UNIT -1

Introduction to Operations
Management and Forecasting

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 Operations Management
• The management of systems or processes that create good or
provide service.
Book you read
Email you send
Travel in bus
Education you get
Whatever you are eating and wear involve operation function

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 Basic Functional Areas of
Organization
• Operation and Marketing are prime or line function.
• Operation management (OM) manage the core (operation).

Organization

Finance Operations Marketing

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 The operation function involve conversion of
inputs into outputs
• Product package combo of good and service.
• Goods and service occur in continuum.
• Value addition= value or price of outputs- cost of input.
Value added
Inputs Outputs
Land Transformation/
Labor Conversion Goods
Capital process Services
Feedback

Control
Feedback Feedback

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 Inputs, Transformation and Output

Inputs Transformation Outputs

Raw Vegetable Cleaning Canned
Metal Sheets Cans making Vegetable
Water Cutting
Energy Cooking
Labor Packing
Equipment Labeling

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 Inputs, Transformation and Output

Inputs Transformation Outputs

Doctors, nurses Examination Healthy Patient
Medical supplies medication
Equipment Therapy
Laboratories Surgery
Monitoring

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 Goods versus Services

• Production of goods – tangible output

• Delivery of services – an act
• Service job categories
– Government
– Wholesale/retail
– Financial services
– Healthcare
– Personal services
– Business services
– Education

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 Production of Goods versus Delivery of Services

1. Customer contact
2. Uniformity of input
3. Labor content of jobs
4. Uniformity of output
5. Measurement of productivity
6. Production and delivery
7. Quality assurance
8. Amount of inventory

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 Difference between Goods and Service

Characteristic Goods Service

Customer contact Low High
Uniformity of Input High Low
Labor content Low High
Uniformity of output High Low
Output Tangible Intangible
Productivity measurement Easy Difficult
Inventory Much Little
Evaluation Easier More difficult
Patentable Usually Not usually

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 Identify production of goods and Service

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 Scope of operation management

• Operations Management includes:

– Forecasting
– Capacity planning
– Scheduling
– Managing inventories
– Assuring quality
– Motivating employees
– Deciding where to locate facilities
– And more . . .

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 Responsibilities of operation management

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 Key decision of operation manager

• What
What resources/what amounts
• When
Needed/scheduled/ordered
• Where
Work to be done
• How
Designed
• Who
To do the work

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 Forecasting

I see that you will

get an A this semester.

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 Forecasting

• Estimation of future activities

• A statement about the future value of a variable of interest
• It is the estimation of future sales or demand
• Forecasts affect decisions and activities throughout an
organization

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 Use of Forecast in business sector

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 Features common to all forecast

• Assumes causal system

past == future
• Forecasts rarely perfect because of randomness
• Forecasts more accurate for groups vs. individuals
• Forecast accuracy decreases as time horizon increases

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 Elements of a good forecast

Timely

Reliable Accurate

Written

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 Steps in the forecasting process

“The forecast”

Step 6 Monitor the forecast

Step 5 Prepare the forecast
Step 4 Gather and analyze data
Step 3 Select a forecasting technique
Step 2 Establish a time horizon
Step 1 Determine purpose of forecast

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 Approaches or techniques of forecasting

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 Approaches or techniques of forecasting

• Qualitative- Use subjective input

• Quantitative – historical data set or the development of

associative models that attempt to utilize casual or explanatory
variable to make a forecast.

• Associative models use equations that consist of one more

explanatory variable that can be used to predict the demand.

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 Qualitative or Judgmental forecasting

• Executive opinions
• Sales force opinions
• Consumer surveys
• Delphi method: an iterative method intended to achieve
consensus forecast.

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 Time Series forecasting

Time series- time ordered sequence of observation taken at

regular intervals.
Analysis of time series data require the analyst to identify the
underlying behavior of the series.
• Trend - long-term movement in data
• Seasonality - short-term regular variations in data
• Cycle – wavelike variations of more than one year’s duration
• Irregular variations - caused by unusual circumstances
• Random variations - caused by chance

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 Time Series forecasting

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 Trend?

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 Trend?

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 Time series methods

Simple moving average: average a no of recent actual values

,updated as new values become available.

𝑆𝑢𝑚 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑𝑠 𝑓𝑜𝑟 𝑐ℎ𝑜𝑠𝑒𝑛 𝑛𝑜 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑𝑠

Moving average = 𝑛𝑜 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑𝑠

F= σ𝑛𝑖=0 𝑑𝑖/𝑛

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 Time series methods

Question: Compute a three period moving average forecast given

demand for shopping carts for the last periods.

Period Demand
. 2014 100
2015 101
2016 111
2017 113
2018 115

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 Time series methods

Weighted moving average: Unequal weights are assigned to the

demand data such that some of all the weights are equal to 1 the most recent
data is given the highest weight and the weight assigned to the oldest data is
least.

𝐹𝑖+1 = ෍ 𝑊𝑖 𝐷𝑖

If the weightage is not given the weightage for n period in decreasing order of
weightage can be calculated as
𝑛 𝑛−1 𝑛−2 1
σ𝑛
….. σ 𝑛 ….. σ 𝑛 ….. σ 𝑛

𝑛(𝑛 + 1)
෍𝑛 =
2

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 Time series methods

Determine the forecast for the year 2019 using weighted average method weights given
in terms of highest to the most recent data set as 0.5, 0.3 and 0.2.
Period No of complaints
2014 60
2015 65
2016 55
2017 58
2018 64

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 Time series methods

60.4

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 Time series methods

Exponential smoothing: a weighted average method based on

previous forecast plus a percentage of the forecast error.
• It only requires the demand for the previous and forecast for
the previous period to calculate forecasting for next period.
𝐹𝑡 = 𝐹𝑡−1 + 𝑎(𝐷𝑡−1 − 𝐹𝑡−1 )
a= smoothening coefficient

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 Time series methods

Exponential smoothing: a weighted average method based on

previous forecast plus a percentage of the forecast error.
• It only requires the demand for the previous and forecast for
the previous period to calculate forecasting for next period.
𝐹𝑡 = 𝐹𝑡−1 + 𝑎(𝐷𝑡−1 − 𝐹𝑡−1 )
a= smoothening coefficient

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 Time series methods

Forecasts based on averages .Given the following data. if the smoothening co-efficent
is 0.4. What will be the forecast for 2020?

Period No of complaints
2015 60
2016 65
2017 55
2018 58
2019 64

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 Time series methods

60.856

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 Forecasting Error

1.Error or deviation= 𝐷𝑖 − 𝐹𝑖

2. Running sum of forecast error= σ(𝐷𝑖 − 𝐹𝑖 )

σ 𝐷𝑖 −𝐹𝑖
3. MAD = 𝑛
(𝐷𝑖 −𝐹𝑖) 2
4. MSE= 𝑛
σ(𝐷𝑖 −𝐹𝑖 )
5.Bias or mean forecast error=
𝑛

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 Forecasting Error

6.Tracking Signal= It monitors the performance of the forecasting

model and indicates whether the model is to be revised or not.
upper limit for TS= 3 𝑀𝑆𝐸
𝑅𝑆𝐹𝐸
TS=
𝑀𝐴𝐷

𝑒𝑟𝑟𝑜𝑟
σ
𝐴𝑐𝑡𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑
7. MAPE (mean absolute percentage error) = 𝞆100
𝑛

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 Forecasting Error

Question: Actual and forecasted demand of a product are as

follows: Determine MAD and MAPE.

Period Actual demand Forecasted demand

1 180 190
2 170 190
3 165 190
4 170 190
5 200 190

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 Forecasting Error

17, 9.85.

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 Forecasting Error

.
Period Demand Forecast (D-F) |D-F| (D-F)^2 (|D-F|/Demand)*100
1 217 215 2 2 4 0.92
2 213 216 -3 3 9 1.41
3 216 215 1 1 1 0.46
4 210 214 -4 4 16 1.90
5 213 211 2 2 4 0.94
6 219 214 5 5 25 2.28
7 216 217 -1 1 1 0.46
8 212 216 -4 4 16 1.89
-2 22 76 10.26

MAD= 2.75
MSE= 9.50
MAPE= 1.28

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 Associative forecasting technique

 These techniques rely on identification of related variables that

can be used to predict values of the variable of interest.
 E.g. the crop yield depends on the condition of soil and
amount and timing of water and fertilizers.
 The essence of associative techniques is the development of an
equation that summarize the effects of predictor variable.

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 Simple Linear Regression

 .In the simplest regression form a linear relationship is

established between two variables.
 The main objective in LR is to get a straight line that minimize
the sum of squared vertical deviations of the data points from
the line.(i.e. least square criterion).
 y= a+bx
y= predicated variable (dependent)
x= predicted variable (independent)
b= slope of line
a= value of y when x=0

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 Simple Linear Regression
𝑛 σ 𝑥𝑦 − σ 𝑥 σ 𝑦
b=
𝑛 σ 𝑥2 − σ 𝑥 2

σ 𝑦−𝑏 σ 𝑥
a=
𝑛

n= no. of paired observations

Book1.xlsx

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 Simple Linear Regression
Application of regression lies in forecasting related to use of
indicators.
Like CPI,
whole sale price index,
stock market price index
Industrial output
.

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 Simple Linear Regression
Condition required for an indicator to be valid
• The relationship between the movement of an indicator and
variable should have logical explanation.
• A high degree of correlation must exist between indicator and
predicted variable.
• Correlation measures direction and strength of relationship.
• Varies between -1 to 1

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 Simple Linear Regression
𝑛 σ 𝑥𝑦 − σ 𝑥 σ 𝑦
• r=
𝑛 σ 𝑥2 − σ 𝑥 2 𝑛 σ 𝑦2 − σ 𝑦 2

𝑟 2 value lies between 0 and 1

A high value of 𝑟 2 indicate that independent variable is a good
predictor of the value of the dependent variable.
𝑟 2 > 0.8 good predictor,
𝑟 2 0.25 to 0.8 moderate predictor,
𝑟 2 < 0.5 poor predictor

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