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3/7/22, 8:07 AM 741-OMGT 1013: OPERATIONS MANAGEMENT & TOTAL QUALITY MANAGEMENT - https://usl-tuguegarao.neolms.com/student_lesson/show/3150285?
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741-OMGT 1013: OPERATIONS MANAGEMENT & TOTAL QUALITY MANAGEMENT

MIDTERM - WEEK 1
Lesson 1
For this week, the following shall be your guide for the different lessons prepared for you. Be patient, read them carefully as learning tasks will be given to you later.
HAVE A FRUITFUL LEARNING EXPERIENCE!!!
Elements of good forecasts
Steps in the forecasting process

Topics: Approaches to forecasting
Qualitative forecasts
After reading this module, you are expected to:

Learning
Outcomes: Relate the importance/significance of
forecasting in business;
Make a forecast using quantitative
forecasting methods.
Before starting, may I invite you to reflect on this bible verse silently. . . . as we continue to pray for one another and offer all our prayers
to the LORD. . . .
LEARNING CONTENT
https://usl-tuguegarao.neolms.com/student_lesson/show/3150285?lesson_id=15084535&section_id=last 1/7
3/7/22, 8:07 AM 741-OMGT 1013: OPERATIONS MANAGEMENT & TOTAL QUALITY MANAGEMENT - https://usl-tuguegarao.neolms.com/student_lesson/show/3150285?lesson_id=15084535§ion…
Introduction:
STORY
Henredon produces low volumes of intricate, handcrafted, household furniture that is sold in 600 retail outlets. Because the demand for high-quality furniture is low, holding it in inventory is
very expensive for retailers. Nonetheless, before the recession of the 19803, Henredon’s retailers carried large inventories to attract customers who demanded both high quality and timely service.
The recession, however, changed the way retailers dealt with Henredon. They cut inventories to remain price competitive while pressuring Henredon to maintain quality levels and reduce delivery
lead times to less than two months.
The average time required to manufacture and ship an order was 11 weeks before the recession. To meet the demand for faster delivery, Henredon needed to reduce the amount of time
required to manufacture and ship orders. Accurate forecasts of demand were essential for meeting this competitive priority. The forecasting system in use before the recession based production and
inventory schedules on the average of the last four months’ demand for a product. This approach wasn’t effective because more than 10 percent of Henredon’s products were new each year and
had no prior order history.
The new forecasting system treats new products differently from mature products. Forecasts for new products are based on a curve created from orders from semi-annual furniture shows and
Henredon’s past experiences with similar products. The curve is used for the first 12 months of a product’s life, after which traditional statistical forecasting techniques are used. Middle managers, as
well as top management, provide inputs to the forecasts. More accurate forecasts provided by the system have helped cut the amount of time needed to manufacture and ship ' orders to about five
weeks. This improvement increased customer service and reduced inventories. Henredon’s orders during the recession increased 3 percent over the pre-recessionary period even though, industry
wide, sales declined.
Lesson Proper:
Henredon’s success demonstrates the value of forecasting. A forecast is a prediction of future events used for planning purposes. At Henredon, management needed accurate forecasts of
retailer demand to reduce lead times and inventory levels. Changing business conditions resulting from global competition, rapid technological change, and increasing environmental concerns exert
pressure on a firm’s capability to generate accurate forecasts. Forecasts are needed to aid in determining what resources are needed, scheduling existing resources, and acquiring additional
resources. Accurate forecasts allow schedulers to use machine capacity efficiently, reduce production times, and cut inventories. The manager of a fast-food restaurant needs to forecast the number
of customers at various times of the day, along with the products they will want, in order to schedule the correct number of cooks and counter clerks. Managers may need forecasts to anticipate
changes in prices or costs or to prepare for new laws or regulations, competitors, resource shortages, or technologies.
Forecasting methods may be based on mathematical models using historical data available, qualitative methods drawing on managerial experience, or a combination of both. In this module
we explore several forecasting methods commonly used today and their advantages and limitations. We also identify the decisions that managers should make in designing a forecasting system.
DEMAND CHARACTERISTICS
At the root of most business decisions is the challenge of forecasting customer demand. It is a difficult task because the demand for goods and services can vary greatly. For example,
demand for lawn fertilizer predictably increases in the spring and summer months; however, the particular weekends when demand is heaviest may depend on uncontrollable factors such as the
weather. Sometimes patterns are more predictable. Thus, weekly demand for haircuts at a local barbershop may be quite stable from week to week, with daily demand being heaviest on Saturday
mornings and lightest on Mondays and Tuesdays. Forecasting demand in such situations requires uncovering the underlying patterns from available information. In this section, we first discuss the
basic patterns of demand and then address the factors that affect demand in a particular situation.
Patterns of Demand
The repeated observations of demand for a product or service in their order of occurrence form a pattern known as time series. The five basic patterns of most demand time series are
1. horizontal, or the fluctuation of data around a constant mean;

2. trend, or systematic increase or decrease in the mean of the series over time;
3. seasonal, or a repeatable pattern of increases or decreases in demand, depending on the time of day, week, month, or season;
4. cyclical, or less predictable gradual increases or decreases in demand over longer periods of time (years or decades); and
5. random, or unforecastable, variation in demand.
Cyclical patterns arise from two influences. The first is the business cycle, which includes factors that cause the economy to go from recession to expansion over a number of years. The other
influence is the product or service life cycle, which reflects the stages of demand from development through decline. Business cycle movement is difficult to predict because it is affected by national
or international events, such as presidential elections or political turmoil in other countries. Predicting the rate of demand build-up or decline in the life cycle also is difficult. Sometimes firms estimate
demand for a new product by starting with the demand history for the product it is replacing. For example, the demand rate for digital audiotapes might emulate the demand build-up for stereo
cassette tapes in the early stages of that product’s life cycle. The ability to make intelligent long-range forecasts depends on accurate estimates of cyclical patterns.
Four of the patterns of demand-horizontal, trend, seasonal, and cyclical- combine in varying degrees to define the underlying time pattern of demand for a product or service. The fifth pattern,
random variation, results from chance causes and thus cannot be predicted. Random variation is an aspect of demand that makes every forecast wrong.
Factors Affecting Demand
What factors cause changes in the demand for a particular product or service over time? Generally, such factors can be divided into two main categories: external and internal.
External Factors. External factors that affect demand for a firm’s products or services are beyond management’s control. A booming economy may positively influence demand, although the effect
may not be the same for all products and services. Furthermore, certain economic activities, such as changes in government regulations, affect some products and services but not others. For
example, a state law limiting the sulfur content of coal used in steam-powered electric generating plants reduces the demand for high-sulfur coal but doesn’t affect the demand for electricity.
Certain government agencies and private firms compile statistics on general economic time series to help organizations predict the direction of change in demand for their products or services. Of
prime importance is the turning point-that is, the period when the long-term rate of growth in demand for a firm’s products or services will change. Although predicting the exact timing of turning
points is impossible, some general economic time series have turning points that can be useful in estimating the timing of the turning points in a firm’s demands.
Leading indicators, such as the rate of business failures, are external factors with turning points that typically precede the peaks and troughs of the general business cycle. For example, an upswing
in residential building contracts might precede an increase in the demand for plywood by several weeks, for homeowners’ insurance by several months, and for furniture by one year. This indicator
gives some advance warning to plywood manufacturers, insurance companies, and furniture manufacturers about possible demand increases. Coincident indicators, such as unemployment figures,
are time series with turning points that generally match those of the general business cycle. Lagging indicators, such as retail sales, follow those turning points, typically by several weeks or months.
Knowing that a series is a lagging indicator can be useful. For example, a firm needing a business loan for expansion should realize that interest rates will drop to a low point several weeks after the
business cycle reaches its trough.
Let’s look briefly at other external factors that affect demand. Consumer tastes can change quickly, as they often do in clothing fashions. The consumer’s image of a product can be another big factor
in changing demand. For example, in the last decade sales of tobacco products in the United States have dropped significantly because many people believe that those products can be hazardous
to their health. In addition, competitors’ actions regarding, advertising promotions, and new products also affect sales. For example, a United Parcel Service commercial showing the speedy delivery
of a parcel reduces the demand for the services of competitors, such as FedEx or DHL. Finally, the success of one product or service affects the demand for complementary products or services.
The Milwaukee plant of Harley Davidson stimulates the sales of many motorcycle parts and components locally. Future demand for parts and components there depends on Harley-Davidson’s
success in that area.
Internal Factors. Internal decisions about product or service design, price and advertising promotions, packaging design, salesperson quotas or incentives, and expansion or contraction of
geographic market target areas all contribute to changes in demand volume. The term demand management describes the process of influencing the timing and, volume of demand or adapting to
the undesirable effects of unchangeable demand patterns. For example, automobile manufacturers use rebates to boost car sales.
Management must carefully consider the timing of demand, an extremely important factor in efficiently utilizing resources and production capacity. Trying to produce for peak customer demand
during the peak demand period can be very costly. To avoid this situation, firms often use price incentives or advertising promotions to encourage customers to make purchases before or after
traditional times of peak demand. For example, telephone companies encourage customers to make long distance calls after normal business hours by offering lower evening and weekend rates.
This practice helps spread demand more evenly over the day. Another tactic is to produce two products that have different heavy seasonal demand periods. A producer of engines for tractor lawn
mowers, for instance, might also make engines for snowmobiles to even out resource and production requirements over the year. In this way costly changes in work-force level and inventory can be
minimized.
Finally, some companies schedule delivery dates for products or services according to the current workload and capacity. Doctors, dentists, and other professionals use this approach by asking
patients to make appointments for their services. Manufacturers of custom-built products also work to backlogs of demand.
Designing the Forecasting System
3 Decisions involved:
What to forecast?
What type of forecast technique to use?
What type of computer hardware or software to use?
Deciding What to Forecast
Level of Aggregation
Aggregation- clustering several similar products or services
Units of Measurement
Most useful forecasts for planning and analyzing operations problems are those based on product or service units.
If forecasting the number of units of demand for a product or service isn’t possible, forecast the standard labor or machine hours required for each critical resources.
Choosing the Forecasting Technique
2 General Types
1.
Qualitative Methods- include judgment methods which translate the opinions of managers, expert opinions, consumer surveys and sales force estimates into quantitative estimates
2.
Quantitative Methods- includes causal methods and time series analysis
a. Causal Methods- use historical data on independent variables such as promotional campaigns, economic conditions, and competitors’ actions to
predict demand
b. Time Series Analysis- a statistical approach that relies heavily on historical data
-used to project future size of demand and recognizes trends and seasonal patterns
- this will be the focus of the topic for this week

Time Horizon- a key factor in choosing the proper forecasting approach
1. Short-term (0-3 months)- managers typically are interested in forecasts of demand for individual products
There is a little time to correct errors in demand forecast, so forecasts should be as accurate as possible
Time Series Analysis is the method used often
2. Medium-term (3 months- 2 years)- managers typically forecast total sales demand in dollars or in the number of units of the group of similar products or services
Causal methods are commonly used
3. Long-term (2 years and above)- for time horizons exceeding two years, forecasts usually are developed for total sales demand in dollars or some other common unit of measurement
Three types of decisions- facility location, capacity planning and process choice- require market demand estimates for an extended period into the future
Causal and judgment methods are the primary techniques used
3.Forecasting with Computers
Categories of Software Packages Forecasting Technique will be chosen by: Parameters will be specified by:
Manual User User
Semi-automatic User Software
Automatic Software Software
METHODS OF FORECASTING
JUDGMENT
1. METHODS
Sales Force Estimates-forecasts compiled from estimates of future demands made periodically by members of a company’s sales force
Advantage Disadvantage
The sales force is the group most likely to know which products or services customers will be
Individual biases of the salesperson may taint the forecast.
buying in the near future, and in what quantities.
Sales territories often are divided by district or region. Information broken down in this manner Salesperson may not always be able to detect the difference between what a customer “wants”
can be useful for inventory management, distribution, and sales force staffing purposes. and “needs”.
The forecast of individual sales force members can be combined easily to get regional or If the firm uses individual sales as a performance measure, salesperson may underestimate
national sales. their forecasts.
Executive Opinion- a forecasting method in which the opinions, experience and technical knowledge of one or more managers are summarized to arrive at a single
forecasts.
Can be used to modify existing sales forecast to account for unusual circumstances. It can be costly because it takes valuable executive time.
Can be used for technological forecasting. Although that may be warranted under circumstances, it sometimes gets out of control.
If executives are allowed to modify a forecast without collectively agreeing to the changes, the

resulting will not be useful.
Market Research- a systematic approach to determine consumer interest in a product or service by creating and testing hypotheses through data-gathering surveys.
May be used to forecasts demand for the short, medium and long term. Numerous classifications and hedges typically included in the findings.
Yields important information. The survey results may not reflect the opinions of the market.
The survey might produce imitative, rather than innovative ideas because the customer’s

reference point is often limited.
Delphi Method- a process of gaining consensus from a group of experts while maintaining their anonymity.
Useful when there are no historical data from which to develop statistical models. The process can take a long time.
Can be used to develop long-range forecasts of product demand and new product sales
Responses may be less meaningful than if experts were accountable for their responses.
projections.
Can also be used for technological forecasting. There is little evidence that Delphi forecasts achieve high degrees of accuracy.
The results can provide direction for a firm’s research and development staff. Poorly designed questionnaires will result in ambiguous or false conclusions.
Guidelines for Using Judgment Forecasts
Adjust quantitative forecasts when their track record is poor and the decision maker has important contextual knowledge.
Make adjustments to quantitative forecasts to compensate for specific events.
TIME
1. SERIES METHODS
1. Naive Forecast – This approach uses two(2) patterns which include the following:
First Pattern: the forecast for the next period equals the demand for the current period. So if the actual demand for Wednesday is 35 customers, the forecasted demand for Thursday is 35 customers.

Second Pattern: the increase or decrease in demand observed between the last two periods is used to adjust the current demand to arrive at a forecast. Suppose that last week the demand
was 120 units and the week before it was 108 units. Demand was increased to 12 units in one week, so the forecast for next week would be 132 units.
2. Simple moving average- used to estimate the average of a demand time series and thereby remove the effects of random fluctuation.
Specifically, the forecast for period t+1, can be calculated as:
Ft+1= sum of the last n demands/ n= Dt+Dt-1+Dt-2..../ n
Where Dt= actual demand in period t
n= total number of periods in the average
Ft+1= forecast for period t+1
Example:
Compute a three-week moving average forecast for the arrival of medical clinic patients in week 4. The number of arrivals for the past three weeks was
Week patient arrivals
1 400
2 380
3 411
If the actual number of patient arrivals in week 4 is 415, what is the forecast for week 5?
Solution
The moving average forecast at the end of week three is
F4= (411+380+400)/3= 397
Thus the forecast for week 4 is 397 patients
The forecast for week 5 requires actual arrivals from week 2-4, the three most recent weeks of data.
F5= (415+411+380)/3= 402
The forecast for week 5 is 402 patients.
3. Weighted moving average- each historical demand in the average can have its own weight. The sum of the weights equals 1.
Example:
The analyst for medical clinic has assigned weights of 0.70 to most recent demand, 0.20 to the demand 1 week ago, and 0.10 to demand 2 weeks ago.
Solution:
The average demand for week 3 is
F4= 0.70(411)+ 0.20(380)+ 0.10(400)= 403.7 or 404 patients.
Suppose actual demand for week 4 is 415 patients. The forecast for week 5 would be
F5= 0.70(415)+0.20(411)+0.10(380)=410.7 or 411
Note: Always follow the rule in “rounding off”.
4. Exponential smoothing- a sophisticated weighted moving average method that calculates the average of time series by giving recent demands more weight than earlier demands.
Ft+1= a(demand this period)+(1-alpha)(forecast calculated last period)
= aDt + (1-a) Ft
Ft+1= Ft + a(Dt- Ft)
Example:

Again consider the patient arrival data in previous example. It is now end of week 3. Using alpha= 0.10, calculate the exponential smoothing forecast for week 4.
Solution:

The exponential smoothing method requires an initial forecast. Suppose we take demand data for past two weeks and average them, (400+380)/2=390 as an initial forecast. To obtain forecast
for week 4, we calculate the average at end of week three as
F4= 0.10(411)+0.90(390)=392.1 patients

Forecast for week 4 would be 392 patients. If the actual demand for week 4 proved to be 415, the forecast for week 5 would be
F5= 0.10(415)+ 0.90(392)=394.4 or 394 patients
END of LESSON
WARNING: No part of this E-module/LMS Content can be reproduced, or transported or shared to others without permission from the University. Unauthorized use of the materials, other than personal learning use, will be
penalized. Please be guided accordingly.
REFERENCES
Chase, Richard,et.al. Production and Operations management: Manufacturing and Services 8th ed. Irwin/McGrwa-Hill. Boston
Stevenson, William J. (2018). Operations management thirteenth edition. McGraw Hill Education, 2 Penn Plaza, New York, NY 10121.

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3/7/22, 8:07 AM 741-OMGT 1013: OPERATIONS MANAGEMENT & TOTAL QUALITY MANAGEMENT - https://usl-tuguegarao.neolms.com/student_lesson/show/3150285?

741-OMGT 1013: OPERATIONS MANAGEMENT & TOTAL QUALITY MANAGEMENT

HAVE A FRUITFUL LEARNING EXPERIENCE!!!

Elements of good forecasts

Steps in the forecasting process

After reading this module, you are expected to:

1. horizontal, or the fluctuation of data around a constant mean;

Factors Affecting Demand

Designing the Forecasting System

Deciding What to Forecast

Aggregation- clustering several similar products or services

Choosing the Forecasting Technique

2 General Types

Causal methods are commonly used

3.Forecasting with Computers

Manual User User

Semi-automatic User Software

Automatic Software Software

Guidelines for Using Judgment Forecasts

Make adjustments to quantitative forecasts to compensate for specific events.

Ft+1= sum of the last n demands/ n= Dt+Dt-1+Dt-2..../ n

Where Dt= actual demand in period t

n= total number of periods in the average

Ft+1= forecast for period t+1

Week patient arrivals

1 400

2 380

3 411

The moving average forecast at the end of week three is

F4= (411+380+400)/3= 397

Thus the forecast for week 4 is 397 patients

F5= (415+411+380)/3= 402

The forecast for week 5 is 402 patients.

The average demand for week 3 is

F4= 0.70(411)+ 0.20(380)+ 0.10(400)= 403.7 or 404 patients.

F5= 0.70(415)+0.20(411)+0.10(380)=410.7 or 411

Note: Always follow the rule in “rounding off”.

Ft+1= a(demand this period)+(1-alpha)(forecast calculated last period)

= aDt + (1-a) Ft

Ft+1= Ft + a(Dt- Ft)

F4= 0.10(411)+0.90(390)=392.1 patients

F5= 0.10(415)+ 0.90(392)=394.4 or 394 patients

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