INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:Demand Management

<< INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:The Decision Process

Roadmap to the Lecture:Fundamental Types of Forecasts, Finer Classification of Forecasts >>

Production and Operations Management MGT613

Lesson 07

Introduction

·Forecasting demand is like forecasting weather .Sometimes the forecast or prediction fails completely

and sometimes its near the predicted value but still not the exact value. Often scientists call forecasting

as an educated guess, but even then forecasting helps us to plan our trips and journeys and most

importantly we as farmers make use of forecasting to plant, harvest and take precautionary measures.

·Forecasting in business forms the basis for budgeting and planning for capacity, sales, production,

inventory, manpower, purchasing and more.

·Forecasting allows the manager to anticipate the future so then can plan accordingly.

Introduction

·There

are two major uses for forecasts. One is to help the Operations Manager plan the system and the

other one is to help him plan the use of the system. These are important concepts different distinct but at

the same time closely lined.

Planning the system refers to planning long term plans about the type of

products or services to offer, what facilities and equipment to have, where to locate and so on and so

forth. Planning the use of the system relates to short range and intermediate range planning which

means planning inventory workforce resources, planning of purchasing and production activities,

budgeting and scheduling etc.

Thus it can be said that planning the systems more of a job of a senior manager, birds eye view and has

ORGANIZATIONAL STRATEGY in it where as planning the use of the system is an OPERATIONAL

STRATEGY

Business Forecasting is more than just predicting demand. Forecasting is also used to predict profits,

revenues, costs, productivity changes, prices and availability of energy and raw materials, interest rates,

movements of key economic indicators (GNP, inflation and government loans) and prices of stocks and

bonds.

Forecasting is not an exact science. Even with the availability of computers, and algorithms, its unable

to make an exact prediction it requires Experience, Managerial Judgment and Technical expertise.

General Responsibility lies with the Marketing workforce but to this day not a single marketing forecast

has been created without the valuable contribution of the Operations side.

FORECAST:

·A statement about the future value of a variable of interest such as resource requirements, capacity

planning, SCM and product or service demand.

Forecasts affect decisions and activities throughout an organization

1. Accounting, finance

2. Human resources

3. Marketing

4. MIS

5. Operations

6. Product / service design

Production and Operations Management MGT613

Applications of Forecasts

Accounting

Cost/profit estimates

Finance

Cash flow and funding

Human Resources

Hiring/recruiting/training

Marketing

Pricing, promotion, strategy

MIS

IT/IS systems, services

Operations

Schedules, MRP, workloads

Product/service design

New products and services

Demand Management

Independent Demand:

Finished Goods/Services

Dependent Demand:

Raw Materials,

Component parts,

Sub-assemblies, etc.

C(2

B(4

D(2

E(1

D(3

F(2

Independent Demand: What a firm can do to manage it?

1. Either be Active or Passive meaning?

2. Can take an active role to influence demand

3. Can take a passive role and simply respond to demand

Components of Demand

·Average demand for a period of time

·Trend

·Seasonal element

·Cyclical elements

·Random variation

·Autocorrelation

Finding Components of Demand

Web-Based Forecasting: CPFR Defined

·Collaborative

Planning, Forecasting, and Replenishment (CPFR) a Web-based tool used to coordinate

demand forecasting, production and purchase planning, and inventory replenishment between supply

chain trading partners. You will learn about this in your later part of the semester.

·Used

to integrate the multi-tier or n-Tier supply chain, including manufacturers, distributors and

retailers.

Production and Operations Management MGT613

·CPFR's

objective is to exchange selected internal information to provide for a reliable, longer term

future views of demand in the supply chain.

·CPFR

uses a cyclic and iterative approach to derive consensus forecasts.

Web-Based Forecasting:

Steps in CPFR

1. Creation of a front-end partnership agreement

2. Joint business planning

3. Development of demand forecasts

4. Sharing forecasts

5. Inventory replenishment

·Assumes causal system( That same system that existed in the past will exist in future, where as in

reality unplanned events happen like tax rate increase, introduction of a competitors product or service

or natural disasters)

·Forecasts rarely perfect because of RANDOMNESS (having no specific pattern). Allowances should

be made for inaccuracies.

·Forecasts more accurate for groups vs. individuals naturally because forecasting errors in a group tend

to cancel out forecasting errors for individuals.

·Forecast accuracy decreases as time horizon increases indicating it is safe to make short range forecasts

instead of long term forecasts. If you can recall we had talked about Flexible and Agile Corporations in

the past.

Table of Contents: