Operation management 10e heizer render chapter 04

Operations
Management
Chapter 4 –
Forecasting
PowerPoint presentation to accompany
Heizer/Render
Principles of Operations Management, 7e
Operations Management, 9e
© 2008 Prentice Hall, Inc.

4–1


Outline
 Global Company Profile: Disney
World
 What Is Forecasting?
 Forecasting Time Horizons
 The Influence of Product Life Cycle

 Types Of Forecasts

© 2008 Prentice Hall, Inc.

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Outline – Continued
 The Strategic Importance of
Forecasting
 Human Resources

 Capacity
 Supply Chain Management

 Seven Steps in the Forecasting
System

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Outline – Continued
 Forecasting Approaches
 Overview of Qualitative Methods
 Overview of Quantitative Methods

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Outline – Continued
 Time-Series Forecasting
Decomposition of a Time Series
Naive Approach
Moving Averages
Exponential Smoothing
Exponential Smoothing with Trend
Adjustment
 Trend Projections

 Seasonal Variations in Data
 Cyclical Variations in Data






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Outline – Continued
 Associative Forecasting Methods:
Regression and Correlation
Analysis
 Using Regression Analysis for
Forecasting
 Standard Error of the Estimate
 Correlation Coefficients for
Regression Lines
 Multiple-Regression Analysis
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Outline – Continued
 Monitoring and Controlling

Forecasts
 Adaptive Smoothing
 Focus Forecasting

 Forecasting In The Service Sector

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Learning Objectives
When you complete this chapter you
should be able to :
 Understand the three time horizons and
which models apply for each use
 Explain when to use each of the four
qualitative models
 Apply the naive, moving average,
exponential smoothing, and trend
methods
© 2008 Prentice Hall, Inc.

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Learning Objectives
When you complete this chapter you
should be able to :
 Compute three measures of forecast

accuracy
 Develop seasonal indexes
 Conduct a regression and correlation
analysis
 Use a tracking signal
© 2008 Prentice Hall, Inc.

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Forecasting at Disney World
 Global portfolio includes parks in Hong
Kong, Paris, Tokyo, Orlando, and
Anaheim
 Revenues are derived from people – how
many visitors and how they spend their
money
 Daily management report contains only
the forecast and actual attendance at
each park

© 2008 Prentice Hall, Inc.

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Forecasting at Disney World
 Disney generates daily, weekly, monthly,
annual, and 5-year forecasts
 Forecast used by labor management,

maintenance, operations, finance, and
park scheduling
 Forecast used to adjust opening times,
rides, shows, staffing levels, and guests
admitted

© 2008 Prentice Hall, Inc.

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Forecasting at Disney World
 20% of customers come from outside the
USA
 Economic model includes gross
domestic product, cross-exchange rates,
arrivals into the USA
 A staff of 35 analysts and 70 field people
survey 1 million park guests, employees,
and travel professionals each year

© 2008 Prentice Hall, Inc.

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Forecasting at Disney World
 Inputs to the forecasting model include
airline specials, Federal Reserve
policies, Wall Street trends,

vacation/holiday schedules for 3,000
school districts around the world
 Average forecast error for the 5-year
forecast is 5%
 Average forecast error for annual
forecasts is between 0% and 3%

© 2008 Prentice Hall, Inc.

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What is Forecasting?
 Process of
predicting a future
event
 Underlying basis of
all business
decisions

??

 Production
 Inventory
 Personnel
 Facilities
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Forecasting Time Horizons
 Short-range forecast
 Up to 1 year, generally less than 3 months
 Purchasing, job scheduling, workforce
levels, job assignments, production levels

 Medium-range forecast
 3 months to 3 years
 Sales and production planning, budgeting

 Long-range forecast
 3+ years
 New product planning, facility location,
research and development
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Distinguishing Differences
 Medium/long range forecasts deal with
more comprehensive issues and support
management decisions regarding
planning and products, plants and
processes
 Short-term forecasting usually employs
different methodologies than longer-term
forecasting
 Short-term forecasts tend to be more

accurate than longer-term forecasts
© 2008 Prentice Hall, Inc.

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Influence of Product Life
Cycle
Introduction – Growth – Maturity – Decline
 Introduction and growth require longer
forecasts than maturity and decline
 As product passes through life cycle,
forecasts are useful in projecting
 Staffing levels
 Inventory levels
 Factory capacity
© 2008 Prentice Hall, Inc.

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Product Life Cycle
Company Strategy/Issues

Introduction

Growth

Maturity

Best period to
increase market
share

Practical to change
price or quality
image

Poor time to
change image,
price, or quality

R&D engineering is
critical

Strengthen niche

Competitive costs
become critical
Defend market
position

Internet search engines
LCD & plasma TVs
Sales

Drive-through
restaurants

Decline

Cost control
critical

CD-ROMs
Analog TVs

iPods
Xbox 360

3 1/2”
Floppy
disks
Figure 2.5

© 2008 Prentice Hall, Inc.

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OM Strategy/Issues

Product Life Cycle
Introduction

Growth

Maturity

Decline

Product design
and
development
critical
Frequent
product and
process design
changes
Short production
runs
High production
costs
Limited models

Forecasting
critical
Product and
process
reliability
Competitive
product
improvements
and options
Increase capacity

Standardization
Less rapid
product changes
– more minor
changes

Optimum
capacity
Increasing
stability of
process
Long production
runs
Product
improvement and
cost cutting

Little product
differentiation
Cost
minimization
Overcapacity
in the
industry
Prune line to
eliminate
items not
returning
good margin
Reduce
capacity

Attention to
quality

Shift toward

product focus
Enhance
distribution

Figure 2.5
© 2008 Prentice Hall, Inc.

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Types of Forecasts
 Economic forecasts
 Address business cycle – inflation rate,
money supply, housing starts, etc.

 Technological forecasts
 Predict rate of technological progress
 Impacts development of new products

 Demand forecasts
 Predict sales of existing products and
services
© 2008 Prentice Hall, Inc.

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Strategic Importance of
Forecasting
 Human Resources – Hiring, training,

laying off workers
 Capacity – Capacity shortages can
result in undependable delivery, loss
of customers, loss of market share
 Supply Chain Management – Good
supplier relations and price
advantages
© 2008 Prentice Hall, Inc.

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Seven Steps in Forecasting
 Determine the use of the forecast
 Select the items to be forecasted
 Determine the time horizon of the
forecast
 Select the forecasting model(s)
 Gather the data
 Make the forecast
 Validate and implement results
© 2008 Prentice Hall, Inc.

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The Realities!
 Forecasts are seldom perfect
 Most techniques assume an
underlying stability in the system

 Product family and aggregated
forecasts are more accurate than
individual product forecasts

© 2008 Prentice Hall, Inc.

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Forecasting Approaches
Qualitative Methods
 Used when situation is vague
and little data exist
 New products
 New technology

 Involves intuition, experience
 e.g., forecasting sales on Internet

© 2008 Prentice Hall, Inc.

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Forecasting Approaches
Quantitative Methods
 Used when situation is ‘stable’ and
historical data exist
 Existing products
 Current technology

 Involves mathematical techniques
 e.g., forecasting sales of color
televisions
© 2008 Prentice Hall, Inc.

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