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Management
Session 3
Session outline
First part: Forecasting Demand
Second Part: Capacity Planning
Third part: Strategy Investment
What is Forecasting?
Distinctive Features
Short Range
Employs different
methodologies
including some of
mathematical
techniques;
Tend to be more
accurate;
Types of Forecasts
Strategic Importance
The forecast is the only estimate of demand
until actual becomes known.
Human resources;
Capacity;
Supply-chain management
HRM
Capacity
When capacity is inadequate, the resulting
shortages can lead to loss of customers and
market share.
Supply-Chain Management
Good supplier relations and the ensuing
price advantages for materials and parts
depend on accurate forecasts.
Forecasting Approaches
Qualitative Method
Quantitative Method
Five quantitative forecasting methods all of
which use historical data.
1. Naive approach
2. Moving averages
3. Exponential smoothing
Time-series
models
4. Trend projection
5. Linear regression
Associative
model
Overview of Quantitative
Methods
Time series a technique that uses a series of past
data points to make a forecast.
Time-Series Forecasting
Future values are predicted only from past
values and based on a sequence of evenly
spaced data points.
Decomposition of a Time Series:
Trend
Seasonality
Cycles
Random variations
Time-Series Forecasting
1. Naive Approach a technique which
assumes that demand in the next period is
equal to demand in the most recent period.
Time-Series Forecasting
2. Moving-average uses a number of historical actual
data values to generate forecast. Used if we can
assume that market demands will stay fairly steady
over time.
demand in previous n
n (number of periods)
periods
Moving average =
Time-Series Forecasting
3. Exponential Smoothing is a sophisticated weightedmoving-average forecasting method which involves
very little record keeping of past data.
New forecast = Last periods forecast
forecast)
Time-Series Forecasting
4. Trend Projection fits a trend line to a
series of historical data points and then
projects the line into the future for forecast
. Seasonal variations regular upward or downward
movements in a time series that tie to recurring events
. Cyclical variations patterns in the data that occur
every several years
Associative Forecasting
5. Regression analysis a straight-line mathematical
model to describe the functional relationships
between independent and dependent variables
The managers job is to develop the best statistical
relationship between dependent and independent
variable
Summarizing Forecasting
Forecasts are critical part of operations
managers functions, driving a firms
production, capacity, scheduling systems
and affecting the financial, marketing and
personnel functions
Forecasting Techniques
Qualitative
Employ judgment,
experience, intuition,
and a host of other
factors that are difficult
to quantify
Quantitative
Capacity
Capacity Planning
2.
3.
System Performance
Measures
Utilization
Actual output as a
percent of design
capacity Actual output
Design capacity
Utilization =
Efficiency
Actual output as a
percent of effective
capacity Actual output
Effective capacity
Efficiency =
Capacity Decisions
Capacity Considerations
1. Forecast Demand accurately
2. Understand the technology and capacity increments
3. Optimum operating size (volume)
4. Build for change
Managing Demand
1. Demand exceeds capacity:
o Raising prices
o Scheduling long lead times
Price reduction
Aggressive marketing
Managing Demand
Matching Capacity to
Demand
1. Making stuffing changes
2. Adjusting equipment
3. Improving processes to increase throughput
4. Redesigning products
5. Adding process flexibility
6. Closing facilities
Service Sector
Demand
Management
Appointments,
reservations or firstcome, first-served rule
Capacity
Management
Bottleneck Analysis
Capacity analysis a means of
determining throughput capacity of
workstations or an entire production system
Bottleneck the limiting factor or
constraint in a system
Process Times
Theory of Constraints
Theory of Constraints (TOC) a body of
knowledge that deals with anything that
limits an organization ability to achieve its
goals
Bottleneck Management
A crucial constraint in any system is the bottleneck,
and managers must focus significant attention on it
1. Release work orders to the system at the pace set
by the bottlenecks capacity the concept of drum,
buffer and rope:
Drum the beat of the system
The buffer the source (inventory)
The rope communication
Bottleneck Management
2. Lost time at the bottleneck represents lost capacity
for the whole system
3. Increasing the capacity of a non-bottleneck station
is a mirage
4. Increasing the capacity of the bottleneck increases
capacity for the whole system
Break-Even Analysis
A means of finding the point, in dollars and
units, at which costs equal revenues
Strategy Investments
Net Present Value a means of determining
the discounted value of series of future cash
receipts
F
F = P(1 + i)n
where: F future value
P present value
I interest rate
N number of years
(1 + i)n
P=
End of Session
Questions and Discussions