Operations and Quality

Management
Session 3

Demand forecasting and Production

Planning

Session outline
First part: Forecasting Demand
Second Part: Capacity Planning
Third part: Strategy Investment

What is Forecasting?

Forecasting the art and science of predicting the

future events.

Forecasting may involve taking historical data and

projecting them into the future with some sort of
mathematical model.

An increasingly complex world economy makes

forecasting challenging

Forecasting Time Horizons

Short range forecast spans up to one year, but

generally less than three months (purchasing
planning, job scheduling, job assignments and
production levels);

Medium range forecast (intermediate) spans from

three months to three years (sales/production
planning, budgeting);

Long range forecast for more then three years

(new product planning, capital expenditures, R&D)

Distinctive Features
Short Range

Employs different
methodologies
including some of
mathematical
techniques;
Tend to be more
accurate;

Intermediate and longrun

Deal with more

comprehensive issues
supporting management
decisions regarding
planning and processes;

Types of Forecasts

Economic predicting inflation rates, money

supplies, housing starts and etc.;

Technological rates of progress, which can result

in the birth of exciting new product

Demand projections for demand for a companys

product and/or services, also called sales forecast,
driving companys production, capacity and
scheduling system.

Strategic Importance
The forecast is the only estimate of demand
until actual becomes known.

Human resources;

Capacity;

Supply-chain management

HRM

Hiring, training and laying off workers all depend on

anticipated demand.

If the human resources department must hire

additional workers without warning, the amount of
training declines and the quality of the workforce
suffers.

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 System Steps

1. Determine the use of the forecast.
2. Select the items to be forecasted.
3. Determine the time horizon of the forecast.
4. Select the forecasting models.
5. Gather the data needed to make the forecast.
6. Make the forecast.
7. Validate and implement the results.

Forecasting Approaches

Quantitative forecasts that employ

mathematical modeling to forecast demand

Qualitative forecasts that incorporate such

factors as the decision makers intuition, emotions,
personal experience and value system

Qualitative Method

Jury of executive opinion uses the opinion of a

small group of high-level managers

Delphi method uses a group process that allows

experts to make forecast (decision makers, staff
personnel and respondents)

Sales force composite based on salespersons

estimates of expected sales

Consumer market survey solicits input from

customers or potential customers regarding future
purchasing plans

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 models predict on the assumption that

the future is a function of the past.

Associative models incorporate the variables or

factors that might influence the quantity being
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 =

(Weight for period n)(Demand in

period n)
Weights
Weighted 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)

+ (Last periods actual demand Last periods

Smoothing Constant the weighting factor used in an

exponential smoothing forecast, a number between 0 and 1,
chosen by forecaster

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

Monitoring and Controlling

Tracking signal a measurement of how well a

forecast is predicting actual values

Bias a forecast that is consistently higher or lower

than actual values of a time series

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

Uses historical data and

causal or associative
relations to project future
demands

Capacity

The throughput or number of units a facility can

hold, receive, store or produce in a period of time

Too little capacity loses customers and too much

capacity is expensive

Capacity determines the rate of output of a process

or the speed at which the firm can pull completed
work out of the process

Capacity Planning

The purpose to ensure the right quantity of goods

or services at the right time and with the best use of
available resources.
1.

What will be done at the facility?

2.

How much capacity is needed?

3.

When should capacity be changed?

Design and Effective

Capacity

Design capacity the theoretical maximum output

of a system in a given period under ideal condition

Effective capacity the capacity a firm can expect

to achieve, given its product mix, methods of
scheduling, maintenance and standards of quality

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 and Strategy

Sustained profits are coming from building

competitive advantage

Capacity decisions must be integrated into

organizations mission and strategy

Capacity Decisions

Facilities and capacity decisions generally are very

expensive and irreversible. Thus, when making such
a decisions in a dynamic environment, the
organization must make a throughout assessment of
the future scenarios that might evolve

Both the size and timing of facility and capacity

decisions depend on the growth (or decline) of
demand for products and services as characterized
by the product life cycle.

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

2. Capacity exceeds demands:

o
o

Price reduction
Aggressive marketing

3. Adjusting to seasonal demands:

o

Product with complementary demand patterns

Managing Demand

Managers calculate theoretical values for

maximization and effective capacity to guide their
production plans

Maximum capacity cannot be increased unless the

facility or the labor force is expanded or modified

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

When managing demand

is not feasible
Changes in full-time,
temporary or part-time
staff

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

Process time of a station the time to produce units

at a single workshop

Process time of a system the time of a longest

(slowest) process, the bottleneck

Process cycle time the time it takes for a product to

go through the production process with no waiting

Theory of Constraints
Theory of Constraints (TOC) a body of
knowledge that deals with anything that
limits an organization ability to achieve its
goals

The Basis of TOC

1. Identify the constraints
2. Develop a plan for overcoming the identified
constraints
3. Focus resources
4. Reduce the effects of the constraints
5. Identify new constraint

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