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PowerPoint presentation to accompany
Heizer and Render
Operations Management, Eleventh Edition
Principles of Operations Management, Ninth Edition
© 2014
© 2014
Pearson
Pearson
Education,
Education,
Inc.Inc. 4-1
Outline
▶ Global Company Profile:
Walt Disney Parks & Resorts
▶ What Is Forecasting?
▶ The Strategic Importance of
Forecasting
▶ Seven Steps in the Forecasting
System
▶ Forecasting Approaches
© 2014
© 2014
Pearson
Pearson
Education,
Education,
Inc.Inc. 4-6
Forecasting Provides a
Competitive Advantage for Disney
© 2014
© 2014
Pearson
Pearson
Education,
Education,
Inc.Inc. 4-7
Forecasting Provides a
Competitive Advantage for Disney
© 2014
© 2014
Pearson
Pearson
Education,
Education,
Inc.Inc. 4-8
Forecasting Provides a
Competitive Advantage for Disney
© 2014
© 2014
Pearson
Pearson
Education,
Education,
Inc.Inc. 4-9
What is Forecasting?
► Process of predicting a
future event
► Underlying basis
of all business
??
decisions
► Production
► Inventory
► Personnel
► Facilities
© 2014 Pearson Education, Inc. 4 - 10
Forecasting Time Horizons
1. Short-range forecast
► Up to 1 year, generally less than 3 months
► Purchasing, job scheduling, workforce levels,
job assignments, production levels
2. Medium-range forecast
► 3 months to 3 years
► Sales and production planning, budgeting
3. Long-range forecast
► 3+ years
► New product planning, facility location,
research and development
© 2014 Pearson Education, Inc. 4 - 11
Distinguishing Differences
1. Medium/long range forecasts deal with more
comprehensive issues and support
management decisions regarding planning
and products, plants and processes
2. Short-term forecasting usually employs
different methodologies than longer-term
forecasting
3. Short-term forecasts tend to be more
accurate than longer-term forecasts
Sales
3D printers
Figure 2.5
© 2014 Pearson Education, Inc. 4 - 14
Product Life Cycle
Introduction Growth Maturity Decline
Product design Forecasting critical Standardization Little product
and development differentiation
Product and Fewer product
critical process reliability changes, more Cost
Frequent product minor changes minimization
Competitive
and process
OM Strategy/Issues
Figure 2.5
© 2014 Pearson Education, Inc. 4 - 15
Types of Forecasts
1. Economic forecasts
► Address business cycle – inflation rate, money
supply, housing starts, etc.
2. Technological forecasts
► Predict rate of technological progress
► Impacts development of new products
3. Demand forecasts
► Predict sales of existing products and services
Trend Cyclical
Seasonal Random
Seasonal peaks
Actual demand
line
Average demand
over 4 years
Random variation
| | | |
1 2 3 4
Time (years)
Figure 4.1
0 5 10 15 20
© 2014 Pearson Education, Inc. 4 - 34
Random Component
► Erratic, unsystematic, ‘residual’
fluctuations
► Due to random variation or unforeseen
events
► Short duration
and nonrepeating
M T W T
© 2014 Pearson Education, Inc. F 4 - 35
Naive Approach
► Assumes demand in next
period is the same as
demand in most recent period
► e.g., If January sales were 68, then
February sales will be 68
► Sometimes cost effective and
efficient
► Can be good starting point
Weighted
moving
average
30 –
25 –
Sales demand
20 –
Actual sales
15 –
Moving average
10 –
5–
| | | | | | | | | | | |
J F M A M J J A S O N D
Figure 4.2 Month
WEIGHT ASSIGNED TO
MOST 2ND MOST 3RD MOST 4th MOST 5th MOST
RECENT RECENT RECENT RECENT RECENT
SMOOTHING PERIOD PERIOD PERIOD PERIOD PERIOD
CONSTANT ( ) (1 – ) (1 – )2 (1 – )3 (1 – )4
= .1 .1 .09 .081 .073 .066
225 –
Actual = .5
demand
200 –
Demand
175 –
= .1
| | | | | | | | |
150 –
1 2 3 4 5 6 7 8 9
Quarter
© 2014 Pearson Education, Inc. 4 - 50
Impact of Different
225 –
Actual = .5
► Chose high of
values
demand
when
200 – underlying average
Demand
is likely to change
► Choose
175 – low values of
when underlying average = .1
is stable
| | | | | | | | |
150 –
1 2 3 4 5 6 7 8 9
Quarter
© 2014 Pearson Education, Inc. 4 - 51
Choosing
The objective is to obtain the most
accurate forecast no matter the
technique
We generally do this by selecting the
model that gives us the lowest forecast
error
Σ|Deviations|
MAD = 10.31 12.33
n
1 12 6 21
2 17 7 31
3 20 8 28
4 19 9 36
5 24 10 ?
= .2 = .4
25 –
20 –
15 –
10 – Forecast including trend (FITt)
5 – with = .2 and = .4
0 –
| | | | | | | | |
1 2 3 4 5 6 7 8 9
Time (months)
© 2014 Pearson Education, Inc. 4 - 73
Trend Projections
Fitting a trend line to historical data points to
project into the medium to long-range
Linear trends can be found using the least
squares technique
^y = a + bx
Deviation5 Deviation6
Deviation3
Least squares method minimizes the
sum of Deviation
the squared
4
errors (deviations)
Deviation1
(error) Deviation2
Trend line, ^y = a + bx
| | | | | | |
1 2 3 4 5 6 7
Figure 4.4
Time period
© 2014 Pearson Education, Inc. 4 - 75
Least Squares Method
Equations to calculate the regression variables
ELECTRICAL ELECTRICAL
YEAR POWER DEMAND YEAR POWER DEMAND
1 74 5 105
2 79 6 142
3 80 7 122
4 90
150 –
Power demand (megawatts)
140 –
130 –
120 –
110 –
100 –
90 –
80 –
70 –
60 –
50 –
| | | | | | | | |
1 2 3 4 5 6 7 8 9
Year Figure 4.5
© 2014 Pearson Education, Inc. 4 - 80
Least Squares Requirements
The multiplicative
seasonal model can
adjust trend data for
seasonal variations
in demand
110 –
100 –
90 –
80 –
70 –
| | | | | | | | | | | |
J F M A M J J A S O N D
Time
© 2014 Pearson Education, Inc. 4 - 89
San Diego Hospital
Trend Data Figure 4.6
10,200 –
10,000 –
Inpatient Days
9745
9,800 – 9702
9616 9659
9573 9724 9766
9,600 – 9530 9680
9594 9637
9551
9,400 –
9,200 –
| | | | | | | | | | | |
9,000 –
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
67 68 69 70 71 72 73 74 75 76 77 78
Month
© 2014 Pearson Education, Inc. 4 - 90
San Diego Hospital
Seasonality Indices for Adult Inpatient Days at San Diego Hospital
1.06 –
1.04 1.04
Index for Inpatient Days
1.04 – 1.03
1.02
1.02 – 1.01
1.00
1.00 – 0.99
0.98
0.98 – 0.99
0.96 – 0.97 0.97
0.96
0.94 –
| | | | | | | | | | | |
0.92 –
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
67 68 69 70 71 72 73 74 75 76 77 78
Month
© 2014 Pearson Education, Inc. 4 - 92
San Diego Hospital
Period 67 68 69 70 71 72
10,200 – 10068
9949
10,000 – 9911
Inpatient Days
9764 9724
9,800 – 9691
9572
9,600 –
9520 9542
9,400 –
9411
9265 9355
9,200 –
| | | | | | | | | | | |
9,000 –
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
67 68 69 70 71 72 73 74 75 76 77 78
Month
© 2014 Pearson Education, Inc. 4 - 94
Adjusting Trend Data
Quarter I:
Quarter II:
Quarter III:
Quarter IV:
^
y = a + bx
^ where y = value of the dependent variable (in
our example, sales)
a = y-axis intercept
b = slope of the regression line
x = the independent variable
4.0 –
Nodel’s sales
(in$ millions)
3.0 –
2.0 –
1.0 –
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll (in $ billions)
© 2014 Pearson Education, Inc. 4 - 98
Associative Forecasting
Example
SALES, y PAYROLL, x x2 xy
2.0 1 1 2.0
3.0 3 9 9.0
2.5 4 16 10.0
2.0 2 4 4.0
2.0 1 1 2.0
3.5 7 49 24.5
Σy = 15.0 Σx = 18 Σx2 = 80 Σxy = 51.5
2.5 4 16 10.0
3.0 –
2.0 2 4 4.0
2.0 2.0 – 1 1 2.0
3.5 7 49 24.5
1.0 –
Σy = 15.0 Σx = 18 Σx2 = 80 Σxy = 51.5
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll (in $ billions)
Sales = $3,250,000
If payroll4.0
next
–
year is estimated to be $6 billion,
then: 3.25
Nodel’s sales
(in$ millions)
3.0 –
2.0 –
Sales (in$ millions) = 1.75 + .25(6)
1.0 –
= 1.75 + 1.5 = 3.25
| | | | | | |
0 1 2 3 4 5 6 7
Sales = $3,250,000
Area payroll (in $ billions)
1.0 –
| | | | | | |
0 1 2 3 4 5 6 7
Figure 4.9 Area payroll (in $ billions)
4.0 –
Nodel’s sales 3.25
(in$ millions) 3.0 –
The standard error 2.0 –
of the estimate is
1.0 –
$306,000 in sales
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll (in $ billions)
x x
(a) Perfect negative (e) Perfect positive
correlation y correlation
y
y
x x
(b) Negative correlation (d) Positive correlation
x
(c) No correlation
–1.0 –0.8 –0.6 –0.4 –0.2 0 0.2 0.4 0.6 0.8 1.0
Correlation coefficient values
Acceptable
0 MADs range
Time
15% –
10% –
5% –
10% –
8% –
6% –
4% –
2% –
0% – 2 4 6 8 10 12 2 4 6 8 10 12
A.M. P.M.
Hour of day