Operations Management Diary – Session 6 Date: 25/10/2018

Name: Nishanth M PGDM: 18160 Section: C

SUMMARY-
The main points covered in this session are summarised in the following
 Defining the trend: Cement consumption v/s GDP
Indian Cement Industry has emerged as second largest behind only China in the
world. GDP, measures the average national standard of living, is a contributing factor
to the cement industry. Increased industrialisation which is caused by economic
expansion has a tendency to drive corresponding to increase in cement consumption.
The relationship between Cement consumption and GDP is widely used in the past to
both judge the relative economic growth between the nations and also for forecasting
likely cement consumption rates.
 Case Study: Forecasting by “Titan Industries”
Titan was established in 1984 as a Joint Venture between the Tata group and Tamil
Nadu Industrial Development Corporation. The company brought a shift in Indian
watch market when it introduced its quartz technology, complemented in international
styling. Titan initiated Precision Engineering Division in 2005, which manufactures
dashboard clocks to car manufacturers in Europe and America. Titan is the 5th largest
watchmaker in the world. It produces around 8 million units per year and their
customers is around 80 million. They operate in industry with 4 core watch brands
namely Titan (mid premium segment), Fastrack (Trendy fashion), Sonata (Mass
market) and Xylys (fashioned for premium market). Coming to the part of forecasting
the demand, the company uses Advanced Planning and Optimization (APO).

Historic Forecasting Forecast is

sales model is vetted by
pattern for applied and the sales
3 years heuristic is and
collected applied marketing
group

Forecast is
modified on
specific
sales or
marketing
prices
 Titan uses APO every day and by this, they prioritizes and decides what needs to be
produced and dispatched. Because of this method the company’s lead cycle has decreased
from 25 to 7 days and production planning from 7 to 3 days.
 Limitations of Moving Average method
Limitations under this method is that averaging period smoothens the forecast
but makes it less sensitive to changes, they also require extensive historical data and
also under this method trends are not well accounted.
 Exponential Smoothing
It is a type of weighted average type method where weights decline
exponentially as the time period increases. Here most recent data is weighted the most
and hence it is also called as Exponentially Weighted Moving Average Method. This
method requires only 3 items of data namely, last periods forecast, actual demand for
the current period and smoothing parameter alpha(α) which has a value between 0 and
1.0. This is calculated as
New forecast = cost periods forecast + α (last periods actual demand – last periods forecast).

𝐹𝑡 = 𝐹𝑡−1 + α ( 𝐴𝑡−1 - 𝐹𝑡−1 )

Where Ft = new forecast Ft-1 = cost period forecast
At-1 = last periods actual demand Ft-1 = last periods forecast
 Choosing α
Forecast error = Actual demand – Forecast value
It is done by selecting the model which gives lowest forecast error.
Typically values of α ranges from 0.01 to 0.50.
There are 3 Sophisticated methods of Exponential Smoothing namely, Double
Smoothing, Smoothing adjusted for Trend, Box Jenkins method.

OWN EXAMPLES:
The following cases or examples were taken from online websites.
 Convenience Store: A convenience store chain knew they needed to reduce
inventory costs and improve the bottom line, but they didn’t have the sophisticated
tools or internal knowledge to make the accurate forecasts necessary to meet these
objectives. The company turned to a consulting firm, where they began by looking at
the chain’s major product categories: dairy, alcohol, candy, snacks, and tobacco. They
examined each category on a national level to determine what was driving the demand
for these products. From there, they dove into a more granular level, taking in
economic factors for certain markets such as employment and cost of living to build
predictive models. With this information, the grocery chain was able to build
predictive models for each of its market areas, which procurement used to stock
shelves with the goods consumers were ready and able to purchase.
 Apple: Apple Inc. uses both judgemental approach and tentative approach to
forecasting in order to receive some estimation of the potential demand rate for the
product. Apple utilizes judgemental approach to gather the knowledge and opinions of
the people, therefore they become in a position where they would know the
appropriate demand for their products. With the help of tentative approach, the
company uses customer surveys, that are at times conducted with use of phones, or on
 the streets or at the shops. The company displays and describes its new product and
potential clientele is questioned if they would be interested in buying the one. Apple
Company also uses consumer panels during the early stages of manufacturing the
company’s product to assess the future performance of the company’s product in the
market. While using this strategy, small groups of potential clienteles gather together
so that they can try the product and discuss its features and qualities.

QUESTIONS:
 The number of heart surgeries performed at Heartville General Hospital has
increased steadily over the past several years. The hospitals administration is
seeking the best method to forecast the demand for such surgeries in year 6. The
data for past 5 years is shown
Year Demand
1 45
2 50
3 52
4 56
5 58
1) Using Exponentially smoothing, with α= 0.6, let the initial forecast for the year 1
be 45, the same as actual demand, find the demand for 6th year
The demand for the 6th year will be 56.304 under exponentially smoothing
method.
2) Using Exponentially smoothing, with α= 0.9, let the initial forecast for the year 1
be 45, the same as actual demand, find the demand for 6th year
The demand for the 6th year will be 57.76 under exponentially smoothing
method.
3) Using 2 year moving average method, estimate sales for 6th year
The demand for the 6th year will be 57 under 2 year moving average
method.
4) State the drawbacks of Moving average method
 Increasing the average period or interval ‘n’ smoothens the forecast but
makes it less sensitive to changes
 Trends are not well accounted
 Requires extensive historical data.

 The yearly demand for units manufactured by the Baja Auto Company has been
as follows

year Units(000’s)
1 100
2 80
3 110
4 115
5 105
 6 110
7 125
8 120

5) Use the exponential smoothing method to forecast the number of units for all the
years. The initial forecast for 1st year was 105 units, α= 0.3

1st year 105

2nd year 103.50
3rd year 96.45
4th year 100.52
5th year 104.86
6th year 104.90
7th year 106.43
8th year 112.00

6) Use exponential smoothing method to forecast the number of units for 9th year if
the initial forecast for 1st year is 100 units, α= 0.25
The demand for the 9th year will be 112.51 under exponentially
smoothing method.

INDIAN EXAMPLE
 Nestle:
Nestlé improved its forecast accuracy and made multi-million reductions in their
inventory by removing human judgement and enabling the predicting of future
demand through ‘demand shaping’. Chief Industry Consultant for business analytics
software leader SAS, worked with Nestlé, helping bring their forecasting and
analytics up to speed through revolutionary Demand-Driven Forecasting solutions.
The technology senses demand signals rather than trend and seasonality,
automatically telling a business what demand signals are actually influencing
consumers’ purchasing of products up and down a hierarchy.

FEEDBACK
The session gave us an insight to the Titan and also helped us to understand
regarding the demand forecasting tool implemented by them. This session also helped
us to understand the importance of demand forecasting as one of the key sources for
success of any company. We also learnt about how to solve problems using
Exponential smoothing method.

References
(n.d.). Retrieved from https://exclusivepapers.com/essays/analytical/how-apple-forecasts-demand-
and-manages-inventory.php

(n.d.). Retrieved from https://www.prevedere.com/3-real-world-market-demand-forecasting-

stories/