OUTLINE

1. Intro to Forecasting
Operations and Supply Chain Management
Forecasting Part 1 – Inventory Management Principles 2. Qualitative VS Quantitative
Azfar Wasim

Bahria University Islamabad

5th Nov 2022
3. Linear vs Exponential
4. Error Calculation in Forecasting

1
Understanding Supply Chain Operations
As a way to get a high-level understanding of operations and how they
relate to each other, we use a simplified version of the supply chain
operations reference (SCOR) model developed by the Supply Chain Council

• Plan Plan
• Source
• Make
Deliver Source
• Deliver

Make
2
SCOR Model

• Order Management • Demand Forecasting

• Delivery Scheduling Plan • Product Pricing
• Return Processing • Inventory Management

Deliver Source

• Product Design
• Procurement
• Product Scheduling Make • Credit & Collections
• Facility Management

3
Introduction to Aggregate Planning
• Capacity has a cost associated with it and lead times are often long.
Therefore, organizations have to make decisions regarding the following
before actual demand is known:
• Capacity levels
• Production levels
• Outsourcing
• Promotions
• Goal of aggregate planning is to build a plan that satisfies demand while
maximizing profit.
• With aggregate planning you answer the question “How best to utilize the
facilities and resources it currently has over a fixed time period?”

4
Aggregate Planning Objectives
• The planner has to identify the following operational parameters over a
specified time horizon:
• Production rate
• Workforce
• Overtime
• Machine capacity level
• Subcontracting
• Backlog
• Inventory on hand
• Aggregate plan serves as a broad blueprint for operations.

5
Aggregate Planning Strategies
• The planner has to make tradeoffs between Capacity, Inventory and Backlog Costs.
• The strategies associated with them are:

• Chase Strategy (Capacity as a lever):

The production rate is synchronized with the demand rate by varying machine capacity or hiring and laying off employees

as the demand rate varies. It can be expensive to implement if the cost of varying machine or labor capacity over time is

high. It can also have a significant negative impact on the morale of the workforce. The chase strategy results in low levels

of inventory in the supply chain and high levels of change in capacity and workforce. It should be used when the cost of

carrying inventory is high and costs to change levels of machine and labor capacity are low.

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Aggregate Planning Strategies
• Flexibility Strategy (Utilization as a lever):
Used if there is excess machine capacity (i.e., if machines are not used 24 hours a day, seven days a week) and the

workforce shows scheduling flexibility. In this case, the workforce (capacity) is kept stable. The number of hours worked is

varied over time in an effort to synchronize production with demand. A planner can use variable amounts of overtime or

a flexible schedule to achieve this synchronization. Although this strategy does require that the workforce be flexible, it

avoids some of the problems associated with the chase strategy—most notably, changing the size of the workforce. This

strategy results in low levels of inventory but with lower average machine utilization. It should be used when inventory

carrying costs are relatively high and machine capacity is relatively inexpensive.

7
Aggregate Planning Strategies
• Level Strategy (Inventory as a lever):
A stable machine capacity and workforce are maintained with a constant output rate. Shortages and surpluses result in

inventory levels fluctuating over time. In this case, production is not synchronized with demand. Either inventories are

built up in anticipation of future demand or backlogs are carried over from high- to low-demand periods. Employees

benefit from stable working conditions. A drawback associated with this strategy is that large inventories may accumulate

and customer orders may be delayed. This strategy keeps capacity and costs of changing capacity relatively low. It should

be used when inventory carrying and backlog costs are relatively low.

8
Capacity Planning
• Upper limit or ceiling on the load that an operating unit can handle.
• Capacity deals with equipment, manpower, space etc
• Basic questions in capacity planning are:

• What kind of capacity is needed?

• How much is needed?

• When is it needed?

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Capacity Types
• Design capacity
Maximum output rate or service capacity an operation, process, or facility is designed for

• Effective capacity
Design capacity minus allowances such as personal time, maintenance, and scrap

• Actual output
Rate of output actually achieved--cannot exceed effective capacity.

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Efficiency and Utilization
Example
Design capacity = 50 trucks/day
Actual output
Efficiency = Effective capacity = 40 trucks/day
Effective capacity Actual output = 36 units/day

Actual output
Utilization =
Design capacity

Both measures expressed as percentages

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Determinants of Effective Capacity
• Facilities
• Product and service factors
• Process factors
• Human factors
• Policy factors
• Operational factors
• Supply chain factors
• External factors

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Key Decisions of Capacity Planning
• Amount of capacity needed
• Capacity cushion (100% - Utilization)
• Timing of changes
• Need to maintain balance
• Extent of flexibility of facilities

Capacity cushion – extra demand intended to offset uncertainty

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Steps for Capacity Planning
• Estimate future capacity requirements
• Evaluate existing capacity
• Identify alternatives
• Conduct financial analysis
• Assess key qualitative issues
• Select one alternative
• Implement alternative chosen
• Monitor results

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Forecasting Capacity Requirements
• Long-term vs. short-term capacity needs
• Long-term relates to overall level of capacity such as facility size, trends, and
cycles
• Short-term relates to variations from seasonal, random, and irregular
fluctuations in demand

15
Calculating Processing Requirements

If annual capacity is 2000 hours, then we need three machines to handle the
required volume: 5,800 hours/2,000 hours = 2.90 machines 16
Planning Service Capacity
• Need to be near customers
• Capacity and location are closely tied
• Inability to store services
• Capacity must be matched with timing of demand
• Degree of volatility of demand
• Peak demand periods

17
Bottleneck Operation
Bottleneck operation: An operation
in a sequence of operations whose
10/hr capacity is lower than that of the
Machine #1 other operations

10/hr
Machine #2
Bottleneck 30/hr
Operation
Machine #3
10/hr

Machine #4 10/hr
Bottleneck Operation

Bottleneck

Operation 1 Operation 2 Operation 3

10/hr.
20/hr. 10/hr. 15/hr.

Maximum output rate

limited by bottleneck