Chapter 7 pages 258 260 Capacity The maximum capability to produce Capacity Planning establishes a firm s overall level of resources o These decisions affect production lead times customer responsiveness operating costs and a firm s ability to compete o It is critical to decide when to increase capacity and by how much o How much to increase capacity depends on 1 the volume and certainty of anticipated demand 2 strategic objectives in terms of growth customer service and competition 3 and the costs of expansion and operation Capacity Lead Strategy Capacity is expanded in anticipation of demand growth It can lure customers from competitors and can provide superior service in peak demand periods Average Capacity Strategy Capacity is expanded to coincide with average expected demand Managers are sure they can sell at least some of the expanded output and endure periods of unmet demand Capacity Lag Strategy Capacity is increased after an increase in demand has been documented This produces a higher return on investment but can lose customers in the process Used in industries with standard products and cost based or weak competition Incremental expansion is less risky but more costly Best operating level the percent of capacity utilization that minimizes average unit cost Capacity Cushion percent of capacity held in reserve for unexpected occurrences o Large capacity cushions are common in industries in which demand is highly variable resource flexibility is low and customer service is important o Airlines have a negative cushion by overbooking Diseconomies of scale when higher levels of output cost more per unit to produce Economies of Scale When it costs less per unit to produce higher levels of output o Fixed costs can be spread over a larger number of units o Production or operating costs do not increase linearly with output levels o Quantity discounts are available for material purchases o Operating efficiency increases as workers gain experience Chapter 12 Forecasting Qualitative Forecast Methods based on judgment opinion past experience or best guesses Uses subjective methods Quantitative Forecast Methods based on mathematical formulas Strategic Planning and Design tend to focus on o Supply Chain Management All of the facilities functions and activities from suppliers to customers Functions include purchasing inventory production scheduling facility location transportation and distribution Components of Forecasting Demand o 1 Time frame how far into the future the forecast is As demand moves further away from the end use consumer the variation in demand becomes greater therefore demand forecasts become less reliable As this slight demand variability is magnified as info moves back up the supply chain the bullwhip effect occurs It can also occur when supply chain members keep their best interest in mind instead of everyone s best interest Continuous replenishment is when info is constantly updated and shared between suppliers and customers Variations of this are quick response Just in time vendor managed inventory and stockless inventory o Quality Management Many customers see good quality as having products and services available right when they need them Inaccurate forecasts can lead to a breakdown in service which leads to poor quality Short range to mid range look at daily weekly or monthly sales demand for up to two years into the future Used to determine production and delivery schedules and to establish inventory levels Long range forecast for a period longer than 2 years into the future Used for strategic planning such as setting long term goals plan new products enter new markets develop new facilities develop technology design the supply chain and implement strategic programs The line between short and long term forecasts is not always distinct The length of the forecast depends on how susceptible the market is to technological changes o 2 Behavior of Demand sometimes behaves in random irregular ways Trends gradual long term up and down movement of demand Trends are often the staring point of developing forecasts Random variations follow no pattern and are virtually unpredictable Cycles up and down repetitive movement in demand o 3 Possible Patterns Seasonal patterns up and down repetitive movement in demand that occurs periodically A seasonal factor is a numerical value that is multiplied by a normal forecast to get a seasonally adjusted forecast Demand usually exhibits a mix of more than one pattern When there is no pattern in demand it is called irregular movements o 4 Causes of demand behavior Forecasting Methods o 1 Time series methods statistical techniques that use historical demand data to predict future demand Assumes that what occurred in the past will occur again It is popular since it is easy to use and understand The two most popular types are Moving averages In na ve forecast demand the current period is used as the next periods demand Moving averages are computed for specific periods example 3 month or 5 month The longer the period the smoother it will be This method is good for stable demand with no pronounced behavioral patterns The disadvantage is that it does not react to variations that occur for a reason Weighted moving average adjusted to more closely reflect fluctuations in data Weights are assigned to most recent data Exponential smoothing Averaging method that weights the most recent data more strongly Is useful if recent changes in data are significant and unpredictable instead of random fluctuations Is popular and frequently used because it requires minimal data Adjusted exponential smoothing Is the exponential smoothing forecast with a trend adjustment factor added to it The closer B smoothing constant for a trend is to 1 0 the stronger the trend is reflected o 2 Regression methods Also called causal attempt to develop a mathematical relationship between demand and factors that make it behave the way it does o 3 Qualitative methods Also called judgmental or the jury of the executive opinion uses management judgment expertise and opinion to make forecasts This is the most common method for the long term strategic planning process Market research can provide useful and accurate info about product demand it must be skillfully conducted and can be expensive Delphi Method acquire informed judgments and opinions from knowledgeable people using questionnaires to develop a forecast of what will happen in the future Forecast Accuracy A forecast is