1. Types of Forecasts Qualitative (Judgmental) Quantitative – Time Series Analysis – Causal Relationships – Simulation

2. Components of Demand Average demand for a period of time Trend Seasonal element Cyclical elements Random variation Autocorrelation

3. Finding Components of Demand 1234 x x x x x x xx x x x xxx x x x x x xx x x x xxx x x x x x x x x x x x x x x x x x x x x Year Sales Seasonal variation Linear Trend

4. Simple Moving Average Formula The simple moving average model assumes an average is a good estimator of future behavior. The formula for the simple moving average is: F t = Forecast for the coming period n = Number of periods to be averaged A t-1 = Actual occurrence in the past period for up to “n” periods

5. Which Forecast Would You Prefer?

7. Weighted Moving Average Formula While the moving average formula implies an equal weight being placed on each value that is being averaged, the weighted moving average permits an unequal weighting on prior time periods. w t = weight given to time period “t” occurrence. (Weights must add to one.) The formula for the weighted average is:

8. Exponential Smoothing Model F t = F t-1 +  (A t-1 - F t-1 ) F t =  A t-1 +(1-  )F t-1 Or, Equivalently  = smoothing constant Where, F t = Forecast for period t A t = Actual value in period t Note: A higher value of  places more weight on more recent observations

9. Which Forecast Would You Prefer?

11. The MAD Statistic to Determine Forecasting Error The ideal MAD is zero. That would mean there is no forecasting error. The larger the MAD, the less the desirable the resulting model. Note that by itself, MAD only lets us know the mean error in a set of forecasts.

12. Tracking Signal Formula The TS is a measure that indicates whether the forecast average is keeping pace with any genuine upward or downward changes in demand. Depending on the number of MAD’s selected, the TS can be used like a quality control chart indicating when the model is generating too much error in its forecasts. The TS formula is:

13. Best Operating Level Underutilization Best Operating Level Average unit cost of output Volume Overutilization

14. Economies & Diseconomies of Scale 100-unit plant 200-unit plant 300-unit plant 400-unit plant Volume Average unit cost of output Economies of Scale and the Experience Curve working Diseconomies of Scale start working

15. The Experience Curve Total accumulated production of units Cost or price per unit As plants produce more products, they gain experience in the best production methods and reduce their costs per unit.

16. Capacity Focus The concept of the focused factory holds that production facilities work best when they focus on a fairly limited set of production objectives. Plants Within Plants (PWP) (from Skinner) – Extend focus concept to operating level

17. Capacity Flexibility Flexible plants - goal is zero changeover time Flexible processes - flexible manufacturing systems + easy set ups = mix flexibility Flexible workers - have multiple skills, but more training ($) is required for this to be achieved

18. Example of a Decision Tree Problem: The Payoff Table The management also estimates the profits when choosing from the three alternatives (A, B, and C) under the differing probable levels of demand. These costs, in thousands of dollars are presented in the table below:

19. Planning Service Capacity Decision points: Time - capacity must be ready when customer is Location - revenue heavily dependent on location Volatility of Demand - higher than in manufacturing

20. Capacity Utilization & Service Quality Best operating point is near 70% of capacity - balances efficiency and reserve From 70% to 100% of service capacity, what do you think happens to service quality? - customers are serviced, but service quality often declines

21. Issues in Facility Location Proximity to Customers Business Climate Total Costs Infrastructure Quality of Labor Suppliers Other Facilities

22. Characteristics of Location Decisions Long-term decisions Very difficult to reverse Affect fixed & variable costs –Transportation cost As much as 25% of product price –Other costs: Taxes, wages, rent etc. Objective: Maximize benefit of location to firm

23. Cost focus –Revenue varies little between locations Location is a major cost factor –Affects shipping & production costs (e.g., labor) –Costs vary greatly between locations Manufacturing Location Strategies © 1995 Corel Corp.

24. Service Location Strategies Revenue focus –Costs differences among locations are relatively less important Location is a major revenue factor –Affects amount of customer contact –Affects volume of business © 1995 Corel Corp.

25. Some Location Methods Factor weighting method Center of gravity method © 1995 Corel Corp.

26. Location Methods: Factor Rating Method +/- + Easy to understand and compute - How do you pick weights? - How do you assign rankings?

27. Location Methods: Centroid Method The centroid is used for locating single facilities that considers: –existing facilities, –the distances between them, and –the volumes of goods to be shipped between them. This methodology involves formulas used to compute the coordinates of the two- dimensional point that meets the distance and volume criteria stated above.

28. Thinking Challenge Solution 0306090120150 30 60 90 0 Seattle (50,60) 494k units Aberdeen (20,35) 18k units Spokane (160,50) 171k units Warehouse at (77, 57): Wenatchee Nat’l Forest! X © 1995 Corel Corp.

29. Master Production Scheduling Material Requirements Planning Order Scheduling Weekly Workforce & Customer Scheduling Daily Workforce & Customer Scheduling Process Planning Strategic Capacity Planning Aggregate Planning Long- range Intermediate- range Short- range Manufacturing Services

30. 13-13 Meet demand Use capacity efficiently Meet inventory policy Minimize cost –Labor –Inventory –Plant & equipment –Subcontract Aggregate Scheduling Goals

31. Key Strategies for Meeting Demand Chase - Match production to customer order rate by hiring and laying off employees Level - Stable workforce with constant output, inventory and backlogs absorb fluctuations in demand Some combination of the two - Stable workforce, variable hours - vary output through overtime or flexible schedules

32. Costs Relevant to Aggregate Planning Direct and indirect labor costs and overtime Costs associated with changing the production rate - hiring, training, layoffs, temps Inventory holding costs - costs of capital, storage, insurance, taxes, spoilage, obsolescence Backordering costs - expediting, loss of goodwill, lost sales from backorders

33. Master Scheduling Process - Determine amounts and dates of each end item to be produced Master scheduling Beginning inventory Forecast Customer orders Inputs Outputs Projected inventory Master production schedule Uncommitted inventory

34. Material Requirements Planning Defined Materials requirements planning (MRP) is the logic for determining the number of parts, components, and materials needed to produce a product. MRP provides time scheduling information specifying when each of the materials, parts, and components should be ordered or produced. Dependent demand drives MRP.

35. Firm orders from known customers Forecasts of demand from random customers Aggregate product plan Master production schedule (MPS) Material planning (MRP) Engineering design changes Bill of material file Inventory transactions Inventory record file Reports 35

36. MRP Input: Master Production Schedule (MPS) Time-phased plan specifying how many and when the firm plans to build each end item. Aggregate Plan (Product Groups) MPS (Specific End Items)

37. Low Level Coding - “How to” Place each item at same level - it simplifies the calculations A B C DCE E Level 0 Level 1 Level 3 Level 2 A B CDC EE Before: After:

38. Types of Time Fences Frozen – No schedule changes allowed within this window. Moderately Firm – Specific changes allowed within product groups as long as parts are available. Flexible – Significant variation allowed as long as overall capacity requirements remain at the same levels.

39. Example of Time Fences 81526 Weeks Frozen Moderately Firm Flexible Firm Customer Orders Forecast and available capacity Capacity