1
LSM733-PRODUCTION OPERATIONS MANAGEMENT
By: OSMAN BIN SAIF
LECTURE 5
2
Summary of last Session
• Case Study– Hard Rock Cafe• Projects Why?• Characteristics and Activities• Work Break down structure• Project Scheduling techniques• Cost time trade offs• Project Control reports
3
Agenda for this Session• What Is Forecasting?• Forecasting Time Horizons• The Strategic Importance of Forecasting• Forecasting Approaches– Qualitative Methods– Quantitative Methods
• Associative Forecasting Methods: Regression and Correlation Analysis
• Monitoring and Controlling Forecasts• Focus Forecasting• Forecasting in the Service Sector
4
What is Forecasting? Process of predicting a
future event Underlying basis
of all business decisions Production Inventory Personnel Facilities
??
5
The Realities!
Forecasts are seldom perfect Most techniques assume an
underlying stability in the system Product family and aggregated
forecasts are more accurate than individual product forecasts
6
Short-range forecast Up to 1 year, generally less than 3 months Purchasing, job scheduling, workforce levels, job
assignments, production levels Medium-range forecast
3 months to 3 years Sales and production planning, budgeting
Long-range forecast 3+ years New product planning, facility location, research
and development
Forecasting Time Horizons
7
Influence of Product Life Cycle
Introduction and growth require longer forecasts than maturity and decline
As product passes through life cycle, forecasts are useful in projecting Staffing levels Inventory levels Factory capacity
Introduction – Growth – Maturity – Decline
8
Product Life Cycle
Product design and development criticalFrequent product and process design changesShort production runsHigh production costsLimited modelsAttention to quality
Introduction Growth Maturity Decline
OM
Str
ateg
y/Is
sues
Forecasting criticalProduct and process reliabilityCompetitive product improvements and optionsIncrease capacityShift toward product focusEnhance distribution
StandardizationFewer product changes, more minor changesOptimum capacityIncreasing stability of processLong production runsProduct improvement and cost cutting
Little product differentiationCost minimizationOvercapacity in the industryPrune line to eliminate items not returning good marginReduce capacity
Figure 2.5
9
Forecasting Approaches
Used when little data exist New products New technology
Involves intuition, experience e.g., forecasting sales on Internet
Qualitative Methods
10
Qualitative Methods
1. Jury of executive opinion (Pool opinions of high-level experts, sometimes augment by statistical models)
2. Delphi method (Panel of experts, queried iteratively until consensus is reached)
3. Sales force composite (Estimates from individual salespersons are reviewed for reasonableness, then aggregated)
4. Consumer Market Survey (Ask the customer)
11
Quantitative Approaches
Used when situation is ‘stable’ and historical data exist Existing products Current technology
Involves mathematical techniques e.g., forecasting sales of LCD televisions
12
Quantitative Approaches
1. Naive approach2. Moving averages3. Exponential
smoothing4. Trend projection5. Linear regression
time-series models
associative model
13
Set of evenly spaced numerical data Obtained by observing response variable at
regular time periods Forecast based only on past values, no
other variables important Assumes that factors influencing past and
present will continue influence in future
Time Series Forecasting
14
Trend
Seasonal
Cyclical
Random
Time Series Components
15
Components of DemandD
eman
d fo
r pro
duct
or s
ervi
ce
| | | |1 2 3 4
Time (years)
Average demand over 4 years
Trend component
Actual demand line
Random variation
Figure 4.1
Seasonal peaks
16
Persistent, overall upward or downward pattern
Changes due to population, technology, age, culture, etc.
Typically several years duration
Trend Component
17
Regular pattern of up and down fluctuations
Due to weather, customs, etc. Occurs within a single year
Seasonal Component
Number ofPeriod Length Seasons
Week Day 7Month Week 4-4.5Month Day 28-31Year Quarter 4Year Month 12Year Week 52
18
Repeating up and down movements Affected by business cycle, political, and
economic factors Multiple years duration
Cyclical Component
0 5 10 15 20
19
Erratic, unsystematic, ‘residual’ fluctuations Due to random variation or unforeseen
events Short duration
and nonrepeating
Random Component
M T W T F
20
Naive Approach Assumes demand in next
period is the same as demand in most recent period e.g., If January sales were 68, then
February sales will be 68 Sometimes cost effective and efficient Can be good starting point
21
MA is a series of arithmetic means Used if little or no trend
Used often for smoothing Provides overall impression of data over
time
Moving Average Method
Moving average =∑ demand in previous n periods
n
22
January 10February 12March 13April 16May 19June 23July 26
Actual 3-MonthMonth Shed Sales Moving Average
(12 + 13 + 16)/3 = 13 2/3
(13 + 16 + 19)/3 = 16(16 + 19 + 23)/3 = 19 1/3
Moving Average Example
101213
(10 + 12 + 13)/3 = 11 2/3
Graph of Moving Average
| | | | | | | | | | | |J F M A M J J A S O N D
Shed
Sal
es
30 –28 –26 –24 –22 –20 –18 –16 –14 –12 –10 –
Actual Sales
Moving Average Forecast
24
Used when some trend might be present Older data usually less important
Weights based on experience and intuition
Weighted Moving Average
Weightedmoving average =
∑ (weight for period n) x (demand in period n) ∑ weights
25
January 10February 12March 13April 16May 19June 23July 26
Actual 3-Month WeightedMonth Shed Sales Moving Average
[(3 x 16) + (2 x 13) + (12)]/6 = 141/3
[(3 x 19) + (2 x 16) + (13)]/6 = 17[(3 x 23) + (2 x 19) + (16)]/6 = 201/2
Weighted Moving Average
101213
[(3 x 13) + (2 x 12) + (10)]/6 = 121/6
Weights Applied Period3 Last month2 Two months ago1 Three months ago6 Sum of weights
26
Increasing n smooths the forecast but makes it less sensitive to changes
Do not forecast trends well Require extensive historical data
Potential Problems With Moving Average
Moving Average And Weighted Moving Average
30 –
25 –
20 –
15 –
10 –
5 –
Sale
s de
man
d
| | | | | | | | | | | |J F M A M J J A S O N D
Actual sales
Moving average
Weighted moving average
Figure 4.2
28
Seasonal Variations In Data
The multiplicative seasonal model can adjust trend data for seasonal variations in demand (jet skis, snow mobiles)
29
Seasonal Variations In Data
1. Find average historical demand for each season 2. Compute the average demand over all seasons 3. Compute a seasonal index for each season 4. Estimate next year’s total demand5. Divide this estimate of total demand by the number of seasons, then
multiply it by the seasonal index for that season
Steps in the process:
30
Seasonal Index Example
Jan 80 85 105 90 94Feb 70 85 85 80 94Mar 80 93 82 85 94Apr 90 95 115 100 94May 113 125 131 123 94Jun 110 115 120 115 94Jul 100 102 113 105 94Aug 88 102 110 100 94Sept 85 90 95 90 94Oct 77 78 85 80 94Nov 75 72 83 80 94Dec 82 78 80 80 94
Demand Average Average Seasonal Month 2010 2011 2012 2010-2012 Monthly Index
31
Seasonal Index Example
Jan 80 85 105 90 94Feb 70 85 85 80 94Mar 80 93 82 85 94Apr 90 95 115 100 94May 113 125 131 123 94Jun 110 115 120 115 94Jul 100 102 113 105 94Aug 88 102 110 100 94Sept 85 90 95 90 94Oct 77 78 85 80 94Nov 75 72 83 80 94Dec 82 78 80 80 94
Demand Average Average Seasonal Month 2010 2011 2012 2010-2012 Monthly Index
0.957
Seasonal index = Average 2010-2012 monthly demandAverage monthly demand
= 90/94 = .957
32
Seasonal Index Example
Jan 80 85 105 90 94 0.957Feb 70 85 85 80 94 0.851Mar 80 93 82 85 94 0.904Apr 90 95 115 100 94 1.064May 113 125 131 123 94 1.309Jun 110 115 120 115 94 1.223Jul 100 102 113 105 94 1.117Aug 88 102 110 100 94 1.064Sept 85 90 95 90 94 0.957Oct 77 78 85 80 94 0.851Nov 75 72 83 80 94 0.851Dec 82 78 80 80 94 0.851
Demand Average Average Seasonal Month 2010 2011 2012 2010-2012 Monthly Index
33
Seasonal Index Example
Jan 80 85 105 90 94 0.957Feb 70 85 85 80 94 0.851Mar 80 93 82 85 94 0.904Apr 90 95 115 100 94 1.064May 113 125 131 123 94 1.309Jun 110 115 120 115 94 1.223Jul 100 102 113 105 94 1.117Aug 88 102 110 100 94 1.064Sept 85 90 95 90 94 0.957Oct 77 78 85 80 94 0.851Nov 75 72 83 80 94 0.851Dec 82 78 80 80 94 0.851
Demand Average Average Seasonal Month 2010 2011 2012 2010-2012Monthly Index
Expected annual demand = 1,200
Jan x .957 = 961,20012
Feb x .851 = 851,20012
Forecast for 2013
34
Seasonal Index Example
140 –
130 –
120 –
110 –
100 –
90 –
80 –
70 –| | | | | | | | | | | |J F M A M J J A S O N D
Time
Dem
and
2013 Forecast2012 Demand 2011 Demand2010 Demand
35
Associative Forecasting
Used when changes in one or more independent variables can be used to predict the changes in the dependent variable
Most common technique is linear regression analysis
36
Associative ForecastingForecasting an outcome based on predictor variables using the least squares technique
y = a + bx^
where y = computed value of the variable to be predicted (dependent variable)a = y-axis interceptb = slope of the regression linex = the independent variable though to predict the value of the dependent variable
^
37
Associative Forecasting ExampleSales Area Payroll
($ millions), y ($ billions), x2.0 13.0 32.5 42.0 22.0 13.5 7
4.0 –
3.0 –
2.0 –
1.0 –
| | | | | | |0 1 2 3 4 5 6 7
Sale
s
Area payroll
38
Associative Forecasting Example
Sales, y Payroll, x x2 xy
2.0 1 1 2.03.0 3 9 9.02.5 4 16 10.02.0 2 4 4.02.0 1 1 2.03.5 7 49 24.5
∑y = 15.0 ∑x = 18 ∑x2 = 80 ∑xy = 51.5
x = ∑x/6 = 18/6 = 3
y = ∑y/6 = 15/6 = 2.5
b = = = .25∑xy - nxy∑x2 - nx2
51.5 - (6)(3)(2.5)80 - (6)(32)
a = y - bx = 2.5 - (.25)(3) = 1.75
39
Associative Forecasting Example
y = 1.75 + .25x^ Sales = 1.75 + .25(payroll)
If payroll next year is estimated to be $6 billion, then:
Sales = 1.75 + .25(6)Sales = $3,250,000
4.0 –
3.0 –
2.0 –
1.0 –
| | | | | | |0 1 2 3 4 5 6 7
Nod
el’s
sale
s
Area payroll
3.25
40
How strong is the linear relationship between the variables?
Correlation does not necessarily imply causality!
Coefficient of correlation, r, measures degree of association Values range from -1 to +1
Correlation
41
Correlation Coefficient
r = nSxy - SxSy
[nSx2 - (Sx)2][nSy2 - (Sy)2]
42
Correlation Coefficient
r = nSxy - SxSy
[nSx2 - (Sx)2][nSy2 - (Sy)2]
y
x(a) Perfect positive correlation: r = +1
y
x(b) Positive correlation: 0 < r < 1
y
x(c) No correlation: r = 0
y
x(d) Perfect negative correlation: r = -1
43
Coefficient of Determination, r2, measures the percent of change in y predicted by the change in x Values range from 0 to 1 Easy to interpret
Correlation
For the Nodel Construction example:r = .901r2 = .81
44
Multiple Regression Analysis
If more than one independent variable is to be used in the model, linear regression can be extended to multiple regression to accommodate several independent variables
y = a + b1x1 + b2x2 …^
Computationally, this is quite complex and generally done on the computer
45
Multiple Regression Analysis
y = 1.80 + .30x1 - 5.0x2
^
In the Nodel example, including interest rates in the model gives the new equation:
An improved correlation coefficient of r = .96 means this model does a better job of predicting the change in construction sales
Sales = 1.80 + .30(6) - 5.0(.12) = 3.00Sales = $3,000,000
46
Measures how well the forecast is predicting actual values
Ratio of cumulative forecast errors to MEAN ABSOLUTE DEVIATION (MAD) Good tracking signal has low values If forecasts are continually high or low, the forecast
has a bias error
Monitoring and Controlling Forecasts
Tracking Signal
47
Monitoring and Controlling Forecasts
Tracking signal
Cumulative errorMAD=
Tracking signal =
∑(Actual demand in period i - Forecast demand in period i)(∑|Actual - Forecast|/n)
48
Tracking Signal
Tracking signal
+
0 MADs
–
Upper control limit
Lower control limit
Time
Signal exceeding limit
Acceptable range
49
Tracking Signal ExampleCumulative
Absolute AbsoluteActual Forecast Cumm Forecast Forecast
Qtr Demand Demand Error Error Error Error MAD
1 90 100 -10 -10 10 10 10.02 95 100 -5 -15 5 15 7.53 115 100 +15 0 15 30 10.04 100 110 -10 -10 10 40 10.05 125 110 +15 +5 15 55 11.06 140 110 +30 +35 30 85 14.2
50
CumulativeAbsolute Absolute
Actual Forecast Cumm Forecast ForecastQtr Demand Demand Error Error Error Error MAD
1 90 100 -10 -10 10 10 10.02 95 100 -5 -15 5 15 7.53 115 100 +15 0 15 30 10.04 100 110 -10 -10 10 40 10.05 125 110 +15 +5 15 55 11.06 140 110 +30 +35 30 85 14.2
Tracking Signal Example
TrackingSignal(Cumm Error/MAD)
-10/10 = -1-15/7.5 = -20/10 = 0-10/10 = -1+5/11 = +0.5+35/14.2 = +2.5
The variation of the tracking signal between -2.0 and +2.5 is within acceptable limits
51
Forecasting in the Service Sector
Presents unusual challenges Special need for short term records Needs differ greatly as function of
industry and product Holidays and other calendar events Unusual events
52
Summary of this Session• What Is Forecasting?• Forecasting Time Horizons• The Strategic Importance of Forecasting• Forecasting Approaches– Qualitative Methods– Quantitative Methods
• Associative Forecasting Methods: Regression and Correlation Analysis
• Monitoring and Controlling Forecasts• Focus Forecasting• Forecasting in the Service Sector
53
THANK YOU
Top Related