Demand Forecasting
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Transcript of Demand Forecasting
PRODUCTION PLANNING
Production is a process which combines and transforms various resources used in production and operations sub system of the organization into value added products or services.
Mgmt decisions -3 levels of categories
strategic planning Tactical planning Operational planning
Strategic planning
Strategic planning- deciding and developing strategic plans to achieve strategic objectives.
Top level decisions having long term implications.
High risk and uncertainty.
Tactical planning
Involves resource acquisitions and utilizations to achieve organizational goals.
Middle level decisions having 1-2 years medium term implications.
Tactical plans cover shorter time frames Less uncertainty and lower risk
Operational planning
Routine decisions ,plans to establish actions necessary for achieving operational goals.
Within year No or very little uncertainty or risk.
PRODUCTION PLANNINGEffective production planning is the key to successful operations in a production System (Medium range planning).
The operation managers develop the medium range plans of how they will Produce Product for next several month.- Aggregate planning
These plans specify the amount of labor, sub-contracting and other sources of Capacity to be used.
Next – operations managers also engage in master production scheduling.
Short range production plans, which finished product to be produced in next several Weeks (Short range planning).
Major concepts of issues and techniques of aggregate planning: Definition : Aggregate plan is a statement
of the companies production rates, work force levels ,inventory holdings based on estimates of customer requirements and capacity Limitation.
Aggregate planning is the development of medium range capacity plans for production system.
(Ex) Whirlpool Corporation
A service firms aggregate plan is called a staffing plan, centers on staffing and other Labor related factors.
Manufacturing firms aggregate plan, called a production plan focuses on production rates of inventory plan.
The purpose of Aggregate plan: The Aggregate plan is useful because it
focuses on a general course of Action, consistent with the company’s strategic goals and objectives.
Process Planning
Strategic Capacity Planning
Aggregate Planning
Master Production Scheduling
Material Requirements Planning
Order Scheduling Weekly Workforce &Customer Scheduling
Daily Workforce &Customer Scheduling
LongRange
MediumRange
ShortRange
Manufacturing Services
4©The McGraw-Hill Companies, Inc., 1998
Managerial Implication of Aggregate plan:Managerial Inputs: What types of information that managers
from various functional areas should supply to aggregate plans.
Necessary for cross- functional co-ordination.
Create a committee of cross functional representative, chaired by G.M, the committee overall responsibility is to see whether company policies are followed, conflicts are revolved and final plan is approved.
Fundamentals of aggregate planning
Aggregate planning is key to managing change in patterns of customer demand .
Provides plans for production resources adapt to those changes.
Need For Aggregate planning:
Minimizes over loading and under loading,
thus reduces production costs. Adequate production capacity to meet
expected aggregate demand. A plan for the orderly and systematic
change of production capacity To meet the peaks and valleys of expected
customer demand. Getting more output for the amount of
resource available.
Aggregate Demand:- Individual product forecasts into aggregate demand.
Dimensions of production capacity For aggregate planning, comprehensive
understanding of each production system is needed.
How much of each production resources is available
How much capacity is provided by each type of resource
At what step in production do we determine capacity
How much does it cost to scale capacity up or down.
Sources of Medium range production capacity (for the period of 6 to 18 months )
Several variables are alerted to change in medium range production capacity
Straight time labor- work force adjustment- overtime Labour
Anticipation Inventory Sub-contracting Backlogs, Backorders and Stock outs
Aggressive alternatives: Complementary products Creative pricing
Traditional Aggregate Plan:-
To match demand plan & the level of capacity plan in conjunction
Inventory backlog, overtime, part time labor, temporary employee or sub- contracting are used.
Matching Demand
In matching demand type of aggregate plan, production capacity in each time period varied should exactly match the forecasted demand in that time period.
This approach varies the level of
workforce in each time period by hiring new workers or laying of workers
Advantage: This plan almost no finished good inventory
is needed Carrying inventory is avoided Labor and material cost are higher (up and
down)
LEVEL CAPACITYProduction level capacity is constant over the planning
horizon
The difference between the constant production rate and the varying demand rate is matched up inventory, backlog, over time labor , temporary employees or sub contracting
Buffering with inventory
Production capacity
demandInventory will be increased
Inventory will be decreased
1 2 3 4
Production capacity
demand
Backlog will be reduced
Backlog will be increased
Buffering with backlog
1 2 3 4
Buffering with overtime, part time labor or sub contracting
Production capacity
demand
Demand capacities
1 2 3 4
The chief advantage of level capacities with inventories
Low production cost The cost of hiring and training and lay off workers and using
over time are practically eliminated Stable employment level Reduced turnover and absenteeism Improved quality levels Increased employees commitment to common goal
Drawbacks
Higher finished good inventory Additional carrying cost Trade off between additional carrying cost and saving labor
and material cost results in level capacity in aggregate plan
BUFFERING WITH BACKLOG: ( Produce- to- order)
In produce- to – order firms, backlog serves the purpose of buffering the Difference between varying demand rate to a constant production rate.
Backlog of customer orders in simply to slack of customer order that have been received but not yet produced or shipped.
During first quarter, backlog could fall because demand is less than production capacity.
Remaining quarters, backlog would rise because exceeds production capacity.
Pros:- Level capacity with backlog is preferred by PM, for
same reason as level capacity with inventory. Low production cost Consistent product quality Dependable production rate Produce custom- designed product.
Cons:- Difficult in developing aggregate capacity plan
because of product diversity. Firm needs a large back- log of customer orders. Because products can be designed and production
can be planned for enough in advance that aggregate production capacity can be planned.
Buffering with overtime (or) sub- contracting:-
Next approach to aggregate capacity planning is to use straight line labor to provide production capacity that equals the minimum forecasted demand rate during the planning horizon.
Sub-contracting is used to supply any demand above minimum.
This approach is used to either product- to- order firms.
Advantage:- No finished goods inventory is carried. No hiring, lay-off, or recalling of workers. Low inventory, stable employment levels for
the work force.
Disadvantage:- The amount of overtime available may be
insufficient to meet the demand peaks too high.
Continual use of overtime can exhaust workers.
Leads to detoriating morale problems with product and service, quality, etc.,
Aggregate plan for services:- Aggregate planning may be even simpler
than in system that produce products. Service system, supply standardized service
to customer. Straight- forward aggregate planning
situation in service systems are restaurants, airlines and banks.
In service system, that supply customized services to customer experiences, the same difficulty as job shop in specifying the nature and extend of services to be performed for each customer.
DEMAND FORECASTING
The first step in planning is therefore Forecasting
o Estimating the future demand for products and services and the resources necessary to produce these output
o These are commonly called as sales forecast
o Which are the starting point for all other planning in operations management
TYPES OF FORECASTING
LONG RANGE FORECAST- (Years)
To make strategic decision about production process and facilities- new product line, factory capacities
SHORT RANGE FORECAST- (months)
To assist them in making decisions about operations about operation issues that spans for few weeks- product groups, work force, inventories, purchased materials
MEDIUM RANGE FORECAST- (weeks)
To assist in making decision usually span for few months – specific product, labor-skill classes, machine capacities.
FORCASTING AS AN INTEGRAL PART OF BUSINESS PLANNING
INPUTSMARKET CONDITIONSCOMPETITORS ACTIONCONSUMER TASTEPRODUCT LIFE CYCLESEASONCONSUMER PLAN
ECONOMIC OUTLOOKBUSINESS CYCLELEADING INDICATOR- STOCK,PRICE,MONEY SUPPLY ,UNEMPLOYMENT
OTHER FACTORSLEGALPOLITICALSOCIOLOGICALCULTURAL
FORECASTING METHODS OR
MODELS
OUTPUTSESTIMATED DEMANDFOR EACH PRODUCT
IN EACH TIMEPERIOD
OTHER OUTPUTS
MANAGEMENT TEAMPROCESSOR
SALESFORECAST
FORECAST OF DEMAND FOR EACH
PRODUCTIN EACH TIME PEROID
PROCEDURE FOR TRANSLATING SALES FORECAST
INTO PRODUCTIONRESOURCESFORECAST
BUSINESS STRAREGYMARKETING PLANPRODUCTION PLANFINANCE PLAN
PRODUCTION RESOURCE FORECAST
LONG RANGE MEDIUM RANGE SHORT RANGEFACTORY CAPACITIES WORK FORCE LABOUR BY SKILL CLASSCAPITAL FUND DEPARTMENT CAPACITIES MACHINCE CAPACITIES
TYPES OF FORECASTING
LONG RANGE FORECASTING
SHORT RANGE FORECASTING
TECHNIQUES OF FORECASTING
QUALITATIVE METHOD JUDGMENTAL METHODS
QUANTITATIVE METHOD CASUAL METHODS
QUALITATIVE METHOD
QUALITATIVE METHODS ARE CALLED AS JUDGEMENTAL METHOD
NEED FOR JUDGEMENTAL METHOD
Forecast from quantitative methods are possible only when there is adequate historical data often called as history file
Historical files may be non-existent when a new product is introduced or when technology is expected to change
Judgmental methods are the only practical way to make the forecast
Judgmental methods are used to make quantitative methods to be more reliable
JUDGMENTAL TECHNIQUES
SALES FORCE ESTIMATE EXEUTIVE OPINION MARKET RESEARCH DELPHI METHOD GUDIELINES FOR USING JUDGMENT FORECAST
Adjust quantitative forecast when their track record is poor and decision makers has important contextual knowledge
Make adjustment to quantitative forecast to compensate for specific events
QUANTITATIVE METHODS
QUANTITATIVE METHODS ARE CALLED AS CASUAL METHODS
NEED FOR CASUAL METHODS
Casual methods are used when historical data are available and the relationship between the factors to be forecasted and other internal and external factors
Provides sophisticated production tools Predicting turning points in demand Preparing long range forecast
PRODUCT LIFE CYCLE
An important part of business strategy is to plan for new product and services to be designed, developed and introduced
Operation strategy is directly influenced by products and service plan
As products are designed , all the detailed characteristics of each product is established
Each products characteristics directly affects how the product can be or produced
How the product is made determine the design of production system, which is the heart of operations strategy
Product life cycle
INTRODUCTIONSTAGE
GROWTHSTAGE
MATURITYSTAGE D
ECLINE
DEE
DECLINE
STAGE
INTRODUCTION STAGE Sales begins, production and marketing are
developing and profits are negative Custom products, very low volume, process focused
GROWTH STAGE Where sales grow dramatically, marketing efforts
intensifies, production concentrates on expanding capacities, profits begins up with demand
Slightly standardizes product, low volume, process focused ,to order small batch Standardized product, high volume, product focused, production line to stock, large batch
MATURITY STAGE Production concentrates on high volume, efficiency to low
cost, marketing shifts to competitive sales, promotion aims at increasing market share, profits are at peak