UNIT - I

SEMESTER - II

Production : Consist of creation of both tangible goods as well as intangible services

Manufacturing : Consist of creation of only Tangible goods

 Production: Application of resources such as people and machinery to convert materials into finished goods and services.
Production and Operations Management: Managing people and machinery in converting materials and resources into finished goods and services.

 The business function responsible for planning, coordinating, and controlling the

resources needed to produce products and services for a company A management function An organizations core function In every organization whether Service or Manufacturing, profit or Not for profit Role of Operations Management OM Transforms inputs to outputs Inputs are resources such as People, Material, and Money
Outputs are goods and services

Goods & Services

Manufacturing
Tangible product Product can be inventoried Low customer contact Longer response time Capital intensive

Services
Intangible product Product cannot be inventoried High customer contact Short response time Labor intensive

OM Decisions

Business Information Flow

OMs Transformation Process

PRODUCTION SYSTEM

DECISION MAKER

CONTROL

INPUT

CONVERSION PROCESS

OUTPUT

Raw Material Labor Capital Machines Land Knowledge

Profit = (Sp-Vc)-FC
Sp = Sales Price Vc =Variable cost
Fc =Fixed cost

Product Or Service

Input
Raw material is a major part of input & conventionally it is 70 % & above Raw material commands overall input price In a given industry ( Steel furniture / Fabrication / Construction etc) All the competitors input cost can vary by +/- 2 to 3 % (Octroi / Transport / loading/ unloading) Input cost is more or less fixed for all competitors

System
Must have output otherwise system is invalid To have output input is mandatory Without input ,output is not possible System does conversion / processing / value addition for ultimate product

Output Product or Service In buyers market price is decided by customer & selling price can vary +/- 2 to 3 % only for product of brand preference & more or less is fixed for all competitors in industrial segments Profit Equation { P=(Sp-Vc)- Fc } Hence Cost + Profit = Selling Price Cost = Material cost + Conversion cost

Systems and Models

Production Systems

PRODUCTION SYSTEM
Solid line represents movement of material through conversion system by value addition to finish goods ( Materials Management)

Dotted Line represents flow of information / set of Instruction

All on line data / information is continuously passed on to control tower ,control tower in terms process / Tabulate all the information in format & sends it to decision maker ( Flow of Information)

Decision Maker Compares / Benchmark actual information with plan & generate the set of instructions for correcting the deviations & sends it to control tower (Plan Vs Actual) Control tower sends instructions at appropriate point for execution & bring back process under control
CONTROL

DECISION

MAKER

INPUT

CONVERSION PROCESS

OUTPUT

The system selection is sensitive because of following parameters

1 . Type of Product
Common parameters Total Volume Varieties in total Volume

2 .Type of Company
Automobile Chemical Pharma

3.Life Cycle of Product / Project

Life cycle phase of Project Introduction ( Low volume ,High Variation)

Conclusion :

System selection is not a static or one time decision but DYNAMIC one & changes as organization passes through I G-M-D Phases & changes the equation of Volume to Variety ratio

Growth ( High volume , Low Variation) Maturity ( High volume , Low Variation)
Decline ( Volume drops , Variation High)

Technology and The Production Process

Robots reprogrammable machines capable of performing routine jobs and manipulating material Computer-Aided Design and Manufacturing enables
engineers to design parts and buildings on computer screens faster and with fewer mistakes.

Computer-Integrated Manufacturing integrates robots, computers and other technologies to help workers design products, control machines, handle materials, and control the production function.

Flexible Manufacturing Systems a production facility that

workers can quickly modify to manufacture different products.

Types of Production System

Mass Production manufacturing products in large amounts through standardization, mechanization and specialized skills.

Customer-Driven Production evaluating customer demands to link with manufacturer.

Flexible Production producing smaller batches using information technology, communication and cooperation.

Types of Production System

Intermittent System

Continuous System

Job Type
Printing Job

Mass Production

Machine Building

Spoons / Hair Pins / Soaps / Chocolates

Batch Type

Process Type

Washing Machine
Fridge / TV / CAR

Cement / Sugar / Chemical Industries

Intermittent System
Receiving Mills Grinders

Raw matl.

storage

Assembly

Large number of low volume products

Part A

Drills Planers Finished Inspecgoods tion storage

Part B

Lathes

Automatics

Stage 1
Raw Material

Machine X

Machine Y

Machine Z

Stage 2
Finished Product

Continuous System

INTERMITTENT SYSTEM
The goods are manufactured specially to fulfill orders made by customers & not for stock

Characteristics : Most products are produced in small quantities Machines & equipments are laid out by process Workloads are unbalanced Highly skilled operators are required for efficient use of machines & equipments In process inventory is very large Flexible to accommodate variety in production Example :

Plants

locomotives

Machine shops
Automobiles

Hospitals

INTERMITTENT SYSTEM
OP1
Information & Control Decision Maker

Storage1

OP2
Storage 2

Storage 4

OP4

Storage 3

OP3

Storage 5

Ex. Paper cutting machine

Intermittent system Classification :

Job Production
Job Production : 1) It is the production of single complete unit by one operator ,Group of operators 2) Whole project is considered as a one operation & work is completed on each product before passing to the next

Characteristics : Complete project is considered as single operation Versatile & skilled labors are required High capital Investment Control operations relatively simple High unit cost of production Examples : Bridge Building Dam Construction Ship Building Heavy machines

Intermittent system Classification :

Batch Production
Batch Production : It is a extension of job type production Whole project is considered as a one operation & work is completed on each product before passing to the next Characteristics : Production schedule can be formulated according to specific orders or demand forecasts Items are processed in lots & batches Only one item is produced in every production run New batch will be taken only after completion of one High WIP High cycle time

Examples

: Chemical Industry Machine tools Printing press Electronic instruments

Batch Production

Continuous System :
In this system the items are produced for the stocks & not for specific order Manufacturing stock is based on sales forecast

Inputs are standardized & standard set of processes & sequence of processes can be used

Input
OP1

Information & Control

Decision Maker

Storage1

OP2

Storage2

Ex. Bottling Plant

OP3

OP4

OP5

Out put

Mass Production

Continuous System :

Fundamental characteristics of the system is standardization

Items are produced in large quantities independent of customer orders i.e Production is to stock & not to order Standardization is w.r. to materials & machines
Uniform & un-interrupted flow of material is maintained through predetermined sequence of operations required to produce the product System can produce only one type of product at one time

Example : Sub assemblies Parts / components Advantage : Economies of production because of specialization & standardization

Continuous System :

Process Production
It gives more stress on AUTOMATION in production process
The volume of production is very high This method is used for manufacturing items with very high demand Example:

Petroleum products Particular brand of medicines Heavy chemical industries Plastic industries

Note : Single raw material can be transformed into different kinds of product at different stages of production process Ex. Processing of crude oil will give Kerosene / Gasoline etc at different stages
of production

Production System Today

Capital Material supply

Competition

Machine Availability

Economic Climate

Customer

Bank

Raw Material INPUT

Machine Men

Control

Product / Service OUT PUT

Demand

Trade Union

Labor Availability

Money

Social Channel

Government

Production System in Organization

Plan : Companies
achievement in near future Mahindra Tractors : We will be largest tractor manufacturer in the world by F10
Plan of Glaxo : We will be life saving drug import substitute

Mission is what co. want to

Policy
Mission

achieve Or Purpose of companies existence Amul Taste of India Glaxo Better India Healthier India
L&T - We will do the things India will proud of

Plan

Production System

Production System : Is a vehicle through which organization achieves its vision / Mission
written by the company As effectiveness of production system can affect vision & mission statement of Co.

System Components and Hierarchy

Corporation

Corporate level

Parts Plant 1

Parts PartsPlant Plant22

Assembly AssemblyPlant Plant11

Shop level

Shaft Production

Gear GearProduction Production

Heat Heat Treating Treating

Purchasing Purchasing

Department level

CNC Mill

CNC CNCLathe Lathe

Gear GearHobber Hobber

Automated Part Workstation Handling System level

Robotic Load/ Unload

Tool Exchanger

Power Controller

Force Sensor

Equipment level

Factors for Comparison of Manufacturing systems

1. Manufacturing costs 2. Capital investment
3. Size of plant

4. Technical requirement
5. Organizational structure 6. Flexibility in production

7. Type of products produced

8. Security of job

Production Management Is A General Set Of Principles For Production Economies ,Facility Design , Job Design , Schedule Design ,Quality Control, Inventory control ,work study ,Cost & Budgetary control .

The Job of Production Managers

Oversee the work of people and machinery to convert inputs (materials and resources) into finished goods and services.

Interaction with other functions

Marketing

Industrial Engg.

Finance

PRODUCTION

Procurement

Accounting

Research & Development

Personnel

Interaction with other functions continued

Marketing :
1. Customer Quality requirement 2. New product & processes 3. Customer feedback on products & services Finance : 1. Budgetary information

2. The analysis of investment 3. Provision of money for improvement 4. Provision of information on general condition of firm Accounts : 1. Data including cost of material ,direct labor & Over head items 2. Release of special reports on operation of the production system ,includes scrap, rework ,overtime etc.
3. Providing data to data processing services

Interaction with other functions continued

Procurement :

1. The determination of items to be purchased 2. The determination of delivery schedule

3. The discovery of new product / process / material 4. Inventory control

Personal : 1. Retirement of people 2. Training of people 3. Labor relations 4. Safety

Industrial Engineering :
Method analysis information Work measurement information

Plant layout & Material handling information Plant maintenance information

R&D : Of New ideas ,products ,processes etc.

Planning the Production Process

Choose what goods or services to offer customers. Convert original product ideas into final specifications. Design the most efficient facilities to produce those products .

Implementing the Production Plan

Make, Buy, or Lease Decision Choosing whether to manufacture a needed product or component in-house, purchase it from an outside supplier, or lease it. Factors in the decision include cost, availability of reliable outside suppliers, and the need for confidentiality. Selection of Suppliers Based on comparison of quality, prices, dependability of delivery, and services offered by competing companies.

Production control creates a well-defined set of procedures for coordinating people, materials, and machinery.
1) Planning
2) Routing

3) Scheduling 4) Dispatching
5) Follow-up

Elementary knowledge of Manufacturing process

Assembling : Welding, Brazing, Riveting, Fastening By Nuts & bolts, Adhesives Forming : In this process shape of work piece changes without necessarily removing or adding material
Ex .Casting, Forging, Extrusions, Stamping, Embossing, Heat Treatment : Heat treatment is process of heating & cooling of metals or alloys in solid state in order to obtain certain desired properties ( Relieve internal stresses , Hardness , toughness etc)

Machining : It involves metal removing by Turning , Drilling , Milling , grinding ,shaping , boring , EDM , ECM etc. Electro discharge machining : (EDM) Spark between work piece & tool across gap removes the material using dielectric , which also cools the metal
Electro Chemical Machining (ECM) : Chemical energy combine with electrical energy is used to do the cutting operation

To enhance profit continuously the only strategy available is to reduce Conversion cost Conversion Cost = Direct Labor Cost + Manufacturing Overhead Cost To reduce conversion cost use of alternative low cost material / processes / suppliers i.e. the focus of production management
Example :The companies which could do all this continuously for cost reduction could survive &
will be winner in long run ( TATA / L&T / Bajjaj / Mahindra / Maruti Udyog Ltd). Companies which could not do this has to vanish from market ( HMV Vs T series , Kodak Vs Konica , EC TV, Crown ,Lambreta Scooter)

Strategic Importance of the Production Function

A vital function is necessary for generating money to pay employees, lenders, and stockholders. Effective production and operations management can: lower a firms costs of production. boost the quality of its goods and services. allow it to respond dependably to customer demands.

enable it to renew itself by providing new products.

Basic Strategies

oThe four basic strategies can be used in developing a production plan:

1. Chase (demand matching) strategy producing the amount demanded at any given time Inventory levels remain stable while production varies to meet demand. 2. Production leveling continually producing an amount equal to the average demand. Production leveling means the company will use its resources at a level rate and produce the same amount each day it is operating.

3. Subcontracting means producing at the level of minimum demand and meeting any additional demand through subcontracting.

4. Hybrid strategy is a combination of the other three strategies.

Four Steps for Strategy Formulation

1. Defining a primary task
What is the firm in the business of doing?

2. Assessing core competencies

What does the firm do better than anyone else?

3. Determining order winners and order qualifiers

What wins the order? What qualifies an item to be considered for purchase?

4. Positioning the firm

How will the firm compete?

Business/Functional Strategy

Three Inputs to a Business Strategy

Examples from Strategies

Mission: Dell Computer- to be the most successful computer company in the world Environmental Scanning: political trends, social trends, economic trends, market place trends,
global trends

Core Competencies: strength of workers, modern facilities, market understanding, best

technologies, financial know-how, logistics

Operations Strategy Designing the Operations Function

Operations Strategy at Wal-Mart

Competitive Priorities- The Edge

Four Important Operations Questions: Will you compete on

Cost? Quality? Time? Flexibility?

All of the above? Some? Tradeoffs?

Competing on Cost?
Offering product at a low price relative to competition Typically high volume products Often limit product range & offer little customization May invest in automation to reduce unit costs Can use lower skill labor Probably use product focused layouts Low cost does not mean low quality

Competing on Quality?
Quality is often subjective Quality is defined differently depending on who is defining it Two major quality dimensions include High performance design: Superior features, high durability, & excellent customer service Product & service consistency: Meets design specifications Close tolerances Error free delivery Quality needs to address Product design quality product/service meets requirements Process quality error free products

Competing on Time?
Time/speed one of most important competition priorities First that can deliver often wins the race Time related issues involve Rapid delivery: Focused on shorter time between order placement and delivery On-time delivery: Deliver product exactly when needed every time

Competing on Flexibility?
Company environment changes rapidly Company must accommodate change by being flexible Product flexibility: Easily switch production from one item to another Easily customize product/service to meet specific requirements of a customer Volume flexibility: Ability to ramp production up and down to match market demands

The Need for Trade-offs

An exchange of one thing in return for another, especially relinquishment of one benefit or advantage for another regarded as more desirable: "a fundamental trade-off between capitalist prosperity and economic security" (David A. Stockman).

Decisions must emphasis priorities that support business strategy Decisions often required trade offs Decisions must focus on order qualifiers and order winners Which priorities are Order Qualifiers? e.g. Must have excellent quality since everyone expects it

Which priorities are Order Winners? e.g. Southwest Airlines competes on cost McDonalds competes on consistency FedEx competes on speed Custom tailors compete on flexibility

The Operational Strategy Filteration

The Operational Strategy Flow

Translating to Production Requirements

Specific Operation requirements include two general categories Structure decisions related to the production process, such as characteristics of facilities used, selection of appropriate technology, and the flow of goods and services Infrastructure decisions related to planning and control systems of operations Dell Computer example structure & infrastructure They focus on customer service, cost, and speed ERP system developed to allow customers to order directly from Dell Product design and assembly line allow a make to order strategy lowers costs, increases returns Suppliers ship components to a warehouse within 15 minutes of the assembly plant Dell set up a shipping arrangement with UPS

Technology should support competitive priorities

Three Applications: product technology, process technology, and information technology

Products - Teflon, CDs, fiber optic cable Processes flexible automation, CAD Information Technology POS, EDI, ERP, B2B
Business-to-business (B2B)

Electronic Data Interchange

Enterprise Resource Planning

Technology for Competitive Advantage

Technology has positive and negative potentials 1. Positive 2. Negative Improve processes Costly Maintain up-to-date standards Promotes dependency Obtain competitive advantage Risks such as overstating benefits

Measuring Productivity

Productivity is a measure of how efficiently inputs are converted to outputs Productivity = output/input
Total Productivity Measure: Total Productivity = (total output)/(total of all inputs) Partial Productivity Measure: Partial Productivity = (total output)/(single input) Multifactor Productivity Measure: Multi-factor Productivity = (total output)/(several inputs)

Services Products

Process and Technology

Capacity

Human Resources

Quality

Facilities

Sourcing

Operating Systems

Operations Strategy: Products and Services

Make-to-Order (Push Strategy) products and services are made to customer specifications after an order has been received

Make-to-Stock (Pull Strategy) products and services are made in anticipation of demand

Request For Quotation

Manufacturing Resource (Material req.) planning

purchase order

Assemble-to-Order (Push / Pull Strategy) products and services add options according to customer specifications

Production Strategy: Processes and technology

Project one-at-a-time production of a product to customer order Batch Production systems process many different jobs at the same time in groups (or batches) Mass Production large volumes of a standard product for a mass market Continuous Production used for very high volume commodity products

Product-Process Matrix

Continuous Production
A paper manufacturer produces a continuous sheet paper from wood pulp slurry, which is mixed, pressed, dried, and wound onto reels.

Mass Production
Here in a clean room a worker performs quality checks on a computer assembly line.

Batch Production
At Martin Guitars bindings on the guitar frame are installed by hand and are wrapped with a cloth webbing until glue is dried.

Project
Construction of the aircraft carrier USS Nimitz was a huge project that took almost 10 years to complete.

Service Strategy: Processes and Technology

Professional Service highly customized and very labor intensive Service Shop customized and labor intensive Mass Service less customized and less labor intensive Service Factory least customized and least labor intensive

Service-Process Matrix

Service Factory
Electricity is a commodity available continuously to customers.

Mass Service
A retail store provides a standard array of products from which customers may choose.

Service Shop
Although a lecture may be prepared in advance, its delivery is affected by students in each class.

Professional Service
A doctor provides personal service to each patient based on extensive training in medicine.

Operations Strategy: Capacity and Facility

Capacity strategic decisions include: When, how much, and in what form to alter capacity Facility strategic decisions include: Whether demand should be met with a few large facilities or with several smaller ones Whether facilities should focus on serving certain geographic regions, product lines, or customers Facility location can also be a strategic decision

Operations Strategy: Human Resources

What are the skill levels and degree of autonomy required to operate production system? What are the training requirements and selection criteria? What are the policies on performance evaluations, compensation, and incentives? Will workers be salaried, paid an hourly rate, or paid a piece rate? Will profit sharing be allowed, and if so, on what criteria? Will workers perform individual tasks or work in teams? Will they have supervisors or work in self-managed work groups? How many levels of management will be required? Will extensive worker training be necessary? Should workforce be cross-trained? What efforts will be made in terms of retention?

Operations Strategy: Quality

What is the target level of quality for our products and services? How will it be measured? How will employees be involved with quality? What will the responsibilities of the quality department be? What types of systems will be set up to ensure quality? How will quality awareness be maintained? How will quality efforts be evaluated? How will customer perceptions of quality be determined? How will decisions in other functional areas affect quality?

Vertical Integration degree to which a firm produces parts that go into its products Strategic Decisions How much work should be done outside the firm? On what basis should particular items be made in-house? When should items be outsourced? How should suppliers be selected? What type of relationship should be maintained with suppliers? What is expected from suppliers? How many suppliers should be used? How can quality and dependability of suppliers be ensured? How can suppliers be encouraged to collaborate?

Operations Strategy: Sourcing

Strategic Planning

Mission and Vision

Corporate Strategy

Marketing Strategy

Operations Strategy

Financial Strategy

The Strategic Planning Process

Strategic and Operational Levels

Policy Deployment

Translating corporate strategy into measurable objectives

Key Performance Indicators

Balanced Scorecard

Radar Chart

Dashboard

Issues and Trends in Operations

Global Markets, Global Sourcing, and Global Operations Virtual Companies Greater Choice, More Individualism Emphasis on Service Speed and Flexibility Supply Chains Collaborative Commerce Technological Advances Knowledge and Ability to Learn Environmental and Social Responsibilities

Changing Corporation
Characteristic 20th-Century Corporation 21st-Century Corporation

Organization

Pyramid

Web

Focus Style Source of strength Structure Resources Operations Products Reach Financials Inventories Strategy

Internal Structures Stability Self-sufficiency Physical assets Vertical integration Mass production Domestic Quarterly Months Top-down

External Flexible Change Interdependencies Information Virtual integration Mass customization Global Real-time Hours Bottom-up

Changing Corporation (cont.)

Characteristic
20th-Century Corporation 21st-Century Corporation

Leadership

Dogmatic

Inspirational

Workers Job expectations Motivation Improvements Quality

Employees Security To compete Incremental Affordable best

Employees, free agents Personal growth To build Revolutionary No compromise

The first step in operations management is to know what customers want, and how much do they want. A part of a firms strategic planning involves identifying current and potential demands of its customers. 1. What should be produced? 2. How much should be produced? 3. Where and When should be produced? ARE the questions of Demand Management. Demand management is 1) To recognize the sources of demand for a firms products, 2) To forecast demand, 3) To determine how the firm will satisfy that demand.
Factors Affecting Demand

Factors Affecting Demand

Demand management phases and stages

A forecast is an Inference of what is likely to happen in future. Forecast can be wrong. Businesses may use Forecasts in several subjects. Some of the major forecasting areas are (1) Economic Forecasting, (2) Technological Forecasting, and (3) Demand Forecasting. Economic Forecast is a prediction of what general business conditions will be in the future. Some examples of economic forecasting are: Inflation rates, Gross National Product, Personal Income, Tax revenues, Level of employment, and so on. Economic forecast is usually made by Government Agencies, Banks, and Econometric Forecasting Services. Another application of forecasting is Technological Forecasting. Technological forecast predicts the probability and significance of possible future developments in technology. Demand Forecast predicts the quantity and timing of demand for a firms products.

Uses of Forecasts
Accounting Finance
Human Resources

Cost/profit estimates Cash flow and funding

Hiring/recruiting/training

Marketing
MIS

Pricing, promotion, strategy

IT/IS systems, services

Operations
Product/service design

Schedules, MRP, workloads

New products and services

Elements of a Good Forecast

Timely

Reliable

Accurate

Written

Steps in the Forecasting Process

The forecast

Step 6 Monitor the forecast Step 5 Prepare the forecast

Step 4 Gather and analyze data Step 3 Select a forecasting technique

Step 2 Establish a time horizon Step 1 Determine purpose of forecast

Forecast Horizon
Forecast Horizon is the number of future periods that the forecasting makes predictions. Based on the length of the horizon, there are three types of forecasting: 1) Long Range Forecasting (which concerns predictions for over 5 years in future) 2) Intermediate Forecasting (which is usually for predictions of up to 2 years), and 3) Short Range Forecasting (which predicts between 1 day and 1 year horizons).

Types of Forecasts
Judgmental - uses subjective inputs

1. Executive opinions 2. Sales force opinions 3. Consumer surveys

4. Outside opinion Time series - uses historical data assuming the future will be like the past

1. Trend - long-term movement in data 2. Seasonality - short-term regular variations in data

3. Cycle wavelike variations of more than one years duration 4. Irregular variations - caused by unusual circumstances 5. Random variations - caused by chance

Associative models - uses explanatory variables to predict the future

Forecasting Methods

A forecast can be developed through either a Subjective approach, OR an Objective approach. Subjective approaches are qualitative in nature AND they are usually based on the opinions of people (that is why they are subjective). Objective approaches involve 1. Quantitative methods and 2. Mathematical formulations. (They cab also be referred as Statistical forecasting)

1. Subjective (Qualitative) Forecasting Methods

There are four major qualitative forecasting techniques:

1) Executive Committee Consensus

Here, a forecast is developed by asking a group of Knowledgeable Executives To discuss their opinions Regarding the future values of the items Being forecasted. This method provides forecast in a relatively short time. This method is mostly used for long and medium range forecasting purposes.

Forecasting Methods
1. Subjective (Qualitative) Forecasting Methods 2) Delphi Method
The Delphi Method also involves a Group of Experts who eventually develop a consensus. They usually make long range forecasting for future technologies OR future sales of a new product. This reduces the influence of powerful executives. There is one coordinator who knows all the participants, And all participants only contact with the coordinator. First, Each member completes a questionnaire and returns it to the coordinator The results are summarized by the coordinator and a new questionnaire is developed based on these results. This summary report is sent back to the participants. The participants review this report AND they either defend OR modify their original views. The process is repeated until a consensus is reached. The quality of the consensus and final decision is largely dependent on the coordinator.

Forecasting Methods
1. Subjective (Qualitative) Forecasting Methods 3) Sales Force Composite

Since Sales people in a company directly deal with customers, They are a good source of information regarding customers future intentions to buy a product. They can help a firm obtain a forecast quickly and inexpensively. In this technique, each sales representative is asked to estimate sales in his/her territory. These individual estimates are then combined together by Upper Managers to develop Regional Sales forecast. This method is more suitable for forecasting sales volume of a new product. But still it is subject to opinion based terms.

4) Customer Surveys
By using a customer survey, a Firm can base its demand forecast on the customers purchasing plans. This information can be directly obtained from the customers themselves . This can be done through personal, telephone Or mail surveys. However, asking questions may annoy some customers. And, this method requires considerable time and large staff for surveys.

Forecasting Methods

Quantitative Forecasting Methods

Quantitative forecasting methods employ mathematical models and historical data to predict demand. The first step in developing a quantitative forecast model is to Collect sufficient data on Past levels of demand. For example, data obtained for at least 2 to 3 years of past ARE desirable. In addition, the effects of unusual or irregular events That caused a change in demand Should be removed from the data (such as natural disasters, or Olympics). There are two major types of quantitative forecast models: 1) Time Series Models, AND 2) Causal Models The main difference between the two models is that: In time series modeling technique, The only independent variable is the time. In contrast, Causal Models may employ some factors other than Time, When predicting forecast values. A Causal model is an abstract model that describes the causal mechanisms of a system. The model must express more than correlation because correlation does not imply causation.

Time Series Modeling

Time Series modeling involves plotting demand data on a time scale. A time series is a sequence of chronologically arranged observations taken at regular intervals for a particular variable. Examples: Daily, weekly, monthly sales data Time series are frequently analyzed to identify any 1) Trends, or 2) Seasonal Factors, or 3) Cyclical Factors that influence the demand data. Trend, is a gradual upward or downward movement of data over time. Trends reflect changes in population levels, technology, and living standards. Seasonality, is variation that repeats itself at fixed intervals. Seasonal variations can correspond to the Seasons of the Year, Holidays, or other special periods. Cyclical variation has a duration of at least one year; The duration varies from cycle to cycle. Therefore, Cyclical variation requires many years of data to determine its repetitiveness

Types of Time Series Modeling

There are two major types of time series models: 1- Smoothing Models 2- Time Series Decomposition Models - Moving Average (Simple & Weighted) - Additive Models - Single Exponential Smoothing - Multiplicative Models - Double Exponential Smoothing

Smoothing Models
When many short-term demand forecasts are required, developing a Complex Forecasting model for each item may be Too Expensive and time-consuming. (for example, a large number of low-cost inventory items)

1. Single Exponential Smoothing

Simple exponential smoothing accomplishes exactly such weighting, where exponentially smaller weights are assigned to older observations. The specific formula for simple exponential smoothing is: St = *Xt + (1- )*St-1

2. Double Exponential Smoothing

Double exponential smoothing is given by the formulas

3. Simple Moving Average

A simple moving average calculates the average demand for the last n periods. The calculated average value is the forecast for the next time period. Since all values in the time series are combined in an average, individual Highs and Lows offset each other. And, This reduces the likelihood of random variations.