SyllabusSyllabus• Class 1 (Jan 5): chap 1; chap 2, case studyClass 1 (Jan 5): chap 1; chap 2, case study• Class 2: (Jan 12) No ClassClass 2: (Jan 12) No Class• Class 3: (Jan 19) Chap 6, Chap 8Class 3: (Jan 19) Chap 6, Chap 8• Class 4: (Jan 26) chap 10, chap 11, Chap 17(Take home exam)Class 4: (Jan 26) chap 10, chap 11, Chap 17(Take home exam)• Class 5: (Feb 2) Chap 5, Chap 7Class 5: (Feb 2) Chap 5, Chap 7• Class 6: (Feb 9) Chap 9, Chap 12, 14Class 6: (Feb 9) Chap 9, Chap 12, 14• Class 7: (Feb 16) Chap 15, Reverse Logistics – need “The Forklifts Class 7: (Feb 16) Chap 15, Reverse Logistics – need “The Forklifts
Have Nothing To Do!” Available in the Lewis and Clark BookstoreHave Nothing To Do!” Available in the Lewis and Clark Bookstore• Class 8: (Feb 23) Cabela’s TourClass 8: (Feb 23) Cabela’s Tour• Class 9: (Mar 2) Chap 13; Chap 16, Chap 4 (take home exam)Class 9: (Mar 2) Chap 13; Chap 16, Chap 4 (take home exam)• Other requirements: Other requirements:
→→visit Harley-Davidson Plant in Kansas City to see visit Harley-Davidson Plant in Kansas City to see operations management in practice and write a 3-5 page paper operations management in practice and write a 3-5 page paper comparing the class slides and readings to the Harley operationscomparing the class slides and readings to the Harley operations
→ → Home Work Home Work
Supply Chain Supply Chain ManagementManagement
Supply Chain Supply Chain Management Management
• First appearance – Financial Times • Importance -
→ Inventory ~ 14% of GDP→ GDP ~ $12 trillion→ Warehousing/Trans ~ 9% of GDP→ Rule of Thumb - $12 increase in sales to = $1 savings in Supply Chain
• 1982 Peter Drucker – last frontier• Supply Chain problems can cause ≤ 11% drop in stock
price• Customer perception of company
SCORSCOR
Reference: www.supply-chain.org
Supply ChainSupply Chain All activities associated with the flow All activities associated with the flow
and transformation of goods and and transformation of goods and services from raw materials to the end services from raw materials to the end user, the customeruser, the customer
A sequence of business activities A sequence of business activities from suppliers through customers from suppliers through customers that provide the products, services, that provide the products, services, and information to achieve customer and information to achieve customer satisfactionsatisfaction
Supply ChainSupply Chain
“The global network used to deliver products and services from raw materials to end customers through an engineered flow of information, physical distribution, and cash.”
APICS Dictionary, 10th ed.
Supply Chain ManagementSupply Chain Management
Synchronization of activities Synchronization of activities required to achieve maximum required to achieve maximum competitive benefitscompetitive benefits
Coordination, cooperation, and Coordination, cooperation, and communicationcommunication
Rapid flow of informationRapid flow of informationVertical integrationVertical integration
Supply Chain UncertaintySupply Chain Uncertainty
Forecasting, lead times, batch Forecasting, lead times, batch ordering, price fluctuations, and ordering, price fluctuations, and inflated orders contribute to inflated orders contribute to variabilityvariability
Inventory is a form of insuranceInventory is a form of insuranceDistorted information is one of Distorted information is one of
the main causes of uncertainty the main causes of uncertainty Bullwhip effectBullwhip effect
Information in the Information in the Supply ChainSupply Chain
Centralized coordination of Centralized coordination of information flowsinformation flows
Integration of transportation, Integration of transportation, distribution, ordering, and productiondistribution, ordering, and production
Direct access to domestic and global Direct access to domestic and global transportation and distribution transportation and distribution channelschannels
Locating and tracking the movement Locating and tracking the movement of every item in the supply chain - of every item in the supply chain - RFIDRFID
Information in the Information in the Supply ChainSupply Chain
Consolidation of purchasing from all Consolidation of purchasing from all supplierssuppliers
Intercompany and intracompany Intercompany and intracompany information accessinformation access
Electronic Data InterchangeElectronic Data Interchange Data acquisition at the point of origin Data acquisition at the point of origin
and point of saleand point of sale Instantaneous updating of inventory Instantaneous updating of inventory
levelslevels Visibility Visibility
Electronic BusinessElectronic Business Replacement of physical processes Replacement of physical processes
with electronic oneswith electronic ones Cost and price reductionsCost and price reductions Reduction or elimination of Reduction or elimination of
intermediariesintermediaries Shortening transaction times for Shortening transaction times for
ordering and deliveryordering and delivery Wider presence and increased visibilityWider presence and increased visibility
In Theory:
Electronic BusinessElectronic Business Greater choices and more information for Greater choices and more information for
customerscustomers Improved serviceImproved service Collection and analysis of customer data Collection and analysis of customer data
and preferencesand preferences Virtual companies with lower pricesVirtual companies with lower prices Leveling the playing field for smaller Leveling the playing field for smaller
companiescompanies Gain global access to markets & customersGain global access to markets & customers
Electronic Data InterchangeElectronic Data Interchange
Computer-to-computer exchange of Computer-to-computer exchange of business documents in a standard business documents in a standard formatformat
Quick access, better customer service, Quick access, better customer service, less paperwork, better communication, less paperwork, better communication, increased productivity, improved increased productivity, improved tracing and expediting, improves billing tracing and expediting, improves billing and cost efficiencyand cost efficiency
Bar CodesBar Codes
Computer readable codes attached to Computer readable codes attached to items flowing through the supply chainitems flowing through the supply chain
Generates point-of-sale data which is Generates point-of-sale data which is useful for determining sales trends, useful for determining sales trends, ordering, production scheduling, and ordering, production scheduling, and deliver plansdeliver plans
1234 5678
IT IssuesIT Issues Increased benefits and sophistication Increased benefits and sophistication
come with increased costscome with increased costs Efficient web sites do not necessarily Efficient web sites do not necessarily
mean the rest of the supply chain will mean the rest of the supply chain will be as efficientbe as efficient
Security problems are very real – Security problems are very real – camera phones, cell phones, thumb camera phones, cell phones, thumb drivesdrives
Collaboration and trust are important Collaboration and trust are important elements that may be new to business elements that may be new to business relationshipsrelationships
SuppliersSuppliers Purchased materials account for about Purchased materials account for about
half of manufacturing costshalf of manufacturing costs Materials, parts, and service must be Materials, parts, and service must be
delivered on time, of high quality, and delivered on time, of high quality, and low costlow cost
Suppliers should be integrated into Suppliers should be integrated into their customers’ supply chainstheir customers’ supply chains
Partnerships should be establishedPartnerships should be established On-demand delivery (JIT) is a frequent On-demand delivery (JIT) is a frequent
requirement - what is JIT and does it requirement - what is JIT and does it work?work?
SourcingSourcing Relationship between customers and Relationship between customers and
suppliers focuses on collaboration and suppliers focuses on collaboration and cooperationcooperation
Outsourcing has become a long-term Outsourcing has become a long-term strategic decisionstrategic decision
Organizations focus on core Organizations focus on core competenciescompetencies
Single-sourcing is Single-sourcing is increasingly a part increasingly a part of supplier relationsof supplier relations
How doessingle source
differ from solesource?
DistributionDistribution The actual movement of products and The actual movement of products and
materials between locationsmaterials between locations Handling of materials and products at Handling of materials and products at
receiving docks, storing products, receiving docks, storing products, packaging, and shippingpackaging, and shipping
Often called logisticsOften called logistics Driving force today Driving force today
is speedis speed Particularly important Particularly important
for Internet dot-comsfor Internet dot-coms
Distribution Centers Distribution Centers and Warehousingand Warehousing
DCs are some of the largest business DCs are some of the largest business facilities in the United Statesfacilities in the United States
Trend is for more frequent orders in Trend is for more frequent orders in smaller quantitiessmaller quantities
Flow-through facilities and automated Flow-through facilities and automated material handlingmaterial handling
Final assembly and product Final assembly and product configuration configuration (postponement) (postponement) may may be done at the DCbe done at the DC
Warehouse Management Warehouse Management SystemsSystems
Highly automated systemsHighly automated systems A good system will control item A good system will control item
slotting, pick lists, packing, and slotting, pick lists, packing, and shippingshipping
Most newer systems include Most newer systems include transportation management (load transportation management (load management/configuration), order management/configuration), order management, yard management, labor management, yard management, labor management, warehouse optimizationmanagement, warehouse optimization
Vendor-Managed InventoryVendor-Managed Inventory Not a new concept – same process used by Not a new concept – same process used by
bread deliveries to stores for decadesbread deliveries to stores for decades Reduces need for warehousingReduces need for warehousing Increased speed, reduced errors, and Increased speed, reduced errors, and
improved serviceimproved service Onus is on the supplier to keep the shelves Onus is on the supplier to keep the shelves
full or assembly lines runningfull or assembly lines running variation of JITvariation of JIT Proctor&Gamble - Wal-MartProctor&Gamble - Wal-Mart DLA – moving from a manager of supplies to DLA – moving from a manager of supplies to
a manager of suppliersa manager of suppliers Direct Vendor Deliveries – loss of visibilityDirect Vendor Deliveries – loss of visibility
Collaborative Distribution Collaborative Distribution and Outsourcingand Outsourcing
Collaborative planning, forecasting, and Collaborative planning, forecasting, and replenishment (CPFR) started by Nabiscoreplenishment (CPFR) started by Nabisco
Allows suppliers to know what is really needed Allows suppliers to know what is really needed and whenand when
Electronic-based exchange of data and Electronic-based exchange of data and informationinformation
Significant decrease in inventory levels and Significant decrease in inventory levels and more efficient logistics - maybe not!more efficient logistics - maybe not!
Companies work together for benefit of all of Companies work together for benefit of all of the supply chainthe supply chain
TransportationTransportation
Common methods are railroads, Common methods are railroads, trucking, water, air, intermodal, trucking, water, air, intermodal, package carriers, and pipelinespackage carriers, and pipelines
RailroadsRailroads
150,000 miles in US150,000 miles in USLow cost, high-volumeLow cost, high-volume Improving flexibilityImproving flexibility
intermodal serviceintermodal service double stackingdouble stacking
Complaints: slow, inflexible, large loadsAdvantages: large/bulky loads, intermodal
Award-Winning Service Award-Winning Service RecognitionRecognition
Wal-Mart Stores, Inc.Carrier of the Year – 5 years in a row
TargetOnly rail carrier to receive the Vice President’s Award
American Honda Motor CompanyPremier Partner – 4 consecutive years
Toyota’s North American Partsand Logistics Division (NAPLD)Rail Carrier of the Year – 3 consecutive years
KIACarrier of the Year
SchneiderCarrier of the Year – 3 consecutive years
Federal ExpressOnly rail carrier to receive outstandingsupplier award - 2 years in a row
United Parcel Service99.5% failure free, damage free and on-time rating from United Parcel Service every year since 1995
Most used mode in US -75% of total Most used mode in US -75% of total freight (not total weight)freight (not total weight)
Flexible, small loadsFlexible, small loads Consolidation, Consolidation,
Internet load match sitesInternet load match sites Single sourcing reduces number of Single sourcing reduces number of
trucking firms serving a companytrucking firms serving a company Truck load (TL) vs. Less Than Truck Truck load (TL) vs. Less Than Truck
Load (LTL)Load (LTL)
TruckingTrucking
AirAirRapidly growing segment of Rapidly growing segment of
transportation industrytransportation industryLightweight, small itemsLightweight, small itemsQuick, reliable, expensive Quick, reliable, expensive
(relatively expensive depending (relatively expensive depending on costs of not getting item there)on costs of not getting item there)
Major airlines and US Postal Major airlines and US Postal Service, UPS, FedEx, DHLService, UPS, FedEx, DHL
Package CarriersPackage Carriers FedEx, UPS, US Postal Service, DHLFedEx, UPS, US Postal Service, DHL Significant growth driven by Significant growth driven by
e-businesses and the move to smaller e-businesses and the move to smaller shipments and consumer desire to have it shipments and consumer desire to have it NOWNOW
Use several modes Use several modes of transportationof transportation
Expensive - relative!!Expensive - relative!! Fast and reliable - relative!!Fast and reliable - relative!! Innovative use of technologies in some Innovative use of technologies in some
casescases Online tracking – some better than othersOnline tracking – some better than others
IntermodalIntermodalCombination of several modes of Combination of several modes of
transportationtransportationMost common are truck/rail/truck Most common are truck/rail/truck
and truck/water/rail/truckand truck/water/rail/truckEnabled by the use of containers – Enabled by the use of containers –
the development of the 20 and 40 the development of the 20 and 40 foot containers significantly foot containers significantly changed the face of shippingchanged the face of shipping
~2% of all US cargo via intermodal~2% of all US cargo via intermodal
WaterWaterOne of oldest means of transportOne of oldest means of transportLow-cost, high-volume, slow Low-cost, high-volume, slow
(relative)(relative)Security - sheer volume - millions of Security - sheer volume - millions of
containers annuallycontainers annuallyBulky, heavy and/or large itemsBulky, heavy and/or large itemsStandardized shipping containers Standardized shipping containers
improve serviceimprove serviceThe most common form of The most common form of
international shippinginternational shipping
PipelinesPipelinesPrimarily for oil & refined oil Primarily for oil & refined oil
productsproductsSlurry lines carry coal or kaolinSlurry lines carry coal or kaolinHigh initial capital investmentHigh initial capital investmentLow operating costsLow operating costsCan cross difficult terrainCan cross difficult terrain
Global Supply ChainGlobal Supply Chain
Free trade & global opportunitiesFree trade & global opportunitiesNations form trading groupsNations form trading groupsNo tariffs or dutiesNo tariffs or dutiesFreely transport Freely transport
goods across bordersgoods across bordersSecurity!!Security!!
Global Supply Chain Global Supply Chain ProblemsProblems
National and regional differencesNational and regional differencesCustoms, business practices, and Customs, business practices, and
regulationsregulationsForeign markets are Foreign markets are
not homogeneousnot homogeneousQuality can be a Quality can be a
major issuemajor issue
Security Security • ~ 10+ million containers annually• Customs-Trade Partnership Against Terrorism (C-
TPAT)• Port Security – SAFE Ports Act; Scanning of all
Containers• Cost - $2 billion closing of major port• 66% of all goods into US comes through 20 major
ports• 44% through LA/Long Beach• Cost of attack on major port estimated at $20
Billion
Chapter 11Chapter 11
ForecastingForecasting
Forecasting SurveyForecasting Survey
• How far into the future do you typically project when trying to forecast the health of your industry?
less than 4 months 3% 4-6 months 12%
7-12 months28% > 12 months
57%Fortune Council survey, Nov 2005
Indices to forecast health Indices to forecast health of industryof industry
• Consumer price index 51%• Consumer Confidence index 44%• Durable goods orders 20%• Gross Domestic Product 35%• Manufacturing and trade inventories and
sales 27%• Price of oil/barrel 34%• Strength of US $ 46%• Unemployment rate 53%• Interest rates/fed funds 59%
Fortune Council survey, Nov 2005
Forecasting ImportanceForecasting Importance
• Improving customer demand forecasting and sharing the information downstream will allow more efficient scheduling and inventory management
• Boeing, 1997: $2.6 billion write down due to “raw material shortages, internal and supplier parts shortages” Wall Street Journal, Oct 23, 1987
Forecasting ImportanceForecasting Importance
• “Second Quarter sales at US Surgical Corporation decline 25%, resulting in a $22 mil loss…attributed to larger than anticipated inventories on shelves of hospitals.” US Surgical Quarterly, Jul 1993
• “IBM sells out new Aetna PC; shortage may cost millions in potential revenue.” Wall Street Journal, Oct 7, 1994
Principles of ForecastingPrinciples of Forecasting• Forecasts are usually wrong
• every forecast should include an estimate of error
• Forecasts are more accurate for families or groups
• Forecasts are more accurate for nearer periods.
Important Factors to Important Factors to Improve ForecastingImprove Forecasting
• Record Data in the same terms as needed in the forecast – production data for production forecasts; time periods
• Record circumstances related to the data
• Record the demand separately for different customer groups
Forecast TechniquesForecast Techniques
• Extrinsic Techniques – projections based on indicators that relate to products – examples
• Intrinsic – historical data used to forecast (most common)
ForecastingForecasting• Forecasting errors can increase the total
cost of ownership for a product- inventory carrying costs
- obsolete inventory- lack of sufficient inventory
- quality of products due to accepting marginal products to prevent stockout
ForecastingForecasting• Essential for smooth operations of
business organizations• Estimates of the occurrence, timing,
or magnitude of uncertain future events
• Costs of forecasting: excess labor; excess materials; expediting costs; lost revenues
ForecastingForecastingPredicting future eventsPredicting future eventsUsually demand behavior Usually demand behavior
over a time frameover a time frameQualitative methodsQualitative methods
Based on subjective methodsBased on subjective methods
Quantitative methodsQuantitative methods Based on mathematical formulasBased on mathematical formulas
Impact of Just-in-TimeImpact of Just-in-Timeon Forecastingon Forecasting
• Just in time as a inventory method
• Just in time as a Continuous process improvement program
• Just in time - one on the shelf
• Usage factors
• Single order vs. Case order
Strategic Role of Strategic Role of ForecastingForecasting
Focus on supply chain managementFocus on supply chain management Short term role of product demandShort term role of product demand Long term role of new products, Long term role of new products,
processes, and technologiesprocesses, and technologiesFocus on Total Quality ManagementFocus on Total Quality Management
Satisfy customer demandSatisfy customer demand Uninterrupted product flow with no Uninterrupted product flow with no
defective itemsdefective itemsNecessary for strategic planningNecessary for strategic planning
Strategic Role of Strategic Role of ForecastingForecasting
Focus on supply chain managementFocus on supply chain management Short term role of product demandShort term role of product demand Long term role of new products, Long term role of new products,
processes, and technologiesprocesses, and technologiesFocus on Total Quality ManagementFocus on Total Quality Management
Satisfy customer demandSatisfy customer demand Uninterrupted product flow with no Uninterrupted product flow with no
defective itemsdefective itemsNecessary for strategic planningNecessary for strategic planning
Total Quality ManagementTotal Quality Management• Management approach to long term
success through customer satisfaction
• Total Quality Control - process of creating and producing quality goods and services that meet the expectations of the customer
• quality - conformance to requirements or fitness for use
Trumpet of DoomTrumpet of Doom• As forecast horizon increases, so does the
forecasting error (i.e., accuracy decreases) – shorten horizon by shortening of cycles or flow times
• Law of Large Numbers – as volume increases, relative variability decreases – forecasting error is smaller: goal – forecast at aggregate levels; collaborate; standardize parts
• Volume and activity increase at end of reporting periods – Krispy Kreme
Time FrameTime Frame Short-range, medium-Short-range, medium-
range, long-rangerange, long-range
Demand BehaviorDemand Behavior Trends, cycles, seasonal Trends, cycles, seasonal
patterns, randompatterns, random
Components of Components of Forecasting DemandForecasting Demand
Time FrameTime Frame
Short-range to medium-rangeShort-range to medium-range Daily, weekly monthly forecasts of Daily, weekly monthly forecasts of
sales datasales data Up to 2 years into the futureUp to 2 years into the future
Long-rangeLong-range Strategic planning of goals, products, Strategic planning of goals, products,
marketsmarkets Planning beyond 2 years into the futurePlanning beyond 2 years into the future
Demand BehaviorDemand BehaviorTrendTrend
gradual, long-term up or down gradual, long-term up or down movementmovement
CycleCycle up & down movement repeating over up & down movement repeating over
long time framelong time frameSeasonal patternSeasonal pattern
periodic oscillation in demand which periodic oscillation in demand which repeatsrepeats
Random movements follow no patternRandom movements follow no pattern
Forms of Forecast MovementForms of Forecast Movement
TimeTime(a) Trend(a) Trend
TimeTime(d) Trend with seasonal pattern(d) Trend with seasonal pattern
TimeTime(c) Seasonal pattern(c) Seasonal pattern
TimeTime(b) Cycle(b) Cycle
Dem
and
Dem
and
Dem
and
Dem
and
Dem
and
Dem
and
Dem
and
Dem
and
Random Random movementmovement
Figure 8.1Figure 8.1
Forecasting MethodsForecasting MethodsTime seriesTime series
Regression or causal modelingRegression or causal modeling
Qualitative methodsQualitative methods Management judgment, expertise, opinionManagement judgment, expertise, opinion Use management, marketing, purchasing, Use management, marketing, purchasing,
engineeringengineering
Delphi methodDelphi method Solicit forecasts from expertsSolicit forecasts from experts
Time Series MethodsTime Series MethodsStatistical methods using historical Statistical methods using historical
datadata Moving averageMoving average Exponential smoothingExponential smoothing Linear trend lineLinear trend line
Assume patterns will repeatAssume patterns will repeatNaive forecastsNaive forecasts
Forecast = data from last periodForecast = data from last period
Moving AverageMoving AverageAverage several periods of dataAverage several periods of dataDampen, smooth out changesDampen, smooth out changesUse when demand is stable with no Use when demand is stable with no
trend or seasonal patterntrend or seasonal patternstock market analysis - trend stock market analysis - trend
analysisanalysis
Moving AverageMoving AverageAverage several Average several
periods of dataperiods of dataDampen, smooth out Dampen, smooth out
changeschangesUse when demand is Use when demand is
stable with no trend stable with no trend or seasonal patternor seasonal pattern
Sum of Demand In n Periods
n
Simple Moving AverageSimple Moving Average
JanJan 120120FebFeb 9090MarMar 100100AprApr 7575MayMay 110110JuneJune 5050JulyJuly 7575AugAug 130130SeptSept 110110OctOct 9090
ORDERSORDERSMONTHMONTH PER MONTHPER MONTH
Example 8.1Example 8.1
JanJan 120120FebFeb 9090MarMar 100100AprApr 7575MayMay 110110JuneJune 5050JulyJuly 7575AugAug 130130SeptSept 110110OctOct 9090
ORDERSORDERSMONTHMONTH PER MONTHPER MONTH
Example 8.1Example 8.1
MAMAnovnov = = 33
==90 + 110 + 13090 + 110 + 130
33
= 110 orders for Nov= 110 orders for Nov
Simple Moving AverageSimple Moving Average
Daug+Dsep+Doct
JanJan 120120 ––FebFeb 9090 – –MarMar 100100 – –AprApr 7575 103.3103.3MayMay 110110 88.388.3JuneJune 5050 95.095.0JulyJuly 7575 78.378.3AugAug 130130 78.378.3SeptSept 110110 85.085.0OctOct 9090 105.0105.0NovNov – – 110.0110.0
ORDERSORDERS THREE-MONTHTHREE-MONTHMONTHMONTH PER MONTHPER MONTH MOVING AVERAGEMOVING AVERAGE
Example 8.1Example 8.1
Simple Moving AverageSimple Moving Average
JanJan 120120 ––FebFeb 9090 – –MarMar 100100 – –AprApr 7575 103.3103.3MayMay 110110 88.388.3JuneJune 5050 95.095.0JulyJuly 7575 78.378.3AugAug 130130 78.378.3SeptSept 110110 85.085.0OctOct 9090 105.0105.0NovNov – – 110.0110.0
ORDERSORDERS THREE-MONTHTHREE-MONTHMONTHMONTH PER MONTHPER MONTH MOVING AVERAGEMOVING AVERAGE
Example 8.1Example 8.1
MAMA55 = =
55
ii = 1= 1 DDii
55
==90 + 110 + 130 + 75 + 5090 + 110 + 130 + 75 + 50
55
= 91 orders for Nov= 91 orders for Nov
Simple Moving AverageSimple Moving Average
Example 8.1Example 8.1
Simple Moving AverageSimple Moving Average
JanJan 120120 –– – –FebFeb 9090 – – – –MarMar 100100 – – – –AprApr 7575 103.3103.3 – –MayMay 110110 88.388.3 – –JuneJune 5050 95.095.0 99.099.0JulyJuly 7575 78.378.3 85.085.0AugAug 130130 78.378.3 82.082.0SeptSept 110110 85.085.0 88.088.0OctOct 9090 105.0105.0 95.095.0NovNov – – 110.0110.0 91.091.0
ORDERSORDERS THREE-MONTHTHREE-MONTH FIVE-MONTHFIVE-MONTHMONTHMONTH PER MONTHPER MONTH MOVING AVERAGEMOVING AVERAGE MOVING AVERAGEMOVING AVERAGE
150 150 –
125 125 –
100 100 –
75 75 –
50 50 –
25 25 –
0 0 –| | | | | | | | | | |
JanJan FebFeb MarMar AprApr MayMay JuneJune JulyJuly AugAug SeptSept OctOct NovNov
Ord
ers
Ord
ers
MonthMonthFigure 8.2Figure 8.2
Smoothing EffectsSmoothing Effects
Smoothing EffectsSmoothing Effects150 150 –
125 125 –
100 100 –
75 75 –
50 50 –
25 25 –
0 0 –| | | | | | | | | | |
JanJan FebFeb MarMar AprApr MayMay JuneJune JulyJuly AugAug SeptSept OctOct NovNov
Ord
ers
Ord
ers
MonthMonth
ActualActual
Figure 8.2Figure 8.2
Smoothing EffectsSmoothing Effects150 150 –
125 125 –
100 100 –
75 75 –
50 50 –
25 25 –
0 0 –| | | | | | | | | | |
JanJan FebFeb MarMar AprApr MayMay JuneJune JulyJuly AugAug SeptSept OctOct NovNov
3-month3-month
ActualActual
Ord
ers
Ord
ers
MonthMonthFigure 8.2Figure 8.2
Smoothing EffectsSmoothing Effects150 150 –
125 125 –
100 100 –
75 75 –
50 50 –
25 25 –
0 0 –| | | | | | | | | | |
JanJan FebFeb MarMar AprApr MayMay JuneJune JulyJuly AugAug SeptSept OctOct NovNov
5-month5-month
3-month3-month
ActualActual
Ord
ers
Ord
ers
MonthMonthFigure 8.2Figure 8.2
Weighted Moving AverageWeighted Moving Average
Adjusts moving average Adjusts moving average method to more closely method to more closely reflect data fluctuationsreflect data fluctuations
Weighted Moving AverageWeighted Moving Average
WMAWMAnn = = ii = 1 = 1 WWii D Dii
wherewhere
WWii = the weight for period = the weight for period ii, ,
between 0 and 100 between 0 and 100 percentpercent
WWii = 1.00= 1.00
Adjusts Adjusts moving moving average average method to method to more closely more closely reflect data reflect data fluctuationsfluctuations
Weighted Moving Weighted Moving Average ExampleAverage Example
MONTH MONTH WEIGHT WEIGHT DATADATA
AugustAugust 17%17% 130130SeptemberSeptember 33%33% 110110OctoberOctober 50%50% 9090
Example 8.2Example 8.2
Weighted Moving Weighted Moving Average ExampleAverage Example
MONTH MONTH WEIGHT WEIGHT DATADATA
AugustAugust 17%17% 130130SeptemberSeptember 33%33% 110110OctoberOctober 50%50% 9090
November forecastNovember forecast WMAWMA33 = = 33
ii = 1 = 1 WWii D Dii
= (0.50)(90) + (0.33)(110) + (0.17)(130)= (0.50)(90) + (0.33)(110) + (0.17)(130)
= 103.4 orders= 103.4 orders3 Month = 110 5 month =
91
yy = = aa + + bxbx
wherewhereaa == intercept (at period 0)intercept (at period 0)bb == slope of the lineslope of the linexx == the time periodthe time periodyy == forecast for demand for period forecast for demand for period xx
Linear Trend LineLinear Trend Line
Seasonal AdjustmentsSeasonal Adjustments
Repetitive increase/ Repetitive increase/ decrease in demanddecrease in demand
Use seasonal factor Use seasonal factor to adjust forecastto adjust forecast
Seasonal AdjustmentsSeasonal Adjustments
Repetitive increase/ Repetitive increase/ decrease in demanddecrease in demand
Use seasonal factor Use seasonal factor to adjust forecastto adjust forecast
Seasonal factor = Seasonal factor = SSii = =DDii
DD= demand for period/sum of demand
Seasonal AdjustmentSeasonal Adjustment
1999 12.61999 12.6 8.68.6 6.36.3 17.517.5 45.045.0
2000 14.12000 14.1 10.310.3 7.57.5 18.218.2 50.150.1
2001 15.32001 15.3 10.610.6 8.18.1 19.619.6 53.653.6
Total 42.0Total 42.0 29.529.5 21.921.9 55.355.3 148.7148.7
DEMAND (1000’S PER QUARTER)DEMAND (1000’S PER QUARTER)
YEARYEAR 11 22 33 44 TotalTotal
Seasonal AdjustmentSeasonal Adjustment
1999 12.61999 12.6 8.68.6 6.36.3 17.517.5 45.045.0
2000 14.12000 14.1 10.310.3 7.57.5 18.218.2 50.150.1
2001 15.32001 15.3 10.610.6 8.18.1 19.619.6 53.653.6
Total 42.0Total 42.0 29.529.5 21.921.9 55.355.3 148.7148.7
DEMAND (1000’S PER QUARTER)DEMAND (1000’S PER QUARTER)
YEARYEAR 11 22 33 44 TotalTotal
SS11 = = = 0.28 = = = 0.28 DD11
DD
42.042.0148.7148.7
SS22 = = = 0.20 = = = 0.20 DD22
DD
29.529.5148.7148.7
SS44 = = = 0.37 = = = 0.37 DD44
DD
55.355.3148.7148.7
SS33 = = = 0.15 = = = 0.15 DD33
DD
21.921.9148.7148.7
Seasonal AdjustmentSeasonal Adjustment
1999 12.61999 12.6 8.68.6 6.36.3 17.517.5 45.045.0
2000 14.12000 14.1 10.310.3 7.57.5 18.218.2 50.150.1
2001 15.32001 15.3 10.610.6 8.18.1 19.619.6 53.653.6
Total 42.0Total 42.0 29.529.5 21.921.9 55.355.3 148.7148.7
DEMAND (1000’S PER QUARTER)DEMAND (1000’S PER QUARTER)
YEARYEAR 11 22 33 44 TotalTotal
SSii 0.280.28 0.200.20 0.150.15 0.370.37
Seasonal AdjustmentSeasonal Adjustment
1999 12.61999 12.6 8.68.6 6.36.3 17.517.5 45.045.0
2000 14.12000 14.1 10.310.3 7.57.5 18.218.2 50.150.1
2001 15.32001 15.3 10.610.6 8.18.1 19.619.6 53.653.6
Total 42.0Total 42.0 29.529.5 21.921.9 55.355.3 148.7148.7
DEMAND (1000’S PER QUARTER)DEMAND (1000’S PER QUARTER)
YEARYEAR 11 22 33 44 TotalTotal
SSii 0.280.28 0.200.20 0.150.15 0.370.37
Forecast for 2002 using simple 3 year moving ave
4550.153.6
148.749.56667
50*.28 14Forecast for 1st qtr 2002
Forecast AccuracyForecast Accuracy
Find a method which minimizes Find a method which minimizes errorerror
Error = Actual - ForecastError = Actual - ForecastMean Absolute Mean Absolute
Deviation (MAD)Deviation (MAD)
MAD ExampleMAD Example
11 3737 37.0037.0022 4040 37.0037.0033 4141 37.9037.9044 3737 38.8338.8355 4545 38.2838.2866 5050 40.2940.2977 4343 43.2043.2088 4747 43.1443.1499 5656 44.3044.30
1010 5252 47.8147.811111 5555 49.0649.061212 5454 50.8450.84
557557
PERIODPERIOD DEMAND, DEMAND, DDtt FFtt ( ( =0.3) =0.3)
Forecast ControlForecast ControlReasons for out-of-control forecastsReasons for out-of-control forecasts
Change in trendChange in trend Appearance of cycleAppearance of cycle Weather changesWeather changes PromotionsPromotions CompetitionCompetition PoliticsPolitics
Tracking SignalTracking Signal• Tracking Signal establishes control limits -
usually +/- 3 MAD• The greater the tracking signal the more
the demand exceeds the forecast• Sum(Demand-Forecast)/Mean Absolute
Deviation• Sometimes called Running Sum of
Forecasting Error
Next WeekNext Week
• Chap 9
• Chapter 14