TQM REVIEWER: CHAPTERS 9-12 ➢ 3 types of forecast error metrics:

✓ Mean Square Error (MSE)- calculated by squaring

A. Chapter 9: Forecasting & Demand Planning
• Forecasting- Process of projecting values of one or
more variables into the future
I. Planning horizon- is the length of time on which a
forecast is based.
Range:
✓ Long-range- 1-10 years (plan for the expansion,
future needs for land, labor, and equipment)
✓ Intermediate-range- 3-12 months (plan
workforce levels, allocate budgets, schedule
resources)
✓ Short-range- up to 3 months (plan production
schedules and assign workers to jobs,
determine)
➢ Time bucket- is the unit of measure for the time
period used in a forecast.
(year, quarter, month, week, day, hour, or even a
minute)
II. Time Series- is a set of observations measured at
successive points in time or over successive periods of
time. It provides the data for understanding how the
variable that we wish to forecast has changed
historically.
➢ Characteristics:
1) Trend- is the underlying pattern of growth or
decline in a time series (gradual shifting over
time)
2) Seasonal patterns- characterized by repeatable
periods of ups and downs over short periods of
time (peaks)
3) Cyclical patterns- regular patterns in a data
series that take place over long periods of time
(stocks)
4) Random variation/ noise- is the unexplained
deviation of a time series from a predictable
pattern such as a trend, seasonal, or cyclical
pattern (factors that change the remaining
characteristics)
5) Irregular variation- is a one-time variation that is
explainable (hurricane, terrorist attacks, Bagyo)
III. Forecast Errors- difference between the observed
value of the time series and the forecast (At – Ft).
the individual forecast errors and then averaging
the results over all T periods of data in the time
series.
-most commonly used measure of forecast
accuracy
-RMSE square root of MSE
✓ Mean Absolute Deviation (MAD)- average of the
sum of the absolute deviations for all the
forecast errors.
✓ Mean Absolute Percentage Error (MAPE)
• A major difference between MSE and MAD is that
MSE is influenced much more by large forecast
errors than by small errors (because the errors
are squared). The values of MAD and MSE
depend on the measurement scale of the time-
series data.
• MAPE is different in that the measurement
scale factor is eliminated by dividing the absolute
error by the time-series data value.
IV. Statistical Forecasting- based on the assumption
that the future will be an extrapolation of the past.
➢ Techniques:
✓ Time Series Methods
(extrapolate historical time-series data)
✓ Regression Methods
(extrapolate historical time-series data but
include other factors that influence the behavior
of the time series)
➢ Methods:
✓ Simple Moving Average- based on the idea of
averaging random fluctuations in a time series to
identify the underlying direction in which the
time series is changing
• (MA) forecast is an average of the most recent
“k” observations in a time series.
- As the value of k increases, the forecast reacts
slowly to changes in the time series
- As the value of k decreases, the forecast reacts
quickly to changes in the time series
- Effective for short planning horizons where
demand is relatively stable and consistent

a) At- value of the time series for period

b) Ft- forecast value for period t
 ✓ Single Exponential Smoothing (SES)- uses a B. Chapter 10: Capacity Management
weighted average of past time-series values to • Capacity- capability of a manufacturing or service
forecast the value of the time series in the next system, such as a facility, process, workstation, or
period piece of equipment, to accomplish its purpose or
- based on averages using and weighting the most to produce output in a period of time
recent actual demand more than older demand ➢ Viewed:
data 1) as the rate of production output per unit of
- SES methods do not try to include trend or time (output-based)
seasonal effects
The capacity to make enough hamburgers during
a weekday lunch hour to meet customer demand
✓ Regression Analysis (forecasting approach) -
at a quick service restaurant
Helps build a statistical model that defines a
relationship between a dependent variable and 2) as units of resource availability (input-based)
one or more independent variables.
➢ 2 Models: The ability to handle emergency room patients
• Simple Linear Regression- value of a time series with a waiting time of 20 minutes or less
(the dependent variable) is a function of a single
independent variable, time (t)
- finds the best values of a and b using the method
of least square
• Multiple Linear Regression- A linear regression
model with more than one independent
variable

V. Judgmental Forecasting- relies upon opinions and

expertise of people in developing forecasts.

➢ Approaches:
✓ Grassroots forecasting- asking those who are
close to the end consumer about the customers’
purchasing plans. I. Capacity Decision and Economies of Scale
✓ Delphi method- forecasting by expert opinion by ➢ Economies of Scale- achieved when the average
gathering judgments and opinions of key unit cost of a good or service decreases as the
personnel based on their experience and
capacity and/or volume of throughput increases
knowledge.
- a group of people both inside and outside the
➢ Diseconomies of Scale- when the average unit
organization, make prediction—independently.
cost of the good or service begins to increase as
VI. Forecasting in Practice the capacity and/or volume of throughput
increases.
-First step is understanding its purpose

• Tracking Signal- provides a method for
monitoring forecast by quantifying
• Bias- tendency of forecasts to consistently be
larger or smaller than the actual values of the
time series.
• Tracking signals between plus and minus 4
indicate that the forecast is performing
adequately. Values outside this range indicate
that you should reevaluate the model used
➢ Focused Factory- way to achieve economies of
scale, without extensive investments in facilities
and capacity.
Focus on:
✓ Focus on a few key products
✓ Employ Specific Technologies
✓ Dedicated processes to maximize efficiency and
effectiveness
✓ Emphasize a specific competitive priority
 ✓ Focus on market segmentation
II. Capacity Measurement
➢ Ways to Measure:
✓ Theoretical Capacity- maximum rate of
output that can be produced in a period of
time under ideal operating conditions.
✓ Effective Capacity- actual capacity that can
reasonably be expected to be achieved in
the long run under normal operating
conditions.
−Setup time is an important factor in
determining effective capacity.
−Short setup times clearly increase capacity
and improve flexibility by
allowing rapid changeovers to different
models or products on manufacturing
or assembly lines.
✓ Safety capacity (capacity cushion)- amount
of capacity reserved for unanticipated
events such as demand surges, materials
shortages, and equipment breakdowns—
extra output
➢ Work Order- a specification of work to be performed
for a customer or a client.
-needed to have time for setup (setup time)
Includes the following:
✓ Quantity to be produced
✓ Processing requirements
✓ Resources needed
-Goods Producing vs Service Providing
III. Long term Capacity Strategies- addresses the
trade-off between the cost of capacity and the
opportunity cost of not having adequate
capacity
➢ Complementary Goods and Services- produced or
delivered using the same resources available to the
firm, but whose seasonal demand patterns are out of
phase with each other.
IV. Capacity Expansion
➢ Assumptions to illustrate
1. capacity is added in “chunks,” or discrete
increments
2. demand is steadily increasing
➢ Strategies for Expanding Capacity
1. One large capacity increase- advantage: firm
can allocate costs over one large project.
2. Capacity straddle strategy- matching
capacity additions with demand as closely as
possible
3. Capacity lead strategy- ahead of demand
4. Capacity lag strategy-
➢ Short-term Capacity Management- can be managed
by adjusting capacity where possible, or through
influencing demand
- Choices when demand fluctuates above or
below capacity level:
✓ Adjust capacity to match the changes in demand
by changing internal resources and capabilities
• Add or share equipment (leasing, innovative
partnership arrangements, capacity sharing)
• Sell unused capacity (hotels often develop
partnership arrangements to accommodate their
competitors’ guests when they are overbooked)
• Change labor capacity and schedules (changes
in workforce levels and schedules)
• Change labor skill mix (cross-training/job
rotation)
• Shift work to slack periods (inventory during
slack periods and hold the goods for peak
demand periods)—when not busy
✓ Manage capacity by shifting and stimulating
demand
• Vary the price of goods or services (Offer sales
and rebates of overstocks)—special offer
• Provide customers with information
• Advertising and promotion (during low
demand)
• Add peripheral goods and/or services (extra
service)
• Provide reservation- promise to provide a good
or service at some future time and place
V. Revenue Management Systems (RMS)- consists
of dynamic methods to forecast demand,
allocate perishable assets across market
segments, decide when to overbook and by how
much, and determine what price to charge
different customer (price) classes.
➢ Components:
1. Forecasting
2. Allocation (segmenting)
3. Overbooking
4. Pricing
The ideas and methods surrounding RMS are often called
yield management
VI. Learning Curves- direct labor unit cost decreases
in a predictable manner as the experience in
producing the unit increases.
• P-percent learning curve- characterizes a process
in which the time of the 2xth unit is p percent of
the time of the xth unit.
✓ estimate labor-hours for repetitive work
✓ useful in computing capacity requirements in
both the short- and long-term.
• Experience Curve- the cost of doing any repetitive
task, work activity, or project decreases as the
accumulated experience of doing the job
increases
—broader extension of the learning curve.
C. Chapter 11: Process Analysis & Resource Utilization
➢ Utilization- fraction of time a workstation or
individual is busy over the long run.
➢ Throughput- number of units or tasks that are
completed per unit time from a process
✓ might be measured as parts per day,
transactions per minute, or customers per
hour, depending on the context
✓ impacted by bottlenecks
The only way to improve the output rate of the process is
to increase the output rate of the bottleneck activity.
➢ Bottleneck- work activity that effectively limits the
throughput of the entire process
✓ often result in waiting lines or queues
✓ Breaking bottlenecks will:
• Reduce waiting
• Reduce work-in-process inventory
• Enhance customer service
• Allow efficient use of resources
✓ Analysis of bottlenecks can provide useful
insights for evaluating and choosing alternative
process designs
I.Little’s Law- simple equation that explains the
relationship among flow time (T), throughput (R),
and work-in-process (WIP) on an aggregate basis
using long-term averages
✓ At any moment, people, orders, jobs,
documents, money, and other entities that flow
through processes are in various stages of
completion and may be waiting in queues
✓ Provide simple to evaluate process performance
➢ Flow time (cycle time)- is the average time it takes to
complete one cycle of a process
✓ Depend not only on the actual time to perform
the tasks required but also on how many other
entities are in the work-in-process stage
II. Managing Waiting Lines
➢ Queue- is a waiting line
➢ Queueing Models—capture the randomness in
arrival and service rates and dynamic behavior that
often exists in manufacturing and service systems
➢ Queueing System- consists of customers that arrive
for service, one or more servers that provide the
service, and a queue (waiting line) of entities that
wait for service if the server is busy
• Common Queueing Configurations:
1. One or more parallel servers fed by a single
queue
- typical configuration used by many banks and
airline ticket counters
2. Several parallel servers fed by their own queues
- Most supermarkets and discount retailers use
this type of system
3. A combination of several queues in series
- common when multiple processing operations
exist, such as in manufacturing facilities and
many service systems

➢ Queueing theory- analytical study of waiting lines

• Performance Measures Computed
1. The probability that the system is empty (i.e., the
probability of 0 units in both the queue and in
service).
2. The average number of units waiting for service
in the queue.
3. The average number of units in the system
(queue and in service).
4. The average time a unit spends waiting for
service (time in queue)
5. The average time a unit spends in the system
(waiting time plus service time).
6. The probability that an arriving unit has to wait
for service.
7. The probability of n units in the system (queue
and in service).

III. Queueing Model for Process Analysis

➢ Server Queueing Model- simplest queueing

model
• Characteristics & Assumptions
1. The waiting line has a single server.
2. The pattern of arrivals follows a Poisson
probability distribution.
3. The service times follow an exponential
probability distribution.
4. The queue discipline is FCFS (1st come-1st serve)
5. Arriving customers must join the queue and
cannot leave while waiting