SDM PPC Class3 22jun10

Production Planning & Control
Class3
22nd June 2010
SDM –IMD
Prof.R.Sukumar
22-Jun-2010 1
MANUFACTURING PLANNING & CONTROL
Simplified – The “Big” Picture
E N T E R P R I S E R E S O U R S E P LA N N I N G S Y S T E M - E R P
SALES & DEMAND
RESOURCE
OPN MANAGEM
PLANNING
PLANNING ENT
MASTER
PDN Front End
SCHEDULE
DETAILED DETAILED
CAPACITY MATERIAL
PLANNING PLANNING
Engine
MATERIAL
&
CAPACITY
PLANS
SHOP
SUPPLIER Back End
FLOOR
SYSTEMS
SYSTEMS
22-Jun-2010 2
Demand Planning
• The MPC system
• Master Production Scheduling
• Order promising
• Demand management
• Forecasting
• Evaluating accuracy of forecasts

22-Jun-2010 3
The MPC System Structure
Long-term,
High uncertainty
Front
End
Engine
Back End
Short-term,
Low uncertainty
22-Jun-2010 4
The MPC System: Front End
MPC Boundary
Sales and
Resourc Operation Demand Market
e s Management Internal &
External
Plannin Planning Customers
g
Rough-cut Master
Capacity Production
Planning Scheduling (MPS)
Engine
22-Jun-2010 5
The MPC System: Engine
Master
Production
Scheduling (MPS)
Routing Bills of Inventor
File Material y Status
Detailed Material Data
Planning
Time-Phased
Requirement (MRP)
Records
Detailed Material & Capacity
Capacity Plans
Planning
Back End
22-Jun-2010 6
The MPC System: Back End
Inventor
y Status
Data
Material & Capacity

Plans
Shop-floor Vendor
Systems Systems
22-Jun-2010 7
Demand Management
• Forms a link between a company and the

market
• Determines the quantities and timing of all
demands
• Provides a framework for coordination
between functional areas in a way
consistent with the market needs
22-Jun-2010 8
Demand Management
• In manufacturing, it enables coordination

between the supply chain elements
• Specific demands initiate actions throughout
MPC systems leading to product delivery
and consumption of materials and
capacities
22-Jun-2010 9
Demand Management
• Consists of:
• Forecasting
• Order entry
• Order promising
• Customer order service
• Physical distribution
• Other customer-contact-related activities
22-Jun-2010 10
Demand Management
• Provides inputs to:

• Master Production Scheduling (MPS) for
end items
• Manufacturing Resource Planning (MRP)
for spare parts and lower-level items
22-Jun-2010 11
Demand Management
• Accounts for all sources of demand, including:

• Finished products
• Spare and service parts
• Intra-company requirements
• Product samples
• Pipeline inventory
• Scrap & rework
• Product returns
22-Jun-2010 12
Demand Management &
Production Planning
• Suppose that the production plan states
aggregate quarterly output in dollars
• Then, demand planning must synchronize
actual production with the aggregate
target
• This requires real-time efficient
communication and data exchange
throughout the entire supply chain
22-Jun-2010 13
Demand Management & MPS
• MPS is an anticipated build schedule for

manufacturing end products or product
options
• MPS is a statement of production, not a
statement of market demand, i.e. it is not a
forecast
• MPS considers capacity limitations and
resource efficiency/utilization issues
22-Jun-2010 14
• MPS forms a critical communication link

with manufacturing in terms of resources
needed to build orders
• MPS is stated in terms of part numbers for
which bills of material exist (physical
parts) rather than aggregate units (dollars)
22-Jun-2010 15
• Specific products may be groups of items

(e.g. J-body cars) rather than individual
end items
• In such cases the exact product mix (e.g. the
number of 2-door & 4-door models all
using J-body design) is determined at the
latest possible moment with a Final
Assembly Schedule (FAS)
22-Jun-2010 16
Types of Demand
Independent Demand
(finished goods and spare parts)
A
B(4) C(2)
D(2) E(1) D(3) F(2)

Dependent Demand
(components)
22-Jun-2010 17
Types of Demand
• Independent demand items need to

be forecast
• These items include:
• Finished goods and
• Spare parts
• Dependent (component) demand items
must be calculated
22-Jun-2010 18
Customer Order De-coupling
(Based upon the Manufacturing Environment)
Customer Order decoupling Point is when the demand changes from independent to
dependent
Inventory Raw WIP Parts Finished

Supplier Material & Matls
Location goods
Customer Order
De-coupling Point
Engineer to Make-to- Assemble to Make-to-

Environment
Order (ETO) Order (MTO) Order (ATO) Stock (MTS)
Make-to-Knowledge: Use of EDI and Internet allows two firms to operate with
knowledge of the other firm’s needs
22-Jun-2010 19
Forecasting as a Part of Strategic
Business Planning
• Forecasting is used:
• For estimating future levels of activities, e.g.
demand
• As a basis for business planning
• As a basis for decisions regarding:
• Process selection
• Facility layout
• Production planning
• Scheduling, etc.
22-Jun-2010 20
Business Planning
Forecastin
Inputs g Outputs
Method(s)
Forecast Sales Management

errors & Forecast Team
feedback
Business Production Resource

Strategy Forecasts
22-Jun-2010 21
Inputs to Forecasting
• Market conditions
• Competitor actions
• Consumer tastes
• Products’ life cycles
• Season
• Customers’ plans
22-Jun-2010 22
• Economic outlook
• Business cycle status
• Leading indicators
• Stocks
• Prices
• Bond yields
• Material prices
• Business failures
• Money supply
• Unemployment
22-Jun-2010 23
• Other factors
• Legal
• Political
• Sociological
• Cultural
22-Jun-2010 24
Business Planning
Forecastin
Inputs g Outputs
Method(s)

feedback

Strategy Forecasts
22-Jun-2010 25
Forecasting Methods
• Qualitative Approaches
• Quantitative Approaches
22-Jun-2010 26
Business Planning
Forecastin
Inputs g Outputs
Method(s)

feedback

Strategy Forecasts
22-Jun-2010 27
Outputs From Forecasting
• Estimated demand
• For each product or product family
(group technology)
• For each time period
• Over the forecasting horizon
• Other outputs
22-Jun-2010 28
Business Planning
Forecastin
Inputs g Outputs
Method(s)

feedback

Strategy Forecasts
22-Jun-2010 29
Management Team
• Makes decisions regarding:

• Production capacity
• Available resources
• Levels of acceptable business risk
22-Jun-2010 30
Management Team
• Based on:
• Experience
• Personal values and motives
• Organizational values and culture
• Societal values and needs
• Other factors
22-Jun-2010 31
Business Planning
Forecastin
Inputs g Outputs
Method(s)

feedback

Strategy Forecasts
22-Jun-2010 32
Sales Forecast
• Determines the level of demand:

• For each product or product family
• In each time period (bucket) over the
planning horizon
22-Jun-2010 33
Business Planning
Forecastin
Inputs g Outputs
Method(s)

feedback

Strategy Forecasts
22-Jun-2010 34
Forecast Error and Feedback
• Suppose that today you develop a forecast

of $1.5 million for next month dollar
value of OEM equipment repairs
What is the probability that the actual

value will be exactly $1.5 million?
• Answer: zero
22-Jun-2010 35
 Demand is Normally distributed. Probability is
the area under the bell-shaped curve. Use
ranging (e.g. demand less than $2 million), as
the area corresponding to any number is zero
$1.5 million $2 million
demand
22-Jun-2010 36
• Monitoring forecast errors and analyzing feedback

provides a basis for:
• Analyzing and influencing inputs (promotions,
bundling, etc.)
• Modifying management decisions in terms of:
• Capacities
• Capabilities
• Resources
• Risk
22-Jun-2010 37
• Forecasting models are evaluated on the

basis of three characteristics:
• Impulse response
• Noise-dampening ability
• Accuracy
22-Jun-2010 38
Business Planning
Forecastin
Inputs g Outputs
Method(s)

feedback

Strategy Forecasts
22-Jun-2010 39
Business Strategy
• The formation of and changes to:

• Marketing plan
• Advertising
• Sales efforts
• Product and service pricing
22-Jun-2010 40
Business Strategy

• Production plan
• Quality levels
• Customer service
• Capacity
• Costs
22-Jun-2010 41
Business Strategy

• Financial plan
• Credit policies
• Billing policies
22-Jun-2010 42
Business Planning
Forecastin
Inputs g Outputs
Method(s)

feedback

Strategy Forecasts
22-Jun-2010 43
Forecasting
• Forecasting as a part of strategic business
planning
• Types of demand – what to forecast?
• Components of demand
• Overview of forecasting techniques
• Forecast ranging – prediction intervals
22-Jun-2010 44
Production Resource Forecasts
• Sales views orders from the point of view

of order value, profit margins, etc.
• Production views orders from the point of
view of order makeup (use of resources)
• Sales forecasts (in dollars, units, etc.) must
be translated into production resource
forecasts (in machine hrs, labor hrs, etc.)
22-Jun-2010 45
Examples
Long - Range Medium - Range Short - Range

Facility Workforce level Labor, by skill
capacities Department class
Capital needs capacities Machine
Facility needs Purchased capacities

Other materials Cash
Inventories Inventories
Other Other
22-Jun-2010 46
Examples
Forecast Time Item Being Forecast Units of
Long -Range Years Product lines Dollars , tons,
Horizon Span Measure

Factory capacities
etc.
Planning for new products
Capital expenditures
Medium-Range Months Product groups Dollars, tons,
Facility location or expansion
Department capacities etc.
Short-Range Weeks Specific product quantities
R&D planning
Sales Physical
Machine capacities
Production planning and budgeting units of
Planning
Purchasing
products
Scheduling
Workforce levels
Production levels
Job assignments
22-Jun-2010 47
Strategic Importance of
Forecasting
• Capacity planning
• New facility planning
• Facility expansion/contraction
• Production planning
• What to produce?
• How much to produce?
• Where to produce?
• Workforce scheduling
• Labor issues
• Resource utilization issues
22-Jun-2010 48
Forecasting
planning
22-Jun-2010 49
Types of Demand
Independent Demand
(finished goods and spare parts)
A
B(4) C(2)
D(2) E(1) D(3) F(2)

Dependent Demand
(components)
22-Jun-2010 50
Types of Demand
• Independent demand items need to

be forecast
• These items include:
• Finished goods and
• Spare parts
• Dependent (component) demand items
must be calculated
22-Jun-2010 51
Forecasting
planning
22-Jun-2010 52
Quantity
Components of Demand
Time
(a) Error: Data cluster about a horizontal line with no

information (white noise process)
22-Jun-2010 53
Quantity
Time
(b) Irregular: Sudden change in process level due to

assignable causes, e.g. strike
22-Jun-2010 54
Quantity
Time
(c) Trend: Data consistently increase or decrease, not necessarily in

a linear fashion
22-Jun-2010 55
Year 1
Quantity
| | | | | | | | | | | |
J F M A M J J A S O N D
Months
(d) Seasonal: Data consistently show peaks and valleys with a one-
year cycle
22-Jun-2010 56
Year 1
Quantity
Year 2
| | | | | | | | | | | |
J F M A M J J A S O N D
Months
(d) Seasonal: Data consistently show peaks and valleys with a one-
year cycle
22-Jun-2010 57
Quantity
| | | | | |
1 2 3 4 5 6
Years
(e) Cyclical: Data reveal gradual increases and
decreases over extended periods of more than one-
year in length
22-Jun-2010 58
Forecasting
planning
22-Jun-2010 59
Forecasting
• Qualitative approaches
• No past sales data is available
• Appropriate for forecasting technology
change, new product sales, consumer
tastes change, etc.
• Quantitative approaches
• Sales history is available
• Product design is stable
22-Jun-2010 60
Qualitative Approaches
• Usually based on judgments about causal factors

that underlie the demand of particular products
or services
• Approaches vary in sophistication from
scientifically conducted surveys to intuitive
hunches about future events
• The approach/method that is appropriate depends
on a product’s life cycle stage
22-Jun-2010 61
Qualitative Approaches
• Educated guess intuitive hunches

• Executive committee consensus
• Delphi method
• Survey of sales force
• Survey of customers
• Historical analogy
• Market research scientifically conducted
surveys
22-Jun-2010 62
Quantitative Approaches
• Based on the assumption that the “forces” that

generated the past demand will generate the
future demand, i.e., history will tend to repeat
itself
• Analysis of the past demand pattern provides a
good basis for forecasting future demand
• Majority of quantitative approaches fall in the
category of time series analysis
22-Jun-2010 63
Regression Models
• Simple regression
• One independent variable
• Multiple regression
• More than one independent variables
• Linear regression
• All variables are of power of 1, e.g. X
• Nonlinear regression
• At least one independent variable is of power
different than 1 or interaction terms are present in
the model, e.g. X2, X1X2
22-Jun-2010 64
Causal Methods: Simple Linear
Regression
Deviation,
Y or error
Regression
Estimate of
Y from
equation:
regression Y = a + bX
Dependent variable
equation
{ Actual
value
of Y
Value of X used
to estimate Y
X
Independent variable
22-Jun-2010 65
Simple Linear Regression
Example
®Using the data below estimate point sales
(in 000 of units) when budgeted advertising
expenditure is $2,300
Examples.xls
Sales Advertising
Month (000 units) (000 $)
1 264 2.5
2 116 1.3
3 165 1.4
4 101 1.0
5 209 2.0
22-Jun-2010 66
Example
Sales vs. Advertising
300.000
250.000
200.000
150.000 Sales (000 units)
100.000
50.000
0.000
0.000 0.500 1.000 1.500 2.000 2.500 3.000
22-Jun-2010 67
Example
SUMMARY OUTPUT

Regression
Statistics
Multiple R 0.979564766
R Square 0.959547131
Adjusted R 0 . 946062842
Square
Standard Error 15.60273574
Observations 5

ANOVA
df SS MS F Significance
F
Regression 1 17323.66391 17323.66391 71.1603775 0 . 003495969
Residual 3 730.3360882 243.4453627
Total 4 18054

Coefficient Standard t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
s Error
Intercept - 22.3524729 -0.363941219 0.74003927 -79.27059775 63.0006253 -79.27059775 63.0006253
8 . 134986226
Advertising (000 $) 109 . 2286501 12.94843989 8.435661059 0 . 00349596 68.0208968 150.4364035 68.0208968 150.4364035
9
22-Jun-2010 68
Example
®The regression line equation is:
F = -8.135 + 109.229 X
®Regression is significant overall as p-value = .003
®Advertising is a significant predictor of sales as
p-value = .003
®94.61 percent of variability in sales is explained by
advertising (good model!)
®If X = 2,300 the expected sales is:
F(23) = -8.135 + 109.229 (2.3) = $243,091
22-Jun-2010 69
Time-Series Regression
®If the independent variable is time (t) the
regression is called time-series regression
22-Jun-2010 70
Time-Series Regression Example
®Using the data below estimate point sales
(in 000 of units) in month 6
Examples.xls
Sales
Month (000 units)
1 150
2 163
3 182
22-Jun-2010 4 191 71
Time Series Regression Example
Sales vs. T ime
250.000
200.000
150.000
Sales (000 units)
100.000
50.000
0.000
0 1 2 3 4 5 6
22-Jun-2010 72
SUMMARY OUTPUT

Regression
Statistics
Multiple R 0.995711736
R Square 0.99144186
Adjusted R Square 0 . 988589147
Standard Error 2.476556749
Observations 5

ANOVA
df SS MS F Significance
F
Regression 1 2131.6 2131.6 347.5434783 0 . 000336881
Residual 3 18.4 6.133333333
Total 4 2150

Coefficients Standard t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Error
Intercept 135 . 2 2.597434632 52.05135804 1.5617E-05 126.933796 143.466204 126.933796 143.466204
Month 14 . 6 0.783156008 18.64251802 0 . 000336881 12.10764572 17.09235428 12.10764572 17.09235428
22-Jun-2010 73
®The regression line equation is:
F = 135.2 + 14.6 t
®Regression is significant overall as
p-value = .0003
®Time is a significant predictor of sales as
p-value = .0003
®98.86 percent of variability in sales is explained by
time (good model!)
®If t = 6 the expected sales is:
F(6) = 135.2 + 14.6 (6) = $222.800
22-Jun-2010 74
Time Series Methods: Simple
Moving Average
®Specify the AP factor
®Calculate the forecast as an average of AP
most recent observations
®Use the forecast if actual value is not
available
22-Jun-2010 75
Simple Moving Average Example
®Calculate a 3-week simple moving average
forecast for part demand in weeks 4 and 5
Examples.xls
Week Demand
1 400
2 380
3 411
22-Jun-2010 4 415 76
5 ?
450 —
430 —
410 —
Shipment arrivals
390 —
370 —
Actual shipment
arrivals
| | | | | |
0 5 10 15 20 25 30
Week
22-Jun-2010 77
Shipment
Week Arrivals
1
2
400
380
3 411
4 415
450 —
F4=(400+380+411)/3 = 397
F5=(380+411+415)/3
430 — = 402
410 —
Shipment arrivals
390 —
370 —
Actual shipment
arrivals
| | | | | |
0 5 10 15 20 25 30
Week
22-Jun-2010 78
®F4 = 397
®F5 = 402
®Observe that as forecasts are made further
into the future the forecast error increases
22-Jun-2010 79
Time Series Methods: Weighted
Moving Average
• Specify the AP factor
• Specify the weights
• Weights are positive fractions summing up to one
• Calculate the forecast as a weighted average of AP
most recent observations
• Assign a larger weight to a more recent observation
• Use the forecast if actual value is not available
22-Jun-2010 80
Weighted Moving Average
Example
®Calculate a 3-week weighted moving
average forecast for part demand in weeks 4
and 5. The weights are: w1=.70, w2=.20,
w3=.10.
Examples.xls
Week Demand
1 400
2 380
3 411
22-Jun-2010 81
4 415
Weighted Moving Average assigned
weights
t Example
Time Period Weight
.70
t-1 .20
t-2 .10
450 —
3-week MA 6-week MA
forecast forecast
430 —
410 —
Shipment arrivals
390 —
370 —
Actual shipment
arrivals
| | | | | |
0 5 10 15 20 25 30
Week
22-Jun-2010 82
Time Period Weighted

Weight Moving Average
t
t-1 Example
.70
.20
t-2 .10
F4 = 0.70(411)
450+—0.20(380) + 0.10(400) = 403.70
F5 = 0.70(415) + 0.20(411) +3-week
0.10(380)
MA= 410.70 6-week MA
forecast forecast
430 —
410 —
Shipment arrivals
390 —
370 —
Actual shipment
arrivals
| | | | | |
0 5 10 15 20 25 30
Week
22-Jun-2010 83
Time Series Methods: Single
Exponential Smoothing
®Specify the smoothing constant 
®It must be a positive fraction, 0<<1
®Specify the starting forecast value
®Usually F1 = A1
®Calculate the forecast using the equation
Ft+1 = Ft + (At – Ft)
22-Jun-2010 84
Single Exponential Smoothing
Example
®Calculate a single exponential smoothing
forecast for period 5 assuming  = 0.1 and
F1 = A1
Examples.xls
Week Demand
1 400
2 380
3 411
22-Jun-2010 85
4 415
Exponential Smoothing,  = 0.10
Single Exponential Smoothing

F t +1 = Ft + (At – Ft )
F = 400.00
1
F = 400+0.10(400-400) = 400.00
Example
2
F3 = 400+0.10(380-400) = 398.00
450 —
F4 = 398+0.10(415-398) = 399.30
F5 = 399.30+.10(415-399.3)
430 — = 400.87
410 —
Shipment arrivals
390 —
370 —
| | | | | |
0 5 10 15 20 25 30
Week
22-Jun-2010 86
Model Comparisons
450 —
3-week MA 3-week weighted MA
forecast forecast
430 —
410 —
Shipment arrivals
390 —
370 —
Exponential
smoothing
α = 0.10
| | | | | |
0 5 10 15 20 25 30
Week
22-Jun-2010 87
Model Comparisons
• These models can be extended to cover

more complex cases
• Which model is the best for
forecasting?
• The choice of the weights, the AP
factor and the smoothing constant 
determines the noise dampening
ability of the forecasting model
22-Jun-2010 88
Time Series Methods: Seasonal
Influences
Consider the following data. Determine the quarterly

seasonally adjusted forecast for year 5 if expected

demand is 2,600 units
 Examples.xls
Quarter Year 1 Year 2 Year 3 Year 4

1 45 70 100 100
2 335 370 585 725
3 520 590 830 1160
4 100 170 285 215
Total 1000 1200 1800 2200
Average 250 300 450 550
22-Jun-2010 89
Seasonal Influences Example
Quarterly Sales
1,400
1,200
1,000
800
sales
600
400
200
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
tim e
22-Jun-2010 90

1 45 70 100 100
2 335 370 585 725
3 520 590 830 1160
4 100 170 285 215
Total 1000 1200 1800 2200
Average 250 300 450 550
Actual Demand
Seasonal Index = Average Demand
22-Jun-2010 91

1 45/250 = 0.18 70 100 100
2 335 370 585 725
3 520 590 830 1160
4 100 170 285 215
Total 1000 1200 1800 2200
Average 250 300 450 550
45
Seasonal Index = 250 = 0.18
22-Jun-2010 92

1 45/250 = 0.18 70/300 = 0.23 100/450 = 0.22 100/550 = 0.18
2 335/250 = 1.34 370/300 = 1.23 585/450 = 1.30 725/550 = 1.32
3 520/250 = 2.08 590/300 = 1.97 830/450 = 1.84 1160/550 = 2.11
4 100/250 = 0.40 170/300 = 0.57 285/450 = 0.63 215/550 = 0.39
Quarter Average Seasonal Index

1 (0.18 + 0.23 + 0.22 + 0.18)/4 = 0.20
2
3
4
22-Jun-2010 93

1 45/250 = 0.18 70/300 = 0.23 100/450 = 0.22 100/550 = 0.18
2 335/250 = 1.34 370/300 = 1.23 585/450 = 1.30 725/550 = 1.32
3 520/250 = 2.08 590/300 = 1.97 830/450 = 1.84 1160/550 = 2.11
4 100/250 = 0.40 170/300 = 0.57 285/450 = 0.63 215/550 = 0.39
Quarter Average Seasonal Index

1 (0.18 + 0.23 + 0.22 + 0.18)/4 = 0.20
2 (1.34 + 1.23 + 1.30 + 1.32)/4 = 1.30
3 (2.08 + 1.97 + 1.84 + 2.11)/4 = 2.00
4 (0.40 + 0.57 + 0.63 + 0.39)/4 = 0.50
22-Jun-2010 94
Projected Annual Demand = 2600
Average Quarterly Demand = 2600/4 = 650

1 45/250 = 0.18 70/300 = 0.23 100/450 = 0.22 100/550 = 0.18
2 335/250 = 1.34 370/300 = 1.23 585/450 = 1.30 725/550 = 1.32
3 520/250 = 2.08 590/300 = 1.97 830/450 = 1.84 1160/550 = 2.11
4 100/250 = 0.40 170/300 = 0.57 285/450 = 0.63 215/550 = 0.39
Quarter Average Seasonal Index Forecast

1 (0.18 + 0.23 + 0.22 + 0.18)/4 = 0.20 650(0.20) = 130
2 (1.34 + 1.23 + 1.30 + 1.32)/4 = 1.30
3 (2.08 + 1.97 + 1.84 + 2.11)/4 = 2.00
4 (0.40 + 0.57 + 0.63 + 0.39)/4 = 0.50
22-Jun-2010 95

1 45/250 = 0.18 70/300 = 0.23 100/450 = 0.22 100/550 = 0.18
2 335/250 = 1.34 370/300 = 1.23 585/450 = 1.30 725/550 = 1.32
3 520/250 = 2.08 590/300 = 1.97 830/450 = 1.84 1160/550 = 2.11
4 100/250 = 0.40 170/300 = 0.57 285/450 = 0.63 215/550 = 0.39
Quarter Average Seasonal Index Forecast

1 (0.18 + 0.23 + 0.22 + 0.18)/4 = 0.20 650(0.20) = 130
2 (1.34 + 1.23 + 1.30 + 1.32)/4 = 1.30 650(1.30) = 845
3 (2.08 + 1.97 + 1.84 + 2.11)/4 = 2.00 650(2.00) = 1300
4 (0.40 + 0.57 + 0.63 + 0.39)/4 = 0.50 650(0.50) = 325
22-Jun-2010 96
Seasonal Patterns
(a) Multiplicative pattern

Demand
| | | | | | | | | | | | | | | |
0 2 4 5 8 10 12 14 16
Period
22-Jun-2010 97
Seasonal Patterns
(b) Additive pattern

Demand
| | | | | | | | | | | | | | | |
0 2 4 5 8 10 12 14 16
Period
22-Jun-2010 98
Forecasting
planning
22-Jun-2010 99
Factors in Choosing a
Forecasting Method
• Cost
• Accuracy
• Data available
• Time span
• Nature of products and services
• Impulse response and noise dampening
22-Jun-2010 100
Cost & Accuracy
• There is a trade-off between cost and accuracy.

Generally, more forecast accuracy can be
obtained at a cost
• High-accuracy approaches have disadvantages:
• Use more data
• Data are ordinarily more difficult to obtain
• The models are more costly to design, implement,
and operate
• Take longer to use
22-Jun-2010 101
Cost & Accuracy
• Low/Moderate-Cost Approaches
• Statistical models, historical analogies,
executive-committee consensus
• High-Cost Approaches
• Complex econometric models, Delphi, and
market research
22-Jun-2010 102
Cost & Accuracy
• Accuracy is the typical criterion for judging

the performance of a forecasting approach
• Accuracy is how well the forecasted values
match the actual values
22-Jun-2010 103
Data Available
• Is the necessary data available or can it be

economically obtained?
• If the need is to forecast sales of a new
product, then a customer survey may not
be practical. Instead, historical analogy or
market research may have to be used
22-Jun-2010 104
Time Span
• What operations resource is being forecast and for

what purpose?
• Short-term staffing needs might best be forecast
with moving average or exponential smoothing
models
• Long-term factory capacity needs might best be
predicted with regression or executive
committee consensus methods
22-Jun-2010 105
Nature of Products and
Services
• Is the product/service high cost or high
volume?
• Where is the product/service in its life
cycle?
• Does the product/service have seasonal
demand fluctuations?
22-Jun-2010 106
Impulse Response & Noise
Dampening
• An appropriate balance must be achieved
between
• How responsive we want the forecasting
model to be to changes in the actual
demand data
• Our desire to suppress undesirable chance
variation or noise in the demand data
22-Jun-2010 107
Impulse Response & Noise
Dampening
• If forecasts have little period-to-period fluctuation,
they are said to be noise dampening
• Forecasts that respond quickly to changes in data
are said to have a high impulse response
• A forecast system that responds quickly to data
changes necessarily picks up a great deal of
random fluctuation (noise)
• Hence, there is a trade-off between high impulse
response and high noise dampening
22-Jun-2010 108
Measures of Forecast Error
• Residual, Et = At – Ft
• Running sum of residuals, CFE = Et
• Mean Squared Error, MSE = (Et2)/n
• Mean Absolute Deviation,
MAD = (|Et|)/n
22-Jun-2010 109
Measures of Forecast Error
Σ (Et – E )2
• Standard deviation,  = n–1

• Mean Absolute Percentage Error,

Σ [ |Et | (100) ] / At
MAPE = n
22-Jun-2010 110
Measures of Error
Measures
CFE = – 15
of Forecast Error
E=
– 15
= – 1.875
Example
8
5275
MSE = 8 = 659.4 Absolute
Error Absolute Percent
σ Month,
= 27.4 Demand, Forecast, Error, Squared, Error, Error,
t Dt Ft Et Et2 |Et| (|Et|/Dt)(100)
195
1 200 225 –25 625 25 12.5%
MAD = 28 = 24.4
240 220 20 400 20 8.3
3 300 285 15 225 15 5.0
4 270 290 –20 400 20 7.4
81.3%
5 230 250 –20 400 20 8.7
MAPE = 68 = 10.2%
260 240 20 400 20 7.7
7 210 250 –40 1600 40 19.0
8 275 240 35 1225 35 12.7
Total –15 5275 195 81.3%
22-Jun-2010 111
Monitoring and Controlling
a Forecasting Model
• The Tracking Signal measures the
cumulative forecast error over n periods
in terms of MAD
• If the forecasting model is performing well,
the TS should be around zero
• The TS indicates the direction of the
forecasting error
• If the TS is positive -- increase the forecasts
• If the TS is negative -- decrease the forecasts
22-Jun-2010 112
The Tracking Signal
Percentage of the Area of the Normal Probability Distribution within the
Control Limits of the Tracking Signal
Control Limit Spread Equivalent Percentage of Area

(number of MAD) Number of  2 within Control Limits
± 1.0 ± 0.80 57.62
± 1.5 ± 1.20 76.98
± 2.0 ± 1.60 89.04
± 2.5 ± 2.00 95.44
± 3.0 ± 2.40 98.36
± 3.5 ± 2.80 99.48
± 4.0 ± 3.20 99.86
22-Jun-2010 113
The Tracking Signal Example
• Tracking Signal = CFE / MAD

+2.0 —
+1.5 — Control limit
+1.0 —
+0.5 —
Tracking signal
0—
–0.5 —
–1.0 —
–1.5 —
Control limit
| | | | |
0 5 10 15 20 25
22-Jun-2010 Observation number 114
The Tracking Signal Example
+2.0 — Out of control

+1.5 — Control limit
+1.0 —
+0.5 —
Tracking signal
0—
–0.5 —
–1.0 —
–1.5 —
Control limit
| | | | |
0 5 10 15 20 25
Observation number
22-Jun-2010 115
Forecasting
planning
22-Jun-2010 116
Forecast Ranging
• Under the assumption that the distribution of

demand is Normal it is necessary to assign a
degree of confidence that future demand will be
covered by an interval of a certain width
• The procedure for determining this interval is
called forecast ranging
• Prediction interval
• Confidence interval
22-Jun-2010 117
Forecast Ranging
• Confidence interval states that that the

mean demand in some future period will
be covered
• Example: The manager is 95 percent
confident that mean sales (i.e. the average
for all sales people) next month will be
between $480,000 and $520,000
• The manager will be wrong in 5 out of 100
cases
22-Jun-2010 118
Forecast Ranging
• Prediction interval allows the decision maker to

state that the individual value of demand in
some future period will be covered
• Example: The manager is 95 percent confident that
John’s sales (i.e. the individual sales) next month
will be between $470,000 and $530,000
• The manager will be wrong in 5 out of 100 cases
22-Jun-2010 119
Forecast Ranging
• For all things being equal, the prediction interval

is always wider than the confidence interval
since there is more variability
• Increasing the sample size, n, reduces variability
and narrows both intervals
• Forecasting far into the future increases variability
and widens both intervals
• Computer forecasting software packages use
forecast ranging without explicitly involving
statistics
22-Jun-2010 120
Computer Software For
Forecasting
• Examples of computer software with forecasting
capabilities
• Forecast Pro
• Autobox
• SmartForecasts for Windows
• SAS
• SPSS
• SAP (part of ERP software)
• Minitab
22-Jun-2010 121
Reasons For Ineffective
Forecasting
• Not involving a broad cross section of people
• Not recognizing that forecasting is integral to
business planning
• Not using forecast ranging
• Not forecasting the right demands
• Not selecting an appropriate forecasting method
• Not tracking the accuracy of the forecasting
models and failure to update the forecasting
model
22-Jun-2010 122

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Production Planning & Control

Material & Capacity

• Forms a link between a company and the

• In manufacturing, it enables coordination

• Provides inputs to:

• Accounts for all sources of demand, including:

• MPS is an anticipated build schedule for

• MPS forms a critical communication link

• Specific products may be groups of items

D(2) E(1) D(3) F(2)

• Independent demand items need to

Inventory Raw WIP Parts Finished

Engineer to Make-to- Assemble to Make-to-

Forecast Sales Management

Business Production Resource

Forecast Sales Management

Business Production Resource

Forecast Sales Management

Business Production Resource

Forecast Sales Management

Business Production Resource

• Makes decisions regarding:

Forecast Sales Management

Business Production Resource

• Determines the level of demand:

Forecast Sales Management

Business Production Resource

• Suppose that today you develop a forecast

What is the probability that the actual

$1.5 million $2 million

• Monitoring forecast errors and analyzing feedback

• Forecasting models are evaluated on the

Forecast Sales Management

Business Production Resource

• The formation of and changes to:

• The formation of and changes to:

• The formation of and changes to:

Forecast Sales Management

Business Production Resource

• Sales views orders from the point of view

Long - Range Medium - Range Short - Range

Facility needs Purchased capacities

D(2) E(1) D(3) F(2)

• Independent demand items need to

(a) Error: Data cluster about a horizontal line with no

(b) Irregular: Sudden change in process level due to

(c) Trend: Data consistently increase or decrease, not necessarily in

• Usually based on judgments about causal factors

• Educated guess intuitive hunches

• Based on the assumption that the “forces” that

Sales vs. Advertising

150.000 Sales (000 units)

Sales vs. T ime

Time Period Weighted

Single Exponential Smoothing

• These models can be extended to cover

seasonally adjusted forecast for year 5 if expected

Quarter Year 1 Year 2 Year 3 Year 4

Quarter Year 1 Year 2 Year 3 Year 4

Quarter Year 1 Year 2 Year 3 Year 4

Quarter Year 1 Year 2 Year 3 Year 4

Quarter Average Seasonal Index