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Mb0044 Unit 04 Slm

Nov 08, 2014

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Production and Operations Management

Unit 4

Unit 4Structure: 4.1 Introduction Objectives 4.2 What is Forecasting? 4.3 The Strategic Importance of Forecasting Human resources Capacity Supply chain management 4.4 Why Forecasting is required? Benefits from forecasts Cost implications of forecasting Decision making using forecasting 4.5 Classification of Forecasting Process 4.6 Methods of Forecasting 4.7 Case-let 4.8 Forecasting and Product Life Cycle 4.9 Selection of the Forecasting Method 4.10 Qualitative Methods of Forecasting 4.11 Quantitative Methods What is time series? Nave method Moving average method Weighted moving average Exponential smoothing method 4.12 Associative Models of Forecasting 4.13 Accuracy of Forecasting Mean Absolute Deviation (MAD) Standard Error (SE) of estimate 4.14 Summary 4.15 Glossary 4.16 Terminal Questions 4.17 Answers 4.18 Case Study

Forecasting

Sikkim Manipal University

Page No. 68

Production and Operations Management

Unit 4

Before we start forecasting, take a look at these famous quotes: With over 50 foreign cars already on sale here, the Japanese auto industry isn't likely to carve out a big slice of the U.S. market. Business Week, 1958. I think there is a world market for about five computers. Thomas J. Watson, 1943, Chairman of the Board of IBM. Do you want to forecast? ____________________________________________________________

4.1 IntroductionIn the previous unit, we have dealt with the concepts of operations strategy, competitive capabilities and core competencies, operations strategy as a competitive weapon, linkage between corporate, business, and operations strategy, developing operations strategy, elements or components of operations strategy, competitive priorities, manufacturing strategies, service strategies, and global strategies and role of operations strategy. In this unit, we will deal with the concepts of forecasting, the strategic importance of forecasting, why forecasting is required, classification of forecasting process, methods of forecasting, forecasting and product life cycle, selection of the forecasting method, qualitative and quantitative methods of forecasting, associative models of forecasting, and accuracy of forecasting. Every business activity aims to satisfy some needs and wants of the society and hence tries to gauge the demand. Only when the demand is properly understood and predicted with sufficient accuracy, it becomes possible to develop and utilise the resources to cater to such demands. Thus, for any business activity to be started, the first step would be to predict the demand and then to develop the plans towards meeting the demand either partially or fully. Hence, it is correctly said that forecasting the demand is the first step and demand forecasting drives all the other activities of production systems which include human resource planning, aggregate planning, capacity planning, and scheduling. Even if a company decides to position itself in a certain way, it has to have done forecasting. Thus good forecasts are of critical importance in all aspects of a business.

Sikkim Manipal University

Page No. 69

Production and Operations Management

Unit 4

The forecast is the only estimate of demand until the actual demand becomes known. However, forecasts are seldom perfect because the demand for a certain product or service is a complex function influenced by a multitude of variables. Many of these variables are not controllable and even not properly evaluated in terms of magnitude and frequency. This means that outside factors which are not known to us or properly predicted or controlled impact the forecast tremendously. Hence, it is essential to allow for this reality. In other words, expecting an accurate forecast is selfdefeating. Most forecasting techniques assume that there is some underlying stability in the system, which is not the case always. Hence, product family and aggregated forecasts are more accurate than individual product forecasts. Objectives: After studying this unit, you should be able to: define forecasting explain the importance of forecasting explain when to use the qualitative models apply the different methods of forecasting and compare the results compute the measures of forecast accuracy identify special cases like causal and seasonal models use a tracking signal for checking the accuracy and efficiency of forecasting

4.2 What Is Forecasting?As stated in Heizer and Render (2010), forecasting is the art and science of predicting the future events. Forecasting is an art because subjective assessment coupled with historical and contemporary judgment is required to improve the accuracy of forecasts. It is a science because a wide variety of numerical methods are used to obtain a number or several numbers and further analysed using mathematical models to ascertain the accuracy of forecast. In most of the cases, forecasting may involve taking historical data and projecting them into the future with some sort of mathematical model. It may be a subjective or an intuitive prediction. Many times, the forecasting maySikkim Manipal University Page No. 70

Production and Operations Management

Unit 4

even resemble a kind of a wild guess or may involve extensive data analysis involving several parameters. Sometimes, it may involve a combination of a mathematical model adjusted by a managers good judgment. Forecasting is synonymous with estimating and prediction, though forecasting is considered to be more scientific rather than a crude or vague guesswork.

4.3 The Strategic Importance of ForecastingForecast is very much required for all types of industrial activity and also for those industries which are purely in the service sector like healthcare and education. Good forecasts are of critical importance in all aspects of a business: The forecast is the only estimate of demand until the actual demand becomes known. Therefore, forecast is said to drive decisions in many business areas. Forecast influences three key activities. They are: Human resources Capacity Supply chain management Let us now discuss these three activities in detail. 4.3.1 Human resources Typically, the number of persons required is a function of the production output which, in turn, depends on demand forecasting. Hence hiring, training, and laying off workers, all depend on the anticipated demand. When fresh workers are hired anticipating a rise in the demand, it is expected that they can quickly get into the required job. However, training is required apart from developing good relations with the existing workers. Similarly, if workers are removed, it sets a demoralising atmosphere. Further, the removed workers will spread the news, and the industry will suffer due to bad reputation and poor image. 4.3.2 Capacity Capacity refers to the ability to meet the demand in terms of resources and the preparedness on the part of the company. When the demand pattern is well recognised and indicates a rise, the capacity build up happens and ensures that there are no lost sales for want of product. On the other hand, if the demand is showing a decline, it signals a decrease in capacity. Thus,Sikkim Manipal University Page No. 71

Production and Operations Management

Unit 4

unnecessary investments are not made. Both for capacity-lead and capacity-lag decisions, demand forecasting is vital. 4.3.3 Supply chain management Supply chain management refers to all the activities that enable the right product at the right place at the right price. Hence, demand forecasting has to be done with utmost care to help identifying the vendors, pricing choices, and material options. When the demand is properly forecasted, it is easy to plan for the suppliers, logistics, and other intermediaries to ensure the delivery of the product at the right time. Self Assessment Questions 1. Forecasting is both art and science of predicting the future events. (True/ False) 2. Demand forecasting is vital both for capacity-lead and capacity-lag decisions. (True / False) 3. Forecasts are not always perfect because the demand for a certain product or service is a complex function influenced by a multitude of variables. (True / False)

4.4 Why Forecasting is required?Forecasting is required for: Production planning Financial planning Personnel planning Scheduling planning Facilities planning Process design and planning 4.4.1 Benefits from forecasts Forecasting basically helps to overcome the uncertainty about the demand and thus provides a workable solution. Without the forecast, no production function can be taken up. Hence, it can be stated that forecasting helps to: Improve employee relations Improve materials management Get better use of capital and facilities Improve customer serviceSikkim Manipal University Page No. 72

Production and Operations Management

Unit 4

4.4.2 Cost implications of forecasting Forecasting requires special efforts and involves inputs from experts which cost a lot to the companies. Well-trained experts and associations substantially invest in human resources and hence charge their clients for the service rendered. Thus, forecasting done in-house or carried out externally requires significant investments. Thus, it can be said that more the efforts put for forecasting, more will be the cost of forecasting. Because of improved accuracy and better judgment, the losses that would occur because of poor forecasting would decrease as more efforts are put in for forecasting. Hence, higher the efforts, lower will be the losses. Because effort is a direct function of forecasting, this cost goes up with increase in the forecasting efforts. Figure 4.1 depicts the forecasting cost implications graphically.

Fig. 4.1: Forecasting Cost Implications

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