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Operations Management

Class 4
Demand Management and Forecasting Design of goods and services
source: (Heizer & Render 2008) and (Gardiner 2008)

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S10 – 1

Learning Objectives
– Define and understand demand management – Understand three forecasting time horizons – Understand quantitative and qualitative forecasting models – Apply moving average forecasting method – Calculate mean average deviation – Define product life cycle – Describe a product development system – Build a house of quality

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S10 – 2

Part 1 Forecasting

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S10 – 3

prepare for future demand (Finished Goods Inventory – Service Staffing Levels etc.Demand (DG book) – Need for a product or service – What the customer wants – may not be the same as what the company is willing or able to supply – Strategic Decision. S10 – 4 .) – Companies can influence demand – „Demand Forecasting‟ .

Components of Demand Demand for product or service Trend component Seasonal peaks Actual demand Average demand over four years | 3 Year | 4 Figure 4. .1 S10 – 5 Random variation | 1 | 2 .

• Forecast is an estimate of future demand • Underlying basis for business decisions (capital expenditure) • Capacity Planning • Facility Planning • Process Planning • Operations Planning • Equipment. Inventory . S10 – 6 .What is Forecasting? • Process of predicting future event. Materials. Personnel.

research and development . production levels • Medium-range forecast • 3 months to 3 years • Sales and production planning. budgeting • Long-range forecast (ball park) • 3+ years • New product planning. generally less than 3 months • Purchasing. facility location. job assignments. workforce levels. S10 – 7 . job scheduling.Time Horizons • Short-range forecast • Up to 1 year.

S10 – 8 .Seven Steps in Forecasting • Determine the use of the forecast • Select the items to be forecasted • Determine the time horizon of the forecast • Select the forecasting model(s) • Gather the data • Make the forecast • Validate and implement results .

g..Forecasting Approaches Quantitative Methods (what has happened in the past will happen in the future. forecasting sales of color televisions . S10 – 9 . „numerical‟) • Used when situation is „stable‟ and historical data exist • Existing products • Current technology • Involves mathematical techniques • e.

experience • e.g. judgmental) • Used when situation is vague and little data exist • New products • New technology • Involves intuition.Forecasting Approaches Qualitative Methods (subjective. S10 – 10 .. forecasting sales on Internet .

Qualitative Methods • Jury of executive opinion • Pool opinions of high-level experts. queried iteratively • Sales Force Composite • Customer Survey . sometimes augment by statistical models • Delphi method • Panel of experts. S10 – 11 .

Two Quantitative Methods • Simple Moving Average • Weighted Moving Average . S10 – 12 .

Moving Average • MA is a series of arithmetic means • Used if little or no trend • Used often for smoothing • Provides overall impression of data over time ∑ demand in previous n periods Moving average = n . S10 – 13 .

S10 – 14 .MA Example Month January February March April May June July Actual Shed Sales 10 12 13 16 19 23 26 3-Month Moving Average (10 + 12 + 13)/3 = 11 2/3 (12 + 13 + 16)/3 = 13 2/3 (13 + 16 + 19)/3 = 16 (16 + 19 + 23)/3 = 19 1/3 What could we use if a trend exists? WMA .

S10 – 15 . to some extent • Multiple reasons – Inappropriate Method – Past data does not hold true for the future • Mean Absolute Deviation MAD – Used to measure the forecasting error .Forecasting Errors • Lies. Damned Lies and Forecasts – Always incorrect.

Forecast| n . S10 – 16 .MAD Mean Absolute Deviation (MAD) MAD = ∑ |Actual .

Design of Goods and Services • Strategically important. Sony Betamax/BluRay? • Focus customer satisfaction – Need to understand their requirements – Voice of the customer . – Get it right. huge success Apple – Get it wrong. S10 – 17 .

Design . S10 – 18 .

Design of Goods and Services • Focus on Core Strengths (SWOT) – What are we really good at • Intel focus on microprocessors • Sony > ElectronicsTV‟s>Music>Movies>Games? • Goal – Meet the demands of the marketplace with a competitive advantage . S10 – 19 .

.Opportunities • Customer Driven • Technology Driven • Social-demographic change • Political or Legal change “Innovate or die” S10 – 20 .

cost.1 S10 – 21 .Product Life Cycles Sales. and cash flow Cost of development and production Sales revenue Net revenue (profit) Cash flow Negative cash flow Loss Introduction . Growth Maturity Decline Figure 5.

3 .Product Development Stages Ideas Ability Customer Requirements Functional Specifications Scope of product development team Product Specifications Scope for design and Design Review engineering teams Test Market Introduction Evaluation Figure 5. S10 – 22 .

Design. Marketing. Production •MuIti-disciplinary Approach •Product Development Teams •Representatives from all departments . S10 – 23 .Organising For Product Development •Traditional Approach •Distinct Departments •R&D.

Quality Function Deployment •Identify customer wants •Identify how the good/service will satisfy customer wants •Relate customer wants to product hows •Identify relationships between the firm‟s hows •Develop importance ratings •Evaluate competing products •Compare performance to desirable technical attributes . S10 – 24 .

QFD House of Quality Customer importance ratings Interrelationships How to satisfy customer wants What the customer wants Relationship matrix Target values Technical evaluation . S10 – 25 Competitive assessment .

Inc.House of Quality Example Your team has been charged with designing a new camera for Great Cameras. S10 – 26 . The first action is to construct a House of Quality .

Analysis of Competitors House of Quality Example How to Satisfy Customer Wants .Interrelationships What the Customer Wants Relationship Matrix What the customer wants Technical Attributes and Evaluation Customer importance rating (5 = highest) Lightweight Easy to use Reliable Easy to hold steady Color correction 3 4 5 2 1 S10 – 27 .

Interrelationships What the Customer Wants Relationship Matrix Low electricity requirements Technical Attributes and Evaluation Aluminum components Ergonomic design Auto exposure Paint pallet Auto focus How to Satisfy Customer Wants . Analysis of Competitors House of Quality Example How to Satisfy Customer Wants S10 – 28 .

S10 – 29 Analysis of Competitors House of Quality Example How to Satisfy Customer Wants .Interrelationships What the Customer Wants Relationship Matrix High relationship Medium relationship Low relationship Technical Attributes and Evaluation Lightweight Easy to use Reliable Easy to hold steady Color corrections 3 4 5 2 1 Relationship matrix .

Analysis of Competitors House of Quality Example How to Satisfy Customer Wants S10 – 30 .Interrelationships What the Customer Wants Relationship Matrix Technical Attributes and Evaluation Aluminum components Relationships between the things we can do Low electricity requirements Ergonomic design Auto exposure Paint pallet Auto focus .

Interrelationships What the Customer Wants Relationship Matrix Technical Attributes and Evaluation Lightweight Easy to use Reliable Easy to hold steady Color corrections 3 4 5 2 1 Our importance ratings Weighted rating . 22 9 27 27 32 25 Analysis of Competitors House of Quality Example How to Satisfy Customer Wants S10 – 31 .

3 4 5 2 1 22 5 G G F G P Company B P P G P P S10 – 32 Company A Technical Attributes and Evaluation Analysis of Competitors House of Quality Example How to Satisfy Customer Wants .Interrelationships What the Customer Wants Relationship Matrix How well do competing products meet customer wants Lightweight Easy to use Reliable Easy to hold steady Color corrections Our importance ratings .

Interrelationships What the Customer Wants Relationship Matrix Failure 1 per 10.5 A 75% Target values (Technical attributes) ok G ok F ok G S10 – 33 Panel ranking .000 Technical Attributes and Evaluation Analysis of Competitors House of Quality Example How to Satisfy Customer Wants Company A 0.6 50% yes 2 Us 0.5 75% yes 2 . 2 circuits 2’ to ∞ 0.7 60% yes 1 Technical evaluation Company B 0.

7 60% yes 0.5 A 75% 1 2 ok ok Technical Company B evaluation Us .6 50% yes 2 circuits Target values (Technical attributes) 2’ to ∞ 0.5 75% yes 2 ok Panel ranking G F G S10 – 34 Company B Paint pallet Auto focus . 0.Low electricity requirements House of Quality Example Aluminum components Ergonomic design Auto exposure Company A Completed House of Quality Lightweight Easy to use Reliable Color correction 3 4 5 1 G P G P F G G P P P Easy to hold steady 2 Our importance ratings 22 9 27 27 32 25 Failure 1 per 10.000 Company A 0.

(2008). Operations Management for Business Excellence (2nd ed.).References • Heizer. Rosedale. (2008). & Render. Saddle River. S10 – 35 . Operations management (9th ed. . North Shore: Pearson Education New Zealand.. • Gardiner. New Jersey: Pearson Prentice Hall. D.). J.. B.