Assignment 1

Case study : Forecasting

The North-South Airline

SUBJECT: PURCHASING AND MATERIALS MANAGEMENT

August 9, 2011 Authored by: Yogesh Luhar

Case Background
In 2008, Northern Airlines merged with Southeast Airlines to create the fourth largest U.S. carrier. Company was headed by Stephan Ruth, who concern is to create a financially strong company and he believes that it can be possible by reducing the maintenance costs. It is noted that, Southeast airline had new/ young fleet compared to northern airlines. In concern to this Ruth has noted that there has been significant difference between in reported B737-200 maintenance cost both in airframe and engines areas between Northern Airlines and Southeast Airlines. To ascertain this issue Ruth assigned Peg Young, vice president for operations and maintenance. The task of the Peg Young is to report Ruth with answer along with quantitative and graphical descriptions about the following: 1) Whether the average fleet age was correlated to direct airframe maintenance cost 2) Whether there was a relationship between average fleet age and direct engine maintenance costs. The fleet data are shown in the following table. Airframe cost data and engine cost data are both shown paired with fleet average age.

Yogesh N Luhar EMBA Operations Roll No : 22035

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It is known that fleet ages of southeast airline are lesser than the Northern fleet. Hence, we will check the correlation between average ages of fleet with maintenance cost for both the airline separately. Correlation is measure of the degree of relatedness of variable. Correlation between two variables is represented with r, called as Pearson product moment correlation co-efficient. The correlation

between two variables falls between -1.0 to 0 to 1. If the correlation is positive, we have a positive relationship. If it is negative, the relationship is negative. Correlation Co-Efficient: Correlation(r) = [N XY - ( X)*( Y) / Sqrt([N X2 - ( X)2][N Y2 - ( Y)2])] where N = Number of values or elements X = First Score Y = Second Score XY = Sum of the product of first and Second Scores X = Sum of First Scores Y = Sum of Second Scores X2 = Sum of square First Scores Y2 = Sum of square Second Scores

There are total five different degrees of correlations. 1) 2) 3) 4) 5) Represents strong negative correlation Represents moderate negative correlation Represents moderate positive correlation Represents strong positive correlation No correlation

Yogesh N Luhar EMBA Operations Roll No : 22035

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PART A) 1) Correlation between average age of fleet and airframe maintenance cost for Northern airline. Northern Airline Year Avg age in hrs x 6512 8404 11077 11717 13275 15215 18390 X= 84590 Airframe cost/Airline y 51.8 54.92 69.7 68.9 63.72 84.73 78.74 Y= 472.51 X2 42406144 70627216 122699929 137288089 176225625 231496225 338192100 X2 = 1118935328 y2 2683.24 3016.2064 4858.09 4747.21 4060.2384 7179.1729 6199.9876 Y2 =32744.1453 XY 337321.6 461547.68 772066.9 807301.3 845883 1289166.95 1448028.6 XY= 5961316.03

2001 2002 2003 2004 2005 2006 2007

r = 0.87715

Scatterplot of Airframe cost/Airline vs Avg age in hrs

85 80 A irframe cost/A irline 75 70 65 60 55 50 5000 7500 10000 12500 A vg age in hrs 15000 17500 20000

The Value of Pearson product moment correlation co-efficient represents strong positive relationship between average fleet age and Airframe cost in case of Northern Airlines. Yogesh N Luhar EMBA Operations Roll No : 22035

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2) Correlation between average age of fleet and airframe maintenance cost for Southeast airline. Southest Airline Year Avg age in hrs x 5107 8145 7360 5773 7150 9364 8259 X= 51158 Airframe cost/Airline y 13.29 25.15 32.18 31.78 25.34 32.78 35.56 Y= 196.08 X2 26081449 66341025 54169600 33327529 51122500 87684496 68211081 X2 = 386937680 y2 176.6241 632.5225 1035.5524 1009.9684 642.1156 1074.5284 1264.5136 Y2 = 5835.825 XY 67872.03 204846.75 236844.8 183465.94 181181 306951.92 293690.04 XY= 1474852.48

2001 2002 2003 2004 2005 2006 2007

r = 0.625

Scatter ot of Airframe cost vs Avg age in hrs

35 Air rame cost_ outheast Air ine

30

25

20

15

10 5000 6000

The Value of Pearson product moment correlation co-efficient represents moderate positive relationship between average fleet age and Airframe cost in case of Southeast Airlines.

Yogesh N Luhar EMBA Operations Roll No : 22035

7000 Avg age in hr _

8000 u heast Air ine

9000

10000

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PART B) 3) Correlation between average age of fleet and engine maintenance cost for Northern airline. In this section relationship between Northern Airlines fleet age and direct engine maintenance cost is evaluated. To check the relationship between these variables, we have to do simple regression analysis. Simple regression analysis is a process of constructing a mathematical model or function that can be used to predict one variable by another variable. In Regression analysis there are two variables, 1) Dependent variable Designated as Y 2) Independent variable Designated as X In this case there are two variables; hence simple regression is the best method to generate the mathematical model. We will find the straight line relationship between average fleet age of Northern Airlines and direct engine maintenance cost. The simple regression line equation is Regression Equation(y) = a + bx Or simplified as y=b0 + b1x ----------------------------------(1)

Slope(b) = (N XY - ( X)( Y)) / (N X2 - ( X)2) Intercept(a) = ( Y - b( X)) / N where x and y are the variables. b = The slope of the regression line a = The intercept point of the regression line and the y axis. N = Number of values or elements X = First Score Y = Second Score XY = Sum of the product of first and Second Scores X = Sum of First Scores Y = Sum of Second Scores X2 = Sum of square First Scores

Yogesh N Luhar EMBA Operations Roll No : 22035

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Avg age in hrs for Northern Airline x 6512 8404 11077 11717 13275 15215 18390 X= 84590

Engine cost / Airline for Northern Airline y 43.49 38.58 51.48 58.72 45.47 50.26 79.6 Y= 367.6

X2 42406144 70627216 122699929 137288089 176225625 231496225 338192100 2 X =1118935328

xy 283206.88 324226.32 570243.96 688022.24 603614.25 764705.9 1463844 XY= 4697863.55

Ssxy SSxx b1 b0

255680.1214 96725599.43 0.002643355 20.57122558

Residual Plots for Engine cost / Northern Airline

Normal Probability Plot
99 10 90 50 10 1 -20 -10 0 Residual 10 20 40 50 60 Fitted Value 70 Residual Percent 5 0 -5 -10

Versus Fits

Histogram
2.0 Frequency 1.5 1.0 0.5 0.0 -10 -5 0 Residual 5 10 1 2 10 5 Residual 0 -5 -10

Versus Order

3 4 5 Observation Order

The regression equation isEngine cost / Northern Airline = 20.6 + 0.00264 Avg age in hrs_Northern Airline. The slope of the line is 0.00264, that means every unit increase in x (avg fleet age) ,Avg engine maintenance cost is predicted to be increased by factor 0.00264 plus fixed cost 1.636.

Yogesh N Luhar EMBA Operations Roll No : 22035

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4) Correlation between average age of fleet and engine maintenance cost for Southeast airline. Avg age in hrs for Southeast Airline x 5107 8145 7360 5773 7150 9364 8259 X= 51158 Engine cost / Airline for Southeast airline y 18.86 31.55 40.43 22.1 19.69 32.58 38.07 Y= 203.28

X2 26081449 66341025 54169600 33327529 51122500 87684496 68211081 2 X = 386937680

xy 96318.02 256974.75 297564.8 127583.3 140783.5 305079.12 314420.13 XY= 1538723.62

sxy SSxx b1 b0

53095.3 13060399.43 0.004065366 -0.670854144

Residual Plots for Engine cost / Southeast Airline

Normal Probability Plot
99 10 90 50 10 1 -10 0 Residual 10 Residual Percent 5 0 -5 -10 20 24 28 32 Fitted Value 36

Versus Fits

Histogram
3 Frequency 10 Residual 5 0 -5 0 -10 -5 0 Residual 5 10 -10 1 2

Versus Order

3 4 5 Observation Order

The regression equation isEngine cost / Southeast Airline = - 0.7 + 0.00407 Avg age in hrs_Southeast airline. Since, it is know that fleet age of southeast airline are low, engine cost will be low and with increase in age, there is a small increase in the maintenance cost.

Yogesh N Luhar EMBA Operations Roll No : 22035

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