130 views

Uploaded by paroengineer

Operation Management

- Managerial Decision Analysis Case study - Akron Zoological Park
- OPERATION MANAGEMENT
- Operation Management
- Production & Operation Management
- Notes on the Random Walk Model
- Methods of Forecasting in a Manufacturing Company
- Operation Management
- operation management
- Forcasting
- Stevenson Ch 04
- Operation Management
- Operation Management
- Productions and Operations Management
- Forecasting Handouts
- operation management
- Operations Management MBA Assignment
- Forecasting Tools in Supply Chain
- operation management
- cha 5.xls
- SCM-APO DP Overview

You are on page 1of 43

Operations Management by R. Dan Reid & Nada R. Sanders 4th Edition Wiley 2010

Wiley 2010

Learning Objectives

Identify Principles of Forecasting Explain the steps in the forecasting process Identify types of forecasting methods and their characteristics Describe time series and causal models

Wiley 2010

Generate forecasts for data with different patterns: level, trend, seasonality, and cyclical Describe causal modeling using linear regression Compute forecast accuracy Explain how forecasting models should be selected

Wiley 2010 3

Principles of Forecasting

Many types of forecasting models that differ in complexity and amount of data & way they generate forecasts: 1. Forecasts are rarely perfect 2. Forecasts are more accurate for grouped data than for individual items 3. Forecast are more accurate for shorter than longer time periods

Wiley 2010 4

Cost, ease of use & accuracy

Wiley 2010 5

Wiley 2010

Qualitative methods judgmental methods Forecasts generated subjectively by the forecaster Educated guesses Quantitative methods based on mathematical modeling: Forecasts generated through mathematical modeling

Wiley 2010 7

Qualitative Methods

Type Executive opinion Characteristics Strengths Weaknesses A group of managers Good for strategic or One person's opinion meet & come up with new-product can dominate the a forecast forecasting forecast Uses surveys & Good determinant of It can be difficult to interviews to identify customer preferences develop a good customer preferences questionnaire Seeks to develop a consensus among a group of experts Excellent for Time consuming to forecasting long-term develop product demand, technological changes, and Wiley 2010

Market research

Delphi method

Quantitative Methods

Assumes information needed to generate a forecast is contained in a time series of data Assumes the future will follow same patterns as the past Explores cause-and-effect relationships Uses leading indicators to predict the future Housing starts and appliance sales

Wiley 2010 9

Data = historic pattern + random variation Level (long-term average) data fluctuates around a constant mean Trend data exhibits an increasing or decreasing pattern Seasonality any pattern that regularly repeats itself and is of a constant length Cycle patterns created by economic fluctuations

Wiley 2010 10

Wiley 2010

11

Naive:

Ft 1 At

Ft 1 At / n

Simple Mean:

The forecast is equal to the actual value observed during the last period good for level patterns

The average of all available data - good for level patterns

Ft 1 At / n

Moving Average:

The average value over a set time period (e.g.: the last four weeks) Each new forecast drops the oldest data point & adds a new observation More responsive to a trend but still lags behind actual data

Wiley 2010 12

Ft 1 Ct A t

All weights must add to 100% or 1.00 e.g. Ct .5, Ct-1 .3, Ct-2 .2 (weights add to 1.0) Allows emphasizing one period over others; above indicates more weight on recent data (Ct=.5) Differs from the simple moving average that weighs all periods equally - more responsive to trends

Wiley 2010 13

Exponential Smoothing: F A 1 F t 1 t t Most frequently used time series method because of ease of use and minimal amount of data needed Need just three pieces of data to start:

Last periods forecast (Ft) Last periods actual value (At) Select value of smoothing coefficient, ,between 0 and 1.0

If no last period forecast is available, average the last few periods or use naive method Higher values (e.g. .7 or .8) may place too much weight on last periods random variation

Wiley 2010

14

Determine forecast for periods 7 & 8 2-period moving average 4-period moving average 2-period weighted moving average with t-1 weighted 0.6 and t-2 weighted 0.4 Exponential smoothing with alpha=0.2 and the period 6 forecast being 375

Wiley 2010

Period 1 2 3 4 5 6

7 8

375

15

Period 1 2 3 4 Actual 300 315 290 345 2-Period 4-Period 2-Per.Wgted. Expon. Smooth.

5

6 7 8

320

360 375 340.0 367.5 328.8 350.0

Wiley 2010

344.0 369.0

372.0 372.6

16

Forecasting trend problem: a company uses exponential smoothing with trend to forecast usage of its lawn care products. At the end of July the company wishes to forecast sales for August. July demand was 62. The trend through June has been 15 additional gallons of product sold per month. Average sales have been 57 gallons per month. The company uses alpha+0.2 and beta +0.10. Forecast for August.

TJuly (S t St 1 ) (1 )Tt 1 0.1 70 57 0.9 15 14.8

Wiley 2010

17

A time series technique that computes a forecast with trend by drawing a straight line through a set of data using this formula:

Y = a + bx where Y = forecast for period X X = the number of time periods from X = 0 A = value of y at X = 0 (Y intercept) B = slope of the line

Wiley 2010 18

Forecasting Trend

Basic forecasting models for trends compensate for the lagging that would otherwise occur One model, trend-adjusted exponential smoothing uses a three step process

S t A t (1 )(S t 1 Tt 1 )

Tt (S t S t 1 ) (1 )Tt 1

FIT t 1 S t Tt

Wiley 2010 19

Forecasting Seasonality

Divide the actual demand of each season by the average demand per season for that year

of all Summer indexes, ...

Wiley 2010

20

Seasonality cont

Forecast demand for the next year & divide by the number of seasons

Use regular forecasting method & divide by four for average quarterly demand

Multiply next years average seasonal demand by each average seasonal index

Wiley 2010

21

Seasonality problem: a university must develop forecasts for the next years quarterly enrollments. It has collected quarterly enrollments for the past two years. It has also forecast total enrollment for next year to be 90,000 students. What is the forecast for each quarter of next year?

Quarter Year 1 Seasonal Year Seasonal Avg. Year3 Index 2 Index Index 24000 1.2 26000 1.238 1.22 27450 Fall Winter Spring

23000 19000 14000 80000 22000 19000 17000 84000 21000

Wiley 2010

Summer

Total

90000 22500

22

Average 20000

Causal Models

Often, leading indicators can help to predict changes in future demand e.g. housing starts Causal models establish a cause-and-effect relationship between independent and dependent variables A common tool of causal modeling is linear regression: Y a bx Additional related variables may require multiple regression modeling

Wiley 2010

23

Linear Regression

XY X Y X 2 X X

Identify dependent (y) and independent (x) variables Solve for the slope of the line

XY n XY b X nX

2 2

Solve for the y intercept Develop your equation for the trend line

a Y bX

Y=a + bX

Wiley 2010 24

Linear Regression Problem: A maker of golf shirts has been tracking the relationship between sales and advertising dollars. Use linear regression to find out what sales might be if the company invested $53,000 in advertising next year. Sales $ (Y) 1 2 3 130 151 150 Adv.$ (X) 32 52 50

XY

4160 7852 7500

X^2

Y^2

XY n XY b X nX

2 2

2

1.15

4

5 Tot

158

153.85 589

55

53 189

8690

3025 24964

Wiley 2010 25

Correlation coefficient (r) measures the direction and strength of the linear relationship between two variables. The closer the r value is to 1.0 the better the regression line fits the data points.

r r

n X

n XY X Y

2

428,202 189589

2

* n Y

2

.982

r 2 .982 .964

Coefficient of determination ( r ) measures the amount of variation in the dependent variable about its mean that is explained by the regression line. 2 Values of ( r ) close to 1.0 are desirable.

Wiley 2010 26

Multiple Regression

Multiple regression develops a relationship between a dependent variable and multiple independent variables. The general formula is:

Wiley 2010

27

Forecasts are never perfect Need to know how much we should rely on our chosen forecasting method Measuring forecast error:

E t A t Ft

Wiley 2010 28

actual

forecast n

actual forecast

2 actual forecast

MSE

n

CFE MAD

Tracking Signal

TS

Wiley 2010

29

Accuracy & Tracking Signal Problem: A company is comparing the accuracy of two forecasting methods. Forecasts using both methods are shown below along with the actual values for January through May. The company also uses a tracking signal with 4 limits to decide when a forecast should be reviewed. Which forecasting method is best?

Method A

Month Actual sales

27

Fcast

Error

Cum. Error

Error

2

Cum. Error

2

Tracking Signal

1

30 26 32 29 31

28 25 32 30 30

2 1 0 -1 1 1

2 3 3 2 3

2 3 3 2 3

25 29 27 29

1 3 2 2 2

3 6 8 10

1.5 3 4 5

MSE

1.4

Wiley 2010

4.4

30

1. The amount & type of available data

Some methods require more data than others

Different models for 3 month vs. 10 years Lagging will occur when a forecasting model meant for a level pattern is applied with a trend

Wiley 2010 31

Forecasting Software

Spreadsheets

Microsoft Excel, Quattro Pro, Lotus 1-2-3 Limited statistical analysis of forecast data

Statistical packages

SPSS, SAS, NCSS, Minitab Forecasting plus statistical and graphics Forecast Master, Forecast Pro, Autobox, SCA

Wiley 2010 32

Does the package have the features you want? What platform is the package available for? How easy is the package to learn and use? Is it possible to implement new methods? Do you require interactive or repetitive forecasting? Do you have any large data sets? Is there local support and training available? Does the package give the right answers?

Wiley 2010

33

Focus Forecasting

Developed by Bernie Smith Relies on the use of simple rules Test rules on past data and evaluate how they perform

Combining Forecasts

Wiley 2010 34

Establish collaborative relationships between buyers and sellers Create a joint business plan Create a sales forecast Identify exceptions for sales forecast Resolve/collaborate on exception items Create order forecast Identify exceptions for order forecast Resolve/collaborate on exception items Generate order

Wiley 2010 35

Forecasts impact not only other business functions but all other operations decisions. Operations managers make many forecasts, such as the expected demand for a companys products. These forecasts are then used to determine: product designs that are expected to sell (Ch 2), the quantity of product to produce (Chs 5 and 6), the amount of needed supplies and materials (Ch 12).

Wiley 2010 36

Also, a company uses forecasts to determine future space requirements (Ch 10), capacity and location needs (Ch 9), and the amount of labor needed (Ch 11).

Wiley 2010

37

Forecasts drive strategic operations decisions, such as: choice of competitive priorities, changes in processes, and large technology purchases (Ch 3). Forecast decisions serve as the basis for tactical planning; developing worker schedules (Ch 11). Virtually all operations management decisions are based on a forecast of the future.

Wiley 2010

38

Marketing relies on forecasting to predict demand and future sales Finance forecasts stock prices, financial performance, capital investment needs.. Information systems provides ability to share databases and information Human resources forecasts future hiring requirements

Wiley 2010 39

Chapter 8 Highlights

Three basic principles of forecasting are: forecasts are rarely perfect, are more accurate for groups than individual items, and are more accurate in the shorter term than longer time horizons. The forecasting process involves five steps: decide what to forecast, evaluate and analyze appropriate data, select and test model, generate forecast, and monitor accuracy. Forecasting methods can be classified into two groups: qualitative and quantitative. Qualitative methods are based on the subjective opinion of the forecaster and quantitative methods are based on mathematical modeling.

Wiley 2010 40

Time series models are based on the assumption that all information needed is contained in the time series of data. Causal models assume that the variable being forecast is related to other variables in the environment. There are four basic patterns of data: level or horizontal, trend, seasonality, and cycles. In addition, data usually contain random variation. Some forecast models used to forecast the level of a time series are: nave, simple mean, simple moving average, weighted moving average, and exponential smoothing. Separate models are used to forecast trends and seasonality.

A simple causal model is linear regression in which a straight-line relationship is modeled between the variable we are forecasting and another variable in the environment. The correlation is used to measure the strength of the linear relationship between these two variables.

Wiley 2010 41

Highlights cont

Three useful measures of forecast error are mean absolute deviation (MAD), mean square error (MSE) and tracking signal. There are four factors to consider when selecting a model: amount and type of data available, degree of accuracy required, length of forecast horizon, and patterns present in the data.

Wiley 2010

42

Homework Help

8.4: (a) forecasts using 3 methods. (b) compare forecasts using MAD. (c) choose the best method and forecast July. 8.7: use 3 methods to forecast and use MAD and MSE to compare. (notes: will not have forecasts for all periods using 3-period MA; use actual for period 1 as forecast to start exp smoothing. 8.10: determine seasonal indices for each day of the week, and use them to forecast week 3. 8.12: simple linear regression (trend) model.

NOTE: Spreadsheets might be very useful for working these problems.

- Managerial Decision Analysis Case study - Akron Zoological ParkUploaded byNariman H. B.
- OPERATION MANAGEMENTUploaded byMalik Muhammad Bilal
- Operation ManagementUploaded byShuja Shah
- Production & Operation ManagementUploaded bypura_malli
- Notes on the Random Walk ModelUploaded bynchaves
- Methods of Forecasting in a Manufacturing CompanyUploaded byeuge_prime2001
- Operation ManagementUploaded bySohaib Ahmed
- operation managementUploaded bysemerederibe
- ForcastingUploaded byAhmad Dalimunte
- Stevenson Ch 04Uploaded byKarla Jenine Pacificador
- Operation ManagementUploaded bySultan Abdul Khader
- Operation ManagementUploaded byAnil Bhardwaj
- Productions and Operations ManagementUploaded byGaurav218
- Forecasting HandoutsUploaded byRiza Oafericua Ponciano
- operation managementUploaded byNaresh Mishra
- Operations Management MBA AssignmentUploaded byaloy1574167
- Forecasting Tools in Supply ChainUploaded byMoshmi Mazumdar
- operation managementUploaded byEnnio Andrea Adinolfi
- cha 5.xlsUploaded byNur Zara Humaira
- SCM-APO DP OverviewUploaded bynaveen_thumu
- Air passenger demand forecasting for planned airports, case study Zafer and OR-GI airports in turkey [Planlanan havalimanlarının yolcu talep miktarlarının tahmin edilmesi Zafer ve OR-Gİ hava l.pdfUploaded byÇağrı KARABİLLİOĞLU
- Ballou Bab 08Uploaded bySanty San
- Forecasting Using MinitabUploaded bysldztrk
- ForecastingUploaded bybiffybyro
- Forecasting Demand for ServicesUploaded byPancho Mateo Elgueda
- Forecasting Enrollment - MemoUploaded byFis Malesori
- Application of Measurement Models to Impedance SpectroscopyUploaded byYu Shu Hearn
- Px c 389Uploaded byMRASSASIN
- Ch_5Uploaded byvijay

- TREE VALUES Havard Business SchoolUploaded byparoengineer
- Biopure Case Solution: Havard Business School caseUploaded byparoengineer
- Biopure 0.7_mg (1) - CopyUploaded byparoengineer
- Metabical case study solutionUploaded byparoengineer
- Case AES CorporationUploaded byparoengineer
- Metabical Case solution Havard Business School reviewUploaded byparoengineer
- Corporate finance terminologiesUploaded byparoengineer
- Business EthicsUploaded byparoengineer
- Category Analysis - Energy DrinksUploaded byparoengineer
- Industry Analysis - CoffeeUploaded byparoengineer
- Gender IssuesUploaded byparoengineer

- ScienceMath - Copy (2)Uploaded byxyza304gmailcom
- Zero-Inflated Negative Binomial RegressionUploaded byhubik38
- Parker Team Player for Grad Students.pptUploaded byRavz Ravnish Wesley
- How a Century of Ammonia Synthesis Changed the WorldUploaded bySyafiq Hamdi Fathi
- Pushover MatlabUploaded byAlla Eddine G C
- Tribology of Piston Compression Ring ConUploaded byanon_952931296
- Concurrent 1C_project FinanceUploaded bySky walking
- Nile History NotesUploaded byKosta Siampos
- Place Attachment and Place Identity in Natives and Non-nativesUploaded byDayse Albuquerque
- ChromatographyUploaded byMATHANKUMAR.S
- Ch NonunifrngUploaded bybing miranda
- Astrological Factors for a Career in Film Industry - Astrology & HoroscopeUploaded byRajagopal Rao
- 12_bibliography.pdfUploaded bySundeep Narwani
- Koha PluginUploaded byGamindu Udayanga
- Plain Text TestUploaded byrex5485-1
- resumeUploaded byapi-264703322
- Oil SealsUploaded bymrmrva
- Lesson 3 - Solubility CurvesUploaded byDannBjorn
- History of the Hanford Site, by DW HarveyUploaded byOccupyMedia
- Discussion Session 4-11Uploaded bySujeanKim
- Fundamentals of Computer for BusinessUploaded bysudhakar12aug8457
- Concur SAP ERP IntegrationUploaded byhjprast7591
- Appendix2 FATEK Communication ProtocolUploaded byCarlos G. Duque
- Waller Et Al 1990 Genetic and Environmental Influences on Religious Interests, Attitudes, And Values - A Study of Twins Reared Apart and TogetherUploaded byhoorie
- 2009 Basil Ielts 4 Reading Passage 2Uploaded byelgrecos
- API academic performance indicatorUploaded byrc_sharma
- GATE-2015 Cut-Off Marks, Result Analysis, Toppers Name, PSU RecruitmentsUploaded bySantosh Kumar
- Media's Role in the Creation of a Culture of Peace HANDOUTUploaded byKrizia Sandra Palisoc
- lesson 4-thinking addition to 18 to subtractUploaded byapi-273444334
- Final ReportUploaded bykingfabio