 20 02 2 03 0 Resp se on Yi 4 6 5 3 7 NA
4-30

M in ov g Total (n 3 =) NA NA NA 4651 ++=5

M in ov g Av e erag (n 3 =) NA NA NA 1 /3=5 5

Moving Average Solution

Tim e 1 98 9 1 99 9 20 00 20 01 20 02 2 03 0 Resp se on Yi 4 6 5 3 7 NA
4-31

M in ov g Total (n 3 =) NA NA NA 4651 ++=5 6531 ++=4

M in ov g Av e erag (n 3 =) NA NA NA 1 /3=5 5 1 /3 42 4 = /3

Moving Average Solution

Tim e 1 98 9 1 99 9 20 00 20 01 20 02 2 03 0 Resp se on Yi 4 6 5 3 7 NA M in ov g Total (n 3 =) NA NA NA 4651 ++=5 6531 ++=4 5371 ++=5
4-32

M in ov g Av e erag (n 3 =) NA NA NA 1 /3 5 5 = .0 1 /3 4 4 = .7 1 /3 5 5 = .0

Moving Average Graph

Sales 8 6 4 2 95 96 97 98 Year
4-33

Actual Forecas t

99

00

Weighted Moving Average Method

Used when trend is present
Older data usually less important

Weights based on intuition

Often varies between 0 & 1, & sum to 1.0

Equation (Weight for period n) (Demand in period n) WMA =

Weights
4-34

Actual Demand, Moving Average, Weighted Moving Average

3 5 3 0 Sales Demand 2 5 2 0 1 5 1 0 5 0 Ja F b M r A r M y Ju Ju A g S p O N v D c n e a p a n l u e ct o e Month
4-35

Weighted moving average Actual sales

Moving average

Exponential Smoothing Solution Ft = Ft-1 + 0.1(At-1 Time Actual 4 5 6 7 8 9 175 190 205 180

Ft-1) Forecast, Ft
(= .10) 174.75 + .10(159 - 174.75) = 173.18 + .10(175 - 173.18) = 173.18 173.36 + .10(190 - 173.36) = 173.36 175.02 + .10(205 - 175.02) = 178.02 178.02 + .10(180 178.02)+ .10(182 178.22 = 178.22 178.22) = 178.58
4-36

18 ? 2

Least Squares Equations

Y=a+bx {Y=an+b{x {xy=a{x+b{x2 (x square)

4-37

Computation Table
Xi X1 X2 : Xn Xi Yi Y1 Y2 : Yn Yi
2 Xi 2 X1 2 X2 2 Yi 2 Y1 2 Y2

XiYi X1Y1 X2Y2 : XnYn XiYi

:
2 Xn 2 Xi
4-38

:
2 Yn 2 Yi

Using a Trend Line

Year 1997 1998 1999 2000 2001 2002 2003 Demand 74 79 80 90 105 142 122
4-39

The demand for electrical power at a small city over the years 1997 2003 is given at the left. Find the overall trend.

Actual and Trend Forecast

E le c tr ic P o w e r D e m a n d
160 150 140 130 120 110 100 90 80 70 60 1997 1998 1999 2000 2001 Y ear 2002 2003 2004 2005

4-40