1. Copyright 2009 John Wiley & Sons, Inc. Beni Asllani University of Tennessee at Chattanooga Forecasting Operations Management - 6 th Edition Chapter 12 Roberta Russell & Bernard W. Taylor, III

2. Copyright 2009 John Wiley & Sons, Inc.12-2 Lecture Outline   Strategic Role of Forecasting in Supply Chain Management   Components of Forecasting Demand   Time Series Methods   Forecast Accuracy   Time Series Forecasting Using Excel   Regression Methods

3. Copyright 2009 John Wiley & Sons, Inc.12-3 Forecasting  Predicting the future  Qualitative forecast methods subjective subjective  Quantitative forecast methods based on mathematical formulas based on mathematical formulas

4. Copyright 2009 John Wiley & Sons, Inc.12-4 Forecasting and Supply Chain Management  Accurate forecasting determines how much inventory a company must keep at various points along its supply chain  Continuous replenishment supplier and customer share continuously updated data supplier and customer share continuously updated data typically managed by the supplier typically managed by the supplier reduces inventory for the company reduces inventory for the company speeds customer delivery speeds customer delivery  Variations of continuous replenishment quick response quick response JIT (just-in-time) JIT (just-in-time) VMI (vendor-managed inventory) VMI (vendor-managed inventory) stockless inventory stockless inventory

5. Copyright 2009 John Wiley & Sons, Inc.12-5 Forecasting   Quality Management Accurately forecasting customer demand is a key to providing good quality service   Strategic Planning Successful strategic planning requires accurate forecasts of future products and markets

6. Copyright 2009 John Wiley & Sons, Inc.12-6 Types of Forecasting Methods  Depend on time frame time frame demand behavior demand behavior causes of behavior causes of behavior

7. Copyright 2009 John Wiley & Sons, Inc.12-7 Time Frame  Indicates how far into the future is forecast Short- to mid-range forecast Short- to mid-range forecast typically encompasses the immediate future typically encompasses the immediate future daily up to two years daily up to two years Long-range forecast Long-range forecast usually encompasses a period of time longer than two years usually encompasses a period of time longer than two years

8. Copyright 2009 John Wiley & Sons, Inc.12-8 Demand Behavior  Trend a gradual, long-term up or down movement of demand a gradual, long-term up or down movement of demand  Random variations movements in demand that do not follow a pattern movements in demand that do not follow a pattern  Cycle an up-and-down repetitive movement in demand an up-and-down repetitive movement in demand  Seasonal pattern an up-and-down repetitive movement in demand occurring periodically an up-and-down repetitive movement in demand occurring periodically

9. Copyright 2009 John Wiley & Sons, Inc.12-9 Time (a) Trend Time (d) Trend with seasonal pattern Time (c) Seasonal pattern Time (b) Cycle Demand Demand Demand Demand Random movement Forms of Forecast Movement

10. Copyright 2009 John Wiley & Sons, Inc.12-10 Forecasting Methods  Time series statistical techniques that use historical demand data to predict future demand statistical techniques that use historical demand data to predict future demand  Regression methods attempt to develop a mathematical relationship between demand and factors that cause its behavior attempt to develop a mathematical relationship between demand and factors that cause its behavior  Qualitative use management judgment, expertise, and opinion to predict future demand use management judgment, expertise, and opinion to predict future demand

11. Copyright 2009 John Wiley & Sons, Inc.12-11 Qualitative Methods   Management, marketing, purchasing, and engineering are sources for internal qualitative forecasts   Delphi method involves soliciting forecasts about technological advances from experts

12. Copyright 2009 John Wiley & Sons, Inc.12-12 Forecasting Process 6. Check forecast accuracy with one or more measures 4. Select a forecast model that seems appropriate for data 5. Develop/compute forecast for period of historical data 8a. Forecast over planning horizon 9. Adjust forecast based on additional qualitative information and insight 10. Monitor results and measure forecast accuracy 8b. Select new forecast model or adjust parameters of existing model 7. Is accuracy of forecast acceptable? 1. Identify the purpose of forecast 3. Plot data and identify patterns 2. Collect historical data No Yes

13. Copyright 2009 John Wiley & Sons, Inc.12-13 Time Series   Assume that what has occurred in the past will continue to occur in the future   Relate the forecast to only one factor - time   Include moving average exponential smoothing linear trend line

14. Copyright 2009 John Wiley & Sons, Inc.12-14 Moving Average  Naive forecast demand in current period is used as next period’s forecast demand in current period is used as next period’s forecast  Simple moving average uses average demand for a fixed sequence of periods uses average demand for a fixed sequence of periods stable demand with no pronounced behavioral patterns stable demand with no pronounced behavioral patterns  Weighted moving average weights are assigned to most recent data weights are assigned to most recent data

15. Copyright 2009 John Wiley & Sons, Inc.12-15 Moving Average: Naïve Approach Jan120 Feb90 Mar100 Apr75 May110 June50 July75 Aug130 Sept110 Oct90 ORDERS MONTHPER MONTH -1209010075110507513011090 Nov - FORECAST

16. Copyright 2009 John Wiley & Sons, Inc.12-16 Simple Moving Average MA n = n i = 1  DiDiDiDi n where n =number of periods in the moving average D i =demand in period i

17. Copyright 2009 John Wiley & Sons, Inc.12-17 3-month Simple Moving Average Jan120 Feb90 Mar100 Apr75 May110 June50 July75 Aug130 Sept110 Oct90 Nov- ORDERS MONTHPER MONTH MA 3 = 3 i = 1  DiDiDiDi 3 = 90 + 110 + 130 3 = 110 orders for Nov –––103.388.395.078.378.385.0105.0110.0MOVINGAVERAGE

18. Copyright 2009 John Wiley & Sons, Inc. Beni Asllani University of Tennessee at Chattanooga Inventory Management Operations Management - 6 th Edition Chapter 13 Roberta Russell & Bernard W. Taylor, III

19. Copyright 2009 John Wiley & Sons, Inc.13-19 Lecture Outline   Elements of Inventory Management   Inventory Control Systems   Economic Order Quantity Models   Quantity Discounts   Reorder Point   Order Quantity for a Periodic Inventory System

20. Copyright 2009 John Wiley & Sons, Inc.13-20 What Is Inventory?   Stock of items kept to meet future demand   Purpose of inventory management how many units to order when to order

21. Copyright 2009 John Wiley & Sons, Inc.13-21 Inventory and Supply Chain Management  Bullwhip effect demand information is distorted as it moves away from the end-use customer demand information is distorted as it moves away from the end-use customer higher safety stock inventories to are stored to compensate higher safety stock inventories to are stored to compensate  Seasonal or cyclical demand  Inventory provides independence from vendors  Take advantage of price discounts  Inventory provides independence between stages and avoids work stoppages

22. Copyright 2009 John Wiley & Sons, Inc.13-22 Inventory and Quality Management in the Supply Chain   Customers usually perceive quality service as availability of goods they want when they want them   Inventory must be sufficient to provide high-quality customer service in QM

23. Copyright 2009 John Wiley & Sons, Inc.13-23 Types of Inventory   Raw materials   Purchased parts and supplies   Work-in-process (partially completed) products (WIP)   Items being transported   Tools and equipment

24. Copyright 2009 John Wiley & Sons, Inc.13-24 Two Forms of Demand  Dependent  Demand for items used to produce final products   Tires stored at a Goodyear plant are an example of a dependent demand item  Independent  Demand for items used by external customers   Cars, appliances, computers, and houses are examples of independent demand inventory

25. Copyright 2009 John Wiley & Sons, Inc.13-25 Inventory Costs  Carrying cost  cost of holding an item in inventory  Ordering cost  cost of replenishing inventory  Shortage cost  temporary or permanent loss of sales when demand cannot be met

26. Copyright 2009 John Wiley & Sons, Inc.13-26 Inventory Control Systems  Continuous system (fixed- order-quantity)  constant amount ordered when inventory declines to predetermined level  Periodic system (fixed-time- period)  order placed for variable amount after fixed passage of time

27. Copyright 2009 John Wiley & Sons, Inc.13-27 Economic Order Quantity (EOQ) Models   EOQ optimal order quantity that will minimize total inventory costs   Basic EOQ model   Production quantity model

28. Copyright 2009 John Wiley & Sons, Inc.13-28 Assumptions of Basic EOQ Model  Demand is known with certainty and is constant over time  No shortages are allowed  Lead time for the receipt of orders is constant  Order quantity is received all at once

29. Copyright 2009 John Wiley & Sons, Inc.13-29 Reorder Point: Example Demand = 10,000 gallons/year Store open 311 days/year Daily demand = 10,000 / 311 = 32.154 gallons/day Lead time = L = 10 days R = dL = (32.154)(10) = 321.54 gallons

30. Copyright 2009 John Wiley & Sons, Inc.13-30 Safety Stocks  Safety stock  buffer added to on hand inventory during lead time  Stockout  an inventory shortage  Service level  probability that the inventory available during lead time will meet demand

31. Copyright 2009 John Wiley & Sons, Inc.13-31 Periodic Inventory System

32. Copyright 2009 John Wiley & Sons, Inc.13-32 Copyright 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permission Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein.