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PowerPoint presentation to accompany
Heizer, Render, Munson
Operations Management, Thirteenth Edition
Principles of Operations Management, Eleventh Edition
Defend market
position
Hybrid engine vehicles Xbox One
Boeing 787
3D printers
Boeing 747
Figure 2.5
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Product Life Cycle
Introduction Growth Maturity Decline
Product design Forecasting critical Standardization Little product
and development Product and Fewer rapid differentiation
critical process reliability product changes, Cost
Frequent product Competitive more minor minimization
and process changes
Strategy/Issues
product Overcapacity in
OMStrategy/Issues
Product
improvement and
cost cutting
Figure 2.5
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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
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Random Component
► Erratic, unsystematic, ‘residual’
fluctuations
► Due to random variation or unforeseen
events
► Short duration
and nonrepeating
M T W T
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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 –
(from Example 1)
5–
| | | | | | | | | | | |
J F M A M J J A S O N D
Figure 4.2 Month
Ft = Ft – 1 + a(At – 1 – Ft – 1)
WEIGHT ASSIGNED TO
MOST 2ND MOST 3RD MOST 4th MOST 5th MOST
RECENT RECENT RECENT RECENT RECENT
SMOOTHING PERIOD PERIOD PERIOD PERIOD PERIOD
CONSTANT (a ) a (1 – a ) a (1 – a )2 a (1 – a )3 a (1 – a )4
a = .1 .1 .09 .081 .073 .066
225 –
Actual a = .5
demand
200 –
Demand
175 –
a = .1
| | | | | | | | |
150 –
1 2 3 4 5 6 7 8 9
Quarter
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Impact of Different
225 –
Actual a = .5
► Choose high of values
demand
when
200 – underlying average
Demand
is likely to change
► Choose low values of
175 –
when underlying average a = .1
is stable
| | | | | | | | |
150 –
1 2 3 4 5 6 7 8 9
Quarter
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Selecting the Smoothing
Constant
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 according to one of three preferred
measures:
► Mean Absolute Deviation (MAD)
► Mean Squared Error (MSE)
► Mean Absolute Percent Error (MAPE)
1 12 6 21
2 17 7 31
3 20 8 28
4 19 9 36
5 24 10 ?
a = .2 b = .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)
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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
^ where y = computed value of the variable to be
predicted (dependent variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable
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
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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
1 74 1 74
2 79 4 158
3 80 9 240
4 90 16 360
5 105 25 525
6 142 36 852
7 122 49 854
Σx Σy = 692 Σx2 = Σxy =
= 28 140 3,063
1 74 1 74
2 79 4 158
3 80 9 240
4 90 16 360
5 105 25 525
6 142 36 852
Demand in year 8 = 56.70 + 10.54(8)
7 122 = 141.02,49or 141 megawatts
854
Σx Σy = 692 Σx2 = Σxy =
= 28 140 3,063
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
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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
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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
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Associative Forecasting
Used when changes in one or more independent
variables can be used to predict the changes in
the dependent 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)
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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
Sales = $3,250,000
3.0 –
2.0 –
Sales (in$ 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)
√ ∑ 𝑦 − 𝑎 ∑ 𝑦− 𝑏∑ 𝑥𝑦
2
𝑆 𝑦 , 𝑥=
𝑛−2
We use the standard error to set up
prediction intervals around the point
estimate
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Standard Error of the Estimate
3.6 –
Nodel’s sales
3.5 – + .306
(in $ millions)
3.4 –
3.3 –
The standard error 3.2 –
of the estimate is 3.1
3.0
–
–
– .306
$306,000 in sales 2.9 –
5 6
Area payroll (in $ billions)
x x
(a) Perfect negative (e) Perfect positive
correlation, r = –1 y correlation, r = 1
y
y
x x
(b) Negative correlation (d) Positive correlation
x
(c) No correlation, r = 0
–1.0 –0.8 –0.6 –0.4 –0.2 0 0.2 0.4 0.6 0.8 1.0
Correlation coefficient values
309 270 39 39
.901
(156)(12) 1,872 43.3