Session 2

Factors influencing demand Basic demand patterns Basic principles of forecasting Principles of data collection Basic forecasting techniques Seasonality Sources and types of forecast error
Visual

Planning Hierarchy
Priority Management Techniques Sales and Operations (S&OP) Capacity Management Techniques Resource Planning (RP)

At each level, there are three questions:

Master Production Schedule (MPS)

Rough-Cut Capacity Planning (RCCP)

Material Requirements Planning (MRP) Capacity Requirements Planning (CRP)

Production Activity Control (PAC)

Input/Output Control Operation Sequencing

What are the priorities? What capacity is available? How can differences be resolved?

Visual

Session 2
Statistical analysis

Marketing input Demand plan Planning horizon 118+ months Unit Quantity or $

Sales input

Product & brand Management Input

Business & Strategy

Visual

Sales & operations planning

Pyramid forecasting Total Business level Roll up

Force down

Product family wise line Wise Family forecast X average price

X1 X2 Z1 Z.. Zn

Individual item X unit price

Visual

Sales & operations planning

Marketing MAKE to Stock

Month
forecast actual difference cumulative

-3
120 109 -11

-2
120 137 +17 +6

-1
current

120 original 133 120 120 120 120 120

Revised
+13 +19

130

130 130

130 130

19/360 5 % increase In demand

Visual

Sales & operations planning

manufacturing

Month
planned actual difference cumulative

-3
125 121 -4

-2
125 118 -7 -11

-1
current

125 original 119 125 120 120 120 120

Revised
-6 -17

135

135 135

135 135

Seems to be not practical

17/375 dropped By 5 %
Visual

Sales & operations planning

inventories

Month
planned Actual 101

-3
106

-2
111

-1
current

116 original 121 121 121 121 121

Revised
difference cumulative

Visual

Sales & operations planning

Decision Authorization Executive SOP Pre- SOP Fix agenda & recommendations Supply planning Demand Planning

Capacity constraint analysis

Management forecast

Run sales Forecast reports

Statistical forecast
Visual

Sales & operations planning

Objective: Better customer service (Customer Lead time) Lower Inventories ( Cost) Stabilize production ( Commitments) Team Work ( Management control on business)

Visual

Sales & operations planning

1. 2. 3. 4. 5. Sales forecasts are reviewed & revised Current inventories & backlog Demonstrated capacities are documented Production rates are revised within the constraints of both materials & capacity availability. Projected inventories and/or backlog positions are calculated & compared to target financial projections are developed and reviewed . Contingency plan developed within the reasonable framework. Alternatives presented discussed reviewed & approval.

6. 7.

Visual

Sales & operations planning

Hiring cost 2000 per employee Layoff cost 5000 Per employee Inventory carrying cost 2 % on month ending inventory Beginning & ending inventory 115,000 SKU Current work force 1437 Plan 1 Chase Plan 2 Level Plan 3Mixed

Visual

Manufacturing Strategies
Delivery Lead Time Design Purchase Manufacture Assemble Ship Engineerto-Order

Delivery Lead Time Inventory Manufacture Assemble Ship

Make-toOrder

Delivery Lead Time

Manufacture Inventory Assemble Ship Assembleto-Order

Delivery Lead Time Manufacture Assemble Inventory Ship Make-toStock

Visual

Reprinted with permission, J.R. Tony Arnold, Introduction to Materials Management, third edition, Prentice-Hall, 1998

Demand Management
Input

Customer orders Customer Schedules Customer commitments Customer Quotas Sales forecast Promotions Distribution center replenishments Samples Intra plant, division ,company requirements

Principle: The Master Schedule must have visibility into all known demands from both internal & external customers
Visual

Sales & operations planning

Financial Review
Strategies

S & OP Meeting

Resources
Performance Measurement

Product Review

Supply Review

Demand Review
Visual

The MPS
SIX key questions 1. Has demand really changed? 2. What is the impact on production plan? 3. Is capacity available? 4. Is material available? 5. What are the costs and associated risks? 6. What is impact in market place?
Firm Zone Trading zone

Planning zone

Master schedule

Past Due

5
Slushy

8
Liquid

Frozen Only firm Orders considered

Total demand considered

Visual

The MPS
+ Cost

Master schedule

Past 1 Due
Firm

Trading

Planing Planning Time fence Total Manufacturing Lead time

Visual

Demand time fence Product total cycle time Time Flexibility

The MPS

Master schedule Firm zone Approved By President Vice Presidents

Past Due

Trading Zone Approved By

Planning Zone Approved By

Manufacturing Dir. Master Scheduler Plant In charge Materials Manager

Visual

Factors Influencing Demand

Planning Demand

Priortizing demand

Communicating demand

Influencing demand

Visual

Factors Influencing Demand

General business and economic conditions

Competitive factors Market trends Firms own plans

____________________ ____________________
Visual

Sources of Demand
All sources of demand must be identified:

Customers Spare parts Promotions Intracompany Other

Visual

Characteristics of Demand

Visual

Demand Patterns
Stable versus dynamic Stable demand retains same general shape over time Dynamic demand tends to be erratic

Visual

Demand Patterns
Dependent versus independent Only independent demand needs to be forecast Dependent demand should never be forecast

Visual

What Should Be Forecast?

Forecast
Business plan Market direction

Time Frame
2 to 10 years

Sales and operations

Product lines and families

End item and option

1 to 3 years

Master production schedule

Months

Visual

Principles of Forecasting
Forecasts

Are rarely 100% accurate over time Should include an estimate of error Are more accurate for product lines and families Are more accurate for nearer periods of time

Visual

Data Preparation and Collection

Record data in terms needed for the forecast Record circumstances relating to the data Record demand separately for different customer groups

Visual

Qualitative Techniques

Are based on intuition and informed opinion Tend to be subjective Are used for business planning and forecasting for new products Are used for medium-term to long-term forecasting

Visual

Quantitative Techniques

Based on historical data usually available in the company Assume future will repeat past

Visual

Extrinsic Techniques

Based on external indicators Useful in forecasting total company demand or demand for families of products

Visual

Intrinsic Quantitative Techniques

Month January February March April May June July August September October November December January Sales 92 83 66 74 75 84 84 81 75 63 91 84 ?
Visual

Moving Averages
Forecast sales as an average of past months

An average of the past 3 months:

(63 + 91 + 84) January forecast = 3

If January sales are 90, forecast for February

(91+ 84 + 90) 3
Visual

Moving Average Forecasting

It can be used to filter out random variation. Longer periods smooth out random variation. If a trend exists, it is hard to detect. Manual calculations can be cumbersome when dealing with more periods.

Visual

Problem 2.1

Visual

Problem 2.1
Three-Month Next Month Total Forecast

Month 1 2 3 4 5 6

Demand 102 91 95 105 94 101

Visual

Problem 2.1 Solution

Visual

2-18a

Exponential Smoothing

Provides a routine method of updating item forecasts Works well for stable items Is satisfactory for short-range forecasts Detects trends, but lags them

Seasonality Measures the amount of seasonal variation of demand for a product Relates the average demand in a particular period to the average demand for all periods

Period average sales Seasonal index = Average sales for all periods
Visual

2-19

Developing Seasonal Sales Indexes

Sales History Year 1 122 130 132 128 Quarter 2 108 100 98 102 3 81 73 71 75 4 90 96 99 95 Total

1 2 3 Average

401 399 400 400

400 Average sales for all quarters = = 100 units 4

Quarter 1 2 3 4 Average Quarterly Sales/100 128/100 102/100 75/100 95/100 = = = = Seasonal Index 1.28 1.02 0.75 0.95

Total

4.00
Visual

2-21

Seasonal Sales
Average Sales for All Periods

Visual

2-22

Tracking the Forecast

Forecasts are rarely 100% correct over time. Why track the forecast? To plan around the error in the future To measure actual demand versus forecasts To improve our forecasting methods

Visual

2-23

Forecasts Can Be Inaccurate in Two Ways

Bias: Cumulative sales may not be the same as forecast.

Month 1 2 3 4 5 6 Total

Forecast 100 100 100 100 100 100 600

Actual 90 125 120 125 120 110 690

Variation 10 +25 +20 +25 +20 +10 +90

Bias exists since the cumulative variation is not zero.

Visual

2-24

Forecasts Can Be Innaccurate in Two Ways (cont.)

Random variation: Sales will vary plus and minus about the average.
Month 1 2 3 4 5 6 Total Forecast 1,000 1,000 1,000 1,000 1,000 1,000 6,000 Actual 1,050 940 980 1,040 1,030 960 6,000 Variation +50 60 20 +40 +30 40 0

There is no bias, but there is random variation each month.

Visual

2-25

Session 2: Objectives

Understand the factors influencing demand Recognize basic demand patterns Describe the basic principles of forecasting Understand the principles of data collection Compare basic forecasting techniques Understand the concept of seasonality Understand the sources and types of forecast error
Visual

2-26

Problem 2.3 (Solution)

Month 1 2 3 4 5 6 7 8 9 10 Demand 102 91 95 105 94 101 108 91 101 99 96 97 98 100 101 100 100 97 Next Month Forecast

Visual

2-27