OM 300 1nd Edition Final Exam Study Guide Lectures 21 33 Lecture 21 What is forecasting Process of predicting a future event Underlying basis of all business decisions o Production o Inventory o Personnel o Facilities Forecasting Time Horizons Short range forecast o Up to 1 year generally less than 3 months o Purchasing job scheduling workforce levels job assignments production levels Medium range forecast o 3 months to 3 years o Sales and production planning budgeting Long range forecast o 3 years o New product planning facility location research and development Types of Forecasts Economic forecasts o Address business cycle inflation rate money supply housing starts etc Technological forecasts o Predict rate of technological progress o Impacts development of new products Demand forecasts o Predict sales of existing products and services Seven Steps in Forecasting 1 Determine the use of forecast 2 Select the items to be forecasted 3 Determine the time horizon of the forecast 4 Select the forecasting model 5 Gather the data 6 Make the forecast 7 Validate and implement results Forecasting Approaches Qualitative Methods o Used when situation is vague and little data exist New products New technology o Involves intuition experience Ex Forecasting sales on internet Quantitative o Used when situation is stable and historical data exist Existing products Current technology o Involves mathematical techniques Ex forecasting sales of color televisions Overview of Qualitative Methods 1 Jury of executive opinion a Pool opinions of high level experts sometimes augmented by statistical models i Involves small group of high level experts and managers ii Group estimates demand by working together iii Combines managerial experience with statistical models iv Relatively quick v Group Think disadvantage 2 Delphi method a Panel of experts queried iteratively i Iterative group process continues until consensus is reached 1 3 Types of Participants a Decision makers b Staf c Respondents 3 Sales force composite a Estimates from individual salespersons are reviewed for reasonableness then aggregated i Each salesperson projects his or her sales ii Combined at district and national levels iii Sales reps know customers wants iv Tends to be overly optimistic 4 Consumer Market Survey a Ask the customer about purchasing plans b What consumers say and what they actually do are often diferent c Sometimes difficult to answer Lecture 22 Current Lecture Time Series Forecasting Set of evenly spaced numerical data o Obtained by observing response variable at regular time periods Forecast based only on past values no other variables important o assumes that factors influencing pas and present will continue influence in future Trend Component Persistent overall upward or downward pattern Changes due to population technology age culture etc Typically several years duration Seasonal Component Regular pattern of up and down fluctuations Due to weather customs etc Occurs within a single unit Cyclical Component Repeating up and down movement Afected by business cycle political and economic factors multiple years duration Often causal or associative relationships Random Component Erratic unsystematic residual fluctuations Due to random variation or unforeseen events Short duration and nonrepeating Na ve Approach Assumes demand in next period is the same as demand in most recent period o Ex If January sales were 68 then February sales will be 68 Sometimes cost efective and efficient Can be good starting point Moving Average Method Used if little or no trend Used often for smoothing Provides overall impression of data over time Weighted Moving Average Used when some trend might be present o Older data usually less important Weights based on experience and intuition Exponential Smoothing Form of weighted moving average o Weights decline exponentially o Most recent data weighted most Requires smoothing constant o Ranges from 0 to 1 o Subjectively chosen Involves little record keeping of past data Choosing a The objective is to obtain the most accurate forecast no matter the technique Forecast error Actual demand Forecast value Common Measures of Error Lecture 24 Lecture 25 Associative Forecasting Used when changes in one or more independent variables can be used to predict the changes in the dependent variable Most common technique is linear regression analysis We apply this technique just as we did in the time series example Monitoring and Controlling Forecasts Tracking Signal Measures how well the forecast is predicting actual values Ration of cumulative forecast errors to mean absolute deviation MAD o Good tracking signal has low values o If forecasts are continually high or low the forecast has a bias error Lecture 26 Inventory management the objective is to strike a balance between investment and customer service Types of Inventory Raw material o Purchased but not processed Work in process o Undergone some change but not completed o A function of cycle time for a product Maintenance repair operating MRO o Necessary to keep machinery and processes productive Finished goods o Completed product awaiting shipment Managing Inventory 1 How inventory items can be classified ABC analysis 2 How accurate inventory records can be maintained ABC Analysis Divides inventory into three categories based on annual dollar volume o Class A high annual dollar volume o Class B medium annual dollar volume o Class C low annual dollar volume Used to establish policies that focus on the few critical parts and not the many trivial ones Other criteria than annual dollar volume may be used o Anticipated engineering changes o Delivery problems o Quality problems o High unit cost Policies employed may include o More emphasis on supplier development for A items o Tighter physical inventory control for A items o More care in forecasting A items Cycle Counting Items are counted and records updated on a periodic basis Often used with ABC analysis to determine cycle Has several advantages o Eliminates shutdowns and interruptions o Eliminates annual inventory adjustment o Trained personnel audit inventory accuracy o Allows causes of errors to be identified and corrected o Maintains accurate inventory records Inventory Costs Carrying costs the costs of holding or carrying inventory over time Ordering costs the costs of placing an order and receiving goods Setup costs cost to prepare a machine or process for manufacturing an order o May be highly correlated