Operations

Management
Chapter 3 -
Forecasting
PowerPoint presentation to accompany
Heizer/Render
Principles of Operations Management, 6e
Operations Management, 8e

© 2006
© 2006 Prentice
Prentice Hall, Inc. Hall, Inc. 4–1
 What is Forecasting?
þ Process of
predicting a future
event
þ Underlying basis of
??
all business
decisions
þ Production
þ Inventory
þ Personnel
þ Facilities
© 2006 Prentice Hall, Inc. 4–2
 Forecasting Time Horizons
þ Short-range forecast
þ Up to 1 year, generally less than 3 months
þ Purchasing, job scheduling, workforce
levels, job assignments, production levels
þ Medium-range forecast
þ 3 months to 3 years
þ Sales and production planning, budgeting
þ Long-range forecast
þ 3+ years
þ New product planning, facility location,
research and development
© 2006 Prentice Hall, Inc. 4–3
 Distinguishing Differences
þMedium/long range forecasts deal with
more comprehensive issues and support
management decisions regarding
planning and products, plants and
processes
þShort-term forecasting usually employs
different methodologies than longer-term
forecasting
þShort-term forecasts tend to be more
accurate than longer-term forecasts

© 2006 Prentice Hall, Inc. 4–4

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

© 2006 Prentice Hall, Inc. 4–5

 Product Life Cycle
Introduction Growth Maturity Decline
Best period to Practical to change Poor time to Cost control
increase market price or quality change image, critical
Company Strategy/Issues

share image price, or quality

R&D engineering is Strengthen niche Competitive costs

critical become critical
Defend market
position
CD-ROM Fax machines

Internet Drive-through
restaurants
Color printers
Sales
3 1/2”
Floppy
Flat-screen disks
monitors DVD

Figure 2.5
© 2006 Prentice Hall, Inc. 4–6
 Product Life Cycle
Introduction Growth Maturity Decline
Product design Forecasting Standardization Little product
and critical differentiation
Less rapid
development Product and product changes Cost
OM Strategy/Issues

critical process – more minor minimization

Frequent reliability changes Overcapacity
product and Competitive Optimum in the
process design product capacity industry
changes improvements Increasing Prune line to
Short production and options stability of eliminate
runs Increase capacity process items not
High production returning
Shift toward Long production
costs good margin
product focus runs
Limited models Reduce
Enhance Product
Attention to distribution improvement capacity
quality and cost cutting

Figure 2.5
© 2006 Prentice Hall, Inc. 4–7
 Types of Forecasts
þ Economic forecasts
þ Address business cycle – inflation rate,
money supply, housing starts, etc.
þ Technological forecasts
þ Predict rate of technological progress
þ Impacts development of new products
þ Demand forecasts
þ Predict sales of existing product

© 2006 Prentice Hall, Inc. 4–8

 Strategic Importance of
Forecasting

þ Human Resources – Hiring, training,

laying off workers
þ Capacity – Capacity shortages can
result in undependable delivery, loss
of customers, loss of market share
þ Supply-Chain Management – Good
supplier relations and price advance

© 2006 Prentice Hall, Inc. 4–9

 Seven Steps in Forecasting
þ Determine the use of the forecast
þ Select the items to be forecasted
þ Determine the time horizon of the
forecast
þ Select the forecasting model(s)
þ Gather the data
þ Make the forecast
þ Validate and implement results
© 2006 Prentice Hall, Inc. 4 – 10
 Forecasting Approaches
Qualitative Methods
þ Used when situation is vague
and little data exist
þ New products
þ New technology
þ Involves intuition, experience
þ e.g., forecasting sales on Internet

© 2006 Prentice Hall, Inc. 4 – 11

 Forecasting Approaches
Quantitative Methods
þ Used when situation is ‘stable’ and
historical data exist
þ Existing products
þ Current technology
þ Involves mathematical techniques
þ e.g., forecasting sales of color
televisions

© 2006 Prentice Hall, Inc. 4 – 12

 Overview of Qualitative
Methods
þ Jury of executive opinion
þ Pool opinions of high-level
executives, sometimes augment by
statistical models
þ Delphi method
þ Panel of experts, queried iteratively

© 2006 Prentice Hall, Inc. 4 – 13

 Overview of Qualitative
Methods
þ Sales force composite
þ Estimates from individual
salespersons are reviewed for
reasonableness, then aggregated
þ Consumer Market Survey
þ Ask the customer

© 2006 Prentice Hall, Inc. 4 – 14

 Jury of Executive Opinion
þ Involves small group of high-level
managers
þ Group estimates demand by working
together
þ Combines managerial experience with
statistical models
þ Relatively quick
þ ‘Group-think’
disadvantage

© 2006 Prentice Hall, Inc. 4 – 15

 Sales Force Composite
þ Each salesperson projects his or
her sales
þ Combined at district and national
levels
þ Sales reps know customers’ wants
þ Tends to be overly optimistic

© 2006 Prentice Hall, Inc. 4 – 16

 Delphi Method
þ Iterative group Decision Makers
(Evaluate
process, responses and
continues until make decisions)
consensus is
reached Staff
(Administering
þ 3 types of survey)
participants
þ Decision makers
þ Staff Respondents
(People who can
þ Respondents make valuable
judgments)
© 2006 Prentice Hall, Inc. 4 – 17
 Consumer Market Survey

þ Ask customers about purchasing

plans
þ What consumers say, and what
they actually do are often different
þ Sometimes difficult to answer

© 2006 Prentice Hall, Inc. 4 – 18

 Overview of Quantitative
Approaches
1. Naive approach
2. Moving averages
Time-Series
3. Exponential Models
smoothing
4. Trend projection
Associative
5. Linear regression Model

© 2006 Prentice Hall, Inc. 4 – 19

 Time Series Forecasting
þ Set of evenly spaced numerical
data
þ Obtained by observing response
variable at regular time periods
þ Forecast based only on past
values
þ Assumes that factors influencing
past and present will continue
influence in future

© 2006 Prentice Hall, Inc. 4 – 20

 Trend Component
þ Persistent, overall upward or
downward pattern
þ Changes due to population,
technology, age, culture, etc.
þ Typically several years
duration

© 2006 Prentice Hall, Inc. 4 – 21

 Seasonal Component
þ Regular pattern of up and
down fluctuations
þ Due to weather, customs, etc.
þ Occurs within a single year
Number of
Period Length Seasons
Week Day 7
Month Week 4-4.5
Month Day 28-31
Year Quarter 4
Year Month 12
Year Week 52
© 2006 Prentice Hall, Inc. 4 – 22
 Cyclical Component
þ Repeating up and down movements
þ Affected by business cycle, political,
and economic factors
þ Multiple years duration
þ Often causal or
associative
relationships

0 5 10 15 20
© 2006 Prentice Hall, Inc. 4 – 23
 Random Component
þ Erratic, unsystematic, ‘residual’
fluctuations
þ Due to random variation or
unforeseen events
þ Short duration and
nonrepeating

M T W T F
© 2006 Prentice Hall, Inc. 4 – 24
 Naive Approach
þ Assumes demand in next period is
the same as demand in most
recent period
þ e.g., If May sales were 48, then June
sales will be 48
þ Sometimes cost effective and
efficient

© 2006 Prentice Hall, Inc. 4 – 25

 Moving Average Method
þ MA is a series of arithmetic means
þ Used if little or no trend
þ Used often for smoothing
þ Provides overall impression of data
over time

∑ demand in previous n periods

Moving average = n

© 2006 Prentice Hall, Inc. 4 – 26

 Moving Average Example
Actual 3-Month
Month Shed Sales Moving Average
January 10
February 12
March 13
April 16 (10 + 12 + 13)/3 = 11 2/3
May 19 (12 + 13 + 16)/3 = 13 2/3
June 23 (13 + 16 + 19)/3 = 16
July 26 (16 + 19 + 23)/3 = 19 1/3

© 2006 Prentice Hall, Inc. 4 – 27

 Weighted Moving Average

þ Used when trend is present

þ Older data usually less important
þ Weights based on experience and
intuition

∑ (weight for period n)

Weighted x (demand in period n)
moving average = ∑ weights

© 2006 Prentice Hall, Inc. 4 – 28

 Weights Applied Period
Weighted Moving Average
3 Last month
2 Two months ago
1 Three months ago
6 Sum of weights

Actual 3-Month Weighted

Month Shed Sales Moving Average
January 10
February 12
March 13
April 16 [(3 x 13) + (2 x 12) + (10)]/6 = 121/6
May 19 [(3 x 16) + (2 x 13) + (12)]/6 = 141/3
June 23 [(3 x 19) + (2 x 16) + (13)]/6 = 17
July 26 [(3 x 23) + (2 x 19) + (16)]/6 = 201/2

© 2006 Prentice Hall, Inc. 4 – 29

 Correlation
þ How strong is the linear
relationship between the
variables?
þ Correlation does not necessarily
imply causality!
þ Coefficient of correlation, r,
measures degree of association
þ Values range from -1 to +1

© 2006 Prentice Hall, Inc. 4 – 30

 Forecasting in the Service
Sector
þ Presents unusual challenges
þ Special need for short term records
þ Needs differ greatly as function of
industry and product
þ Holidays and other calendar events
þ Unusual events

© 2006 Prentice Hall, Inc. 4 – 31

 Operations
Management
Chapter 8 –
Location Strategies
PowerPoint presentation to accompany
Heizer/Render
Principles of Operations Management, 6e
Operations Management, 8e

© 2006
© 2006 Prentice
Prentice Hall, Inc. Hall, Inc. 4 – 32
 Learning Objectives
• When you complete this chapter you should be
able to :
• Identify or define :
- Objectives of location strategy .
- International location issues.
- Clustering .
- Geographic information systems .

© 2006 Prentice Hall, Inc. 4 – 33

 Learning Objectives
• Define or explain the three methods
of solving the location decisions .
- Factor rating method .
- Locational break even analysis .

© 2006 Prentice Hall, Inc. 4 – 34

 Location Strategy
þ One of the most important decisions
a firm makes
þ Increasingly global in nature
þ Long term impact and decisions are
difficult to change

© 2006 Prentice Hall, Inc. 4 – 35

 Location Strategy
þ The objective is to maximize the
benefit of location to the firm

© 2006 Prentice Hall, Inc. 4 – 36

 Location Strategy
Location options include :
• Expanding an existing facility
instead of moving .
• Maintaining the current sites while
adding another facility elsewhere , or
• Closing the existing facility and
moving to another location .

© 2006 Prentice Hall, Inc. 4 – 37

 Location and Costs
• Because location is such a significant cost
driver , location has the power to make ( or break
) a company business strategy (Long-term
decisions )
• Location decisions based on a low-cost strategy
require careful consideration .
• Once management is committed to a specific
location , many costs are firmly in place and very
difficult to replace (change)

© 2006 Prentice Hall, Inc. 4 – 38

 Location and Innovation
þ Four key attributes when strategy is
based on innovation
þ The presence of high-quality and
specialized inputs , such as scientific and
technical talent .
þ An environment that encourages investment
and local rivalry
þ Pressure and insight gained from
sophisticated local market
þ Local presence of related and supporting
industries
© 2006 Prentice Hall, Inc. 4 – 39
 Factors that affect location Decisions
• Selecting a facility location is becoming much more
complex with the globalization of the workplace .
• Globalization has taken place because of the development
of :
1- markets economics .
2- better international communications
3- more rapid , reliable travel and shipping
4- ease of capital flow between countries, and
5- high differences labor costs .
Ø Many firms now consider opening new offices , factories
, retail stores , or banks outside their home country .
Location decisions transcend national borders .
© 2006 Prentice Hall, Inc. 4 – 40
 Factors that affect location Decisions
• One approach to selecting a country is to identify
what the parent organization believes are critical
success factor needed to achieve competitive
advantage .
• Once a firm decides which country is best for its
location , it focuses on a region of the chosen
country and a community .
• The final step in the location decision process is
choosing a specific site within a community .
• The company must pick the one location that is
best suited for shipping and receiving , zoning ,
utilities ,size ,and cost .

© 2006 Prentice Hall, Inc. 4 – 41

 Factors that affect location Decisions
Country Decision Critical Success Factors
1. Political risks, government
rules, attitudes, incentives
2. Cultural and economic
issues
3. Location of markets
4. Labor availability,
attitudes, productivity,
costs
5. Availability of supplies,
communications, energy
Figure 8.1 6. Exchange rates and
© 2006 Prentice Hall, Inc.
currency risks 4 – 42
 Factors that affect location Decisions
Region/ Critical Success Factors
Community
Decision 1. Corporate desires
2. Attractiveness of region
3. Labor availability, costs,
MN
attitudes towards unions
WI
4. Costs and availability of utilities
MI
5. Environmental regulations
IL IN
OH 6. Government incentives and
fiscal policies
7. Proximity to raw materials and
customers
Figure 8.1
8. Land/construction costs
© 2006 Prentice Hall, Inc. 4 – 43
 Factors that affect location Decisions
Site Decision Critical Success Factors
1. Site size and cost
2. Air, rail, highway, and
waterway systems
3. Zoning restrictions
4. Proximity (nearness) of
services/ supplies
needed
5. Environmental impact
issues
Figure 8.1

© 2006 Prentice Hall, Inc. 4 – 44

 Factors that affect location Decisions

• Besides globalization , a number of other factors

affect the location decisions . Among these are:
- labor productivity ,
- foreign exchange ,
- culture ,
- changing attitudes toward the industry , and
- proximity to markets , suppliers , and
competitor's .
© 2006 Prentice Hall, Inc. 4 – 45
 Factors That Affect
Location Decisions
þ Labor productivity
þ Wage rates are not the only cost
þ Lower productivity may increase total cost

Labor cost per day

= cost per unit
Productivity (units per day)

Connecticut plant Juarez , Mexico , plant

$70 $25
= $1.17 per unit = $1.25 per unit
60 units 20 units

© 2006 Prentice Hall, Inc. 4 – 46

 Factors That Affect
Location Decisions
þ Exchange rates and currency risks
þ Can have a significant impact on cost structure
þ Rates change over time
þ Costs : we can divide location costs into two categories :
þ Tangible costs - are easily measured costs such
as utilities, labor, materials, taxes , depreciation ..
þ Intangible costs - are less easy to quantify and
include quality of education, public transportation
facilities , community attitude towards industry and
the company , quality-of-life .
© 2006 Prentice Hall, Inc. 4 – 47
 Factors That Affect
Location Decisions
þ Attitudes
þ Attitudes of national, state, local
governments toward private and
intellectual property, zoning, pollution,
employment stability
þ Worker attitudes towards turnover, unions,
absenteeism .
þ Globally cultures have different attitudes
towards punctuality, legal, and ethical
issues
© 2006 Prentice Hall, Inc. 4 – 48
 Factors That Affect
Location Decisions
þ Proximity to markets
þ Very important to locate near customers ( services
organization ) e.g. restaurants , posts offices , or
barbers
þ JIT systems or high transportation costs may make it
important to manufacturers firms

© 2006 Prentice Hall, Inc. 4 – 49

 Factors That Affect
Location Decisions
þ Proximity to suppliers
þ Firms locate near their raw materials and
suppliers because of :
1- Perishability (Perishable goods) e.g.
bakeries , dairy plants , frozen foods deal with
perishable raw materials
2- high transportation costs.
3- bulky products , e.g. steel producers using
coal and iron ore )

© 2006 Prentice Hall, Inc. 4 – 50

 Factors That Affect
Location Decisions
þ Proximity to competitors :
þ Called clustering
þ Clustering : occurs when a major resource is
found in that region . Such resources include:
natural resources, information resources ,
venture capital resources , and talent
resources
þ Found in both manufacturing and service
industries .
þ Table 8.3 on page 317 presents seven
examples of industries that explain clustering
, and the reasons why .
© 2006 Prentice Hall, Inc. 4 – 51
 Methods of Evaluating Location
Alternatives
• Four methods are used for solving location
problems :
- The factor- rating method ,
- Locational break- even analysis .
- The center – of – gravity method .
- The transportation method .

© 2006 Prentice Hall, Inc. 4 – 52

 The Factor – Rating Method
• Factor - rating method : Allocation method
that instills objectivity into the process of
identifying hard – to – evaluate costs .

© 2006 Prentice Hall, Inc. 4 – 53

 The Factor – Rating Method
• The factor – rating method has six steps :
1- Develop a list of relevant factors called critical
success factors .
2- Assign a weight to each factor to reflect its
relative importance in the company objectives .
3- Develop a scale for each factor ( e.g. 1 to 10 or 1
to 100 points ) .

© 2006 Prentice Hall, Inc. 4 – 54

 The Factor – Rating Method

4- Have management score each location for

each factor , using the scale in step 3 .
5- Multiply the score by the weights for each
factor and total the score for each location .
6- Make a recommendation based on the
maximum point , considering the results of
quantitative approaches as well .

© 2006 Prentice Hall, Inc. 4 – 55

 The Factor – Rating Method
Example :
Five Flags over – Florida , a U.S chain of 10 family
– oriented theme parks , has decided to expand
overseas by operating it first park in Europe . The
rating sheet in the table below list critical factors
that management has decided are important , their
weighting and their rating for two possible sites :
France and Denmark

© 2006 Prentice Hall, Inc. 4 – 56

 The Factor – Rating Method
Weights, Scores, and Solution
Critical Success Weights Scores Weighted Scores
Factor ( Out of 100)
France France Denmark
Denmark

0.25 70 ( .25) ( 70) =17.5

Labor availability 60 (.25)( 60)= 15.0
and attitude
People –to- car 0 .5 50 (0.5)( 50)= 2.5
60 (. 5)( 60)= 3.0
ratio
Per Capita Income 0 .10 85 80 (.10)( 85)= 8.5 (. 10)( 80)= 8.0

Tax Structure 0.39 75 70 (.39)( 75)= 29.3

(. 39)( 70)= 27.3
Education and 0.21 60 70 (.21)( 60)= 14.7
(.21)( 70)= 14.7
Health
Total 1.00 70.4 68.0

© 2006 Prentice Hall, Inc.

The French Location is Preferable 4 – 57
 Locational
Break-Even Analysis

þ Method of cost-volume analysis used to make an

economic comparison of location alternatives for
industrial locations
þ Three steps in the method
1. Determine fixed and variable costs for each location
2. Plot the cost for each location .
3. Select location with lowest total cost for expected
production volume .

© 2006 Prentice Hall, Inc. 4 – 58

 Locational
Break-Even Analysis
• A manufacturer of automobile carburetors is
considering three locations – Akron ,Bowling,
Green and Chicago – for a new plant .Cost
studies indicate that fixed costs per year at the
sites are $30000 ,$60000, and $ 110000
,respectively : and variable costs are$ 75 per unit
,$45 per unit and $ 25 per unit , respectively .
• The expected selling price of the carburetors
produced is $ 120 .The company wishes to find
the most economical location for an expected
volume of 2000 units per year .

© 2006 Prentice Hall, Inc. 4 – 59

 Locational
Break-Even Analysis
• The total costs ( fixed costs + variable costs) at
the expected volume of output .
For Akorn
Total costs = $ 30000+ $ 75( 2000) = $180000
For Bowling Green
Total costs = $60000+$45( 2000) = $150000
For Chicago
Total costs = $110000+ $ 25( 2000) = $160000
© 2006 Prentice Hall, Inc. 4 – 60
© 2006 Prentice Hall, Inc. 4 – 61
 Locational
Break-Even Analysis
• With an expected volume of 2000 units per year .
Bowling Green provides the lowest location . The
expected profit is
Total revenue - total cost =$12(2000)-$15000=$90000 per year
The crossover point for Akorn and Bowling Green is
30000+75(x)=60000+45(x)
30 x = 30000
x = 1000

© 2006 Prentice Hall, Inc. 4 – 62

 Locational
Break-Even Analysis
and the crossover point for bowling Green
and Chicago is
60000+ 45(x) = 110000+25(x)
20 (x) = 50000
x= 2500

© 2006 Prentice Hall, Inc. 4 – 63

 END

© 2006 Prentice Hall, Inc. 4 – 64

 Center-of-Gravity Method
þ A mathematical technique used for
finding the best location for a single
distribution point that services several
stores or areas
þ Considers
þ Location of markets
þ Volume of goods shipped to those markets
þ Shipping cost in finding the best location for
distribution center (or distance)
© 2006 Prentice Hall, Inc. 4 – 65
 Transportation Model
þ A technique for solving a class of linear
programming problems .
þ Finds amount to be shipped from several
points of supply to several points of
demand
þ Solution will minimize total production and
shipping costs
þ A special class of linear programming
problems
© 2006 Prentice Hall, Inc. 4 – 66
 Worldwide Distribution of
Volkswagens and Parts

Figure 8.4
© 2006 Prentice Hall, Inc. 4 – 67