ME 3222 Exam 2

coefficient of determination

(r^2) measures the percent of change in y predcted by the change in x - values from 0 to 1

Medium-range Forecast

- 3 months to 3 years - Sales and production planning, budgeting

Long-range Forecast

- 3+ years - New product planning, facility location, research and development

S&OP requires

- A logical unit for measuring sales and output - A forecast of demand for a reasonable intermediate planning period in aggregate terms - a method to determine the relevant costs - A model that combines forecasts and costs so scheduling decisions can be made for the planning period

Capacity Options: Varying production rates through overtime or idle time

- Allows constant workforce - May be difficult to meet large increases in demand - Overtime can be costly and may drive down productivity - Absorbing idle time may be difficult

Qualitative Methods: Market Survey

- Ask the customer about purchasing plans - Useful for demand and product design and planning - What consumers say and what they do may be different - May be overly optimistic

Demand Options: Counterseasonal product and service mixing

- Develop a product mix of counterseasonal items - May lead to products or services outside the company's areas of expertise

Scheduling Process-Focused Facilities

- High variety, low volume - Production items differ considerably - Schedule incoming orders without violating capacity constraints - Scheduling can be complex

Capacity Options: changing inventory levels

- Increase inventory in low demand periods to meet high demand in the future - Increases costs associated with storage, insurance, handling, obsolescence, and capital investment - Shortages may mean lost sales due to long lead times and poor customer service

Gantt Charts

- Load chart shows the loading and idle times of departments, machines, or facilities - Displays relative workloads over time - Schedule chart monitors jobs in process - All Gantt charts need to be updated frequently to account for changes

Scheduling Criteria

- Minimize completion time - Maximize utilization of facilities - Minimize work-in-process (WIP) inventory - Minimize customer waiting time

Factors that Affect Location Decisions: Political Risk, Values, and Culture

- National, state, local governments attitudes toward private and intellectual property, zoning, pollution, employment stability may be in flux - Worker attitudes towards turnover, unions, absenteeism - Globally cultures have different attitudes towards punctuality, legal, and ethical issues

Demand Options: Backordering during high demand periods

- Requires customers to wait for an order without loss of goodwill or the order - Most effective when there are a few if any substitutes for the product or service - Often result in a loss of sales

Time-Series Forecasting

- Set of evenly spaced numerical data - Obtained by observing response variable at regular time periods - Forecast based only on past values, no other variables important - Assumes that factors influencing past and present will continue influence in future -Types: trend, seasonal, cyclical, random

Capacity Options: Subcontracting

- Temporary measure during periods of peak demand - May be costly - Assuring quality and timely delivery may be difficult - Exposes your customers to a possible competitor

Short-range Forecast

- Up to 1 year, generally less than 3 months - Purchasing, job scheduling, workforce levels, job assignments, production levels - More accurate than long-term

Factors that Affect Location Decisions: labor productivity

- Wage rates are not the only cost - Lower productivity may increase total cost (labor cost per unit)

backward scheduling

- begins with the due date and schedules the final operation first - Schedule is produced by working backwards through the processes - Resources may not be available to accomplish the schedule

forward scheduling

- starts as soon as the requirements are known - Produces a feasible schedule though it may not meet due dates - Frequently results in buildup of work-in-progress inventory

Demand Options: Influencing demand

- use advertising or promotion to increase demand in low periods - attempt to shift demand to slow periods - may not be sufficient to balance demand and capacity

Factors that Affect Location Decisions: Exchange rates and currency risks

-Can have a significant impact on costs -Rates change over time - Operational hedging: shift production as exchange rates change

Random Component

-Erratic, unsystematic, 'residual' fluctuations -Due to random variation or unforeseen events -Short duration and nonrepeating

Capacity Options: Varying workforce size by hiring or layoffs

-Match production rate to demand -Training and separation costs for hiring and laying off workers -New workers may have lower productivity -Laying off workers may lower morale and productivity

The Strategic Importance of Location

-One of the most important decisions a firm makes -Increasingly global in nature -Significant impact on fixed and variable costs -Decisions made relatively infrequently (Long-term decisions) -Once committed to a location, many resource and cost issues are difficult to change

Finite Capacity Scheduling

-Overcomes disadvantages of rule-based systems by providing an interactive, computer-based graphical system -May include rules and expert systems or simulation to allow real-time response to system changes -FCS allows the balancing of delivery needs and efficiency

Scheduling Issues

-Scheduling deals with the timing of operations -The task is the allocation and prioritization of demand -Significant factors are 1. Forward or backward scheduling 2. Finite or infinite loading 3. The criteria for sequencing jobs

Aggregate Planning Strategies

-Should inventories be used to absorb changes in demand? -Should changes be accommodated by varying the size of the workforce? -Should part-timers, overtime, or idle time be used to absorb changes? -Should subcontractors be used and maintain a stable workforce? -Should prices or other factors be changed to influence demand?

KSF in Region/Community decision

1) Corporate desires 2) Attractiveness of region 3) Labor availability and costs 4) Costs and availability of utilities 5) Environmental regulations 6) government incentives and fiscal policies (taxes) 7) Proximity to raw materials and consumers 8) Land/construction costs

Critical Ration Technique

1) Determine the status of a specific job 2) Establish relative priorities among jobs on a common basis 3) Adjust priorities automatically for changes in both demand and job progress 4) Dynamically track job progress

Potential Problems with Moving Averages

1) Increasing n smooths the forecast but makes it less sensitive to changes 2) Does not forecast trends well 3) Requires extensive historical data

KSF in Country Decision

1) Political risks, governments rules, attitudes, incentives 2) Cultural and economic issues 3) Location of Markets 4) Labor talent, attitudes, productivity, and cost 5) Availability of suppliers, communications, energy 6) Exchange rates and currency risks

KSF in Site Decision

1) Site size and cost 2) Air, railway, highway, and waterway systems 3) Zoning restrictions 4) Proximity of services/supplies needed 5) Environmental impact issues 6) Customer density and demographics

Graphical Methods

1. Determine the demand for each period 2. Determine the capacity for regular time, overtime, and subcontracting each period 3. Find labor costs, hiring and layoff costs, and inventory holding costs 4. Consider company policy on workers and stock levels 5. Develop alternative plans and examine their total cost

Seven Steps in Forecasting

1. Determine the use of the forecast 2. Select the items to be forecasted 3. Determine the time horizon of the forecast 4. Select the forecasting model(s) 5. Gather the data needed to make the forecast 6. Make the forecast 7. Validate and implement results

Seasonal Variations in Data

1. Find average historical demand for each season 2. Compute the average demand over all seasons 3. Compute a seasonal index for each season 4. Estimate next year's total demand 5. Divide this estimate of total demand by the number of seasons, then multiply it by the seasonal index for that season Seasonal index = average period demand for past n years/ average monthly demand

Making Revenue Management Work

1. Multiple pricing structures must be feasible and appear logical to the customer 2. Forecasts of the use and duration of use 3. Changes in demand

Service Location Strategy

1. Purchasing power of customer-drawing area 2. Service and image compatibility with demographics of the customer-drawing area 3. Competition in the area 4. Quality of the competition 5. Uniqueness of the firm's and competitors' locations 6. Physical qualities of facilities and neighboring businesses 7. Operating policies of the firm 8. Quality of management

Limitations of Rule-Based Dispatching Systems

1. Scheduling is dynamic and rules need to be revised to adjust to changes 2. Rules do not look upstream or downstream 3. Rules do not look beyond due dates

Economic Forecasts

Address business cycle - inflation rate, money supply, housing starts, etc.

Revenue Management

Allocating resources to customers at prices that will maximize revenue or yield 1) Service or Product ca be sold in advance of consumption 2) Demand fluctuates 3) Relatively fixed resource (capacity) 4) Segmentable Demand 5) Low variable costs; high fixed costs

locational cost-volume analysis

An economic comparison of location alternatives - Three steps in the method 1) Determine fixed and variable costs for each location 2) Plot the cost for each location 3) Select location with lowest total cost for expected production volume

Critical Ratio (CR)

An index number found by dividing the time remaining until the due date by the work time remaining on the job Jobs with low critical ratios are scheduled ahead of jobs with higher critical ratios Performs well on average job lateness criteria CR = Time Remaining until due/workdays remaining

infinite loading

Assigns work without the consideration of capacity - All due dates are met - Capacities may have to be adjusted

Naive approach

Assumes demand in next period is the same as demand in most recent period Sometimes cost effective and efficient can be god starting point

Sales and Operations Planning

Coordination of demand forecasts with functional areas and the supply chain Typically done by cross-functional teams Determine which plans are feasible Limitations must be reflected Provides warning when resources do not match expectations Output is an aggregate plan Decisions must be tied to strategic planning and integrated with all areas of the firm over all planning horizons

Level Strategy

Daily production is uniform Use inventory or idle time as buffer Stable production leads to better quality and productivity

Importance of Short-Term Scheduling

Effective and efficient scheduling can be a competitive advantage - Faster movement of goods through a facility means better use of assets and lower costs - Additional capacity resulting from faster throughput improves customer service through faster delivery - Good schedules result in more dependable deliveries

Qualitative Methods: Sales force composite

Estimates from individual salespersons are reviewed for reasonableness, then aggregated - May be overly optimistic

Exponential Smoothing

Form of weighted moving average - Weights decline exponentially - Most recent data weighted most Requires smoothing constant (alpha) - Ranges from 0 to 1 - Subjectively chosen Involves little record keeping of past data Ft = F(t-1)+alpha*[A(t-1)-F(t-1)] higher alpha = average is likely to change lower alpha = average is stable

Factors that Affect Location Decisions

Globalization adds to complexity; Drivers of globalization are: - Market economics - Communication - Rapid, reliable transportation - Ease of capital flow - Differing labor costs Identify key success factors (KSFs)

Geographic Information System (GIS)

Important tool to help in location analysis Enables more complex demographic analysis Available databases include: - Detailed census data - Detailed maps - Utilities - Geographic features - Location of major services

Moving Averages

MA is a series of arithmetic means Used if little or no trend Used often for smoothing Provides overall impression of data over time Demand in previous n periods/n

Factors that Affect Location Decisions: Proximity to Markets/Suppliers/Competitors

Markets: - Very important to services - JIT systems or high transportation costs may make it important to manufacturers Suppliers: - Perishable goods, high transportation costs, bulky products Competitors: (Clustering) - Often driven by resources such as natural, information, capital, talent - Found in both manufacturing and service industries

Chase Strategy

Match output rates to demand forecast for each period Vary workforce levels or vary production rate Favored by many service organizations

Center of Gravity Method

Method for locating a distribution center that minimizes distribution cost. Considers: - Location of markets - Volume of goods shipped to those markets - Shipping cost/distance

aggregate planning in services

Most services use combination strategies and mixed plans --Controlling the cost of labor is critical 1. Accurate scheduling of labor-hours to assure quick response to customer demand. 2. An on-call labor resource to cover unexpected demand 3. Flexibility of individual worker skills 4. Flexibility in rate of output or hours of work

Comparison of Sequencing Rules

No one sequencing rule excels on all criteria 1. SPT does well on minimizing flow time and number of jobs in the system But SPT moves long jobs to the end which may result in dissatisfied customers 2. FCFS does not do especially well (or poorly) on any criteria but is perceived as fair by customers 3. EDD minimizes maximum lateness

Qualitative Methods: Delphi method

Panel of experts, queried iteratively - Decision makers, staff, and respondents - iterative group process; continues until consensus is reached

Trend Component

Persistent, overall upward or downward pattern Changes due to population, technology, age, culture, etc. Typically several years duration

Qualitative Methods: Jury of executive opinions

Pool opinions of high-level experts, sometimes augmented by statistical models - Group estimates demand by working together - Relatively quick - "Group-think" disadvantage

Factor Rating Method

Popular because a wide variety of factors can be included in the analysis 1) Develop a list of relevant factors (KSF) 2) Assign a weight to each factor 3) Develop a scale for each factor 4) Score each location for each factor 5) Multiply score by weights for each factor and total the score for each location 6) Make a recommendation based on the highest point score

Technological Forecasts

Predict rate of technological progress Impacts development of new products

Demand Forecasts

Predict sales of existing products and services

Forecasting in the Service Sector

Presents unusual challenges -Special need for short term records -Needs differ greatly as function of industry and product -Holidays and other calendar events -Unusual events

Forecasting

Process of predicting a future event - Underlying basis of all business decisions (production, inventory, personnel, and facilities)

Seasonal Component

Regular pattern of up and down fluctuations Due to weather, customs, etc. Occurs within a single year

Cyclical Component

Repeating up & down movements Affected by business cycle, political, and economic factors Usually multiple years in duration

Priority Rules for Sequencing Jobs

Specifies the order in which jobs should be performed at work centers - FCFS: first come first serve - SPT: Shortest Processing Time - EDD: Earliest due date - LPT: longest processing time

Average completion time

Sum of total flow time / number of jobs

Strategic Importance of Forecasting

Supply-Chain Management - Good supplier relations, advantages in product innovation, cost and speed to market Human Resources - Hiring, training, laying off workers Capacity - Capacity shortages can result in undependable delivery, loss of customers, loss of market share

Aggregate Planning

The objective of aggregate planning is usually to meet forecast demand while minimizing cost over the planning period - Combines appropriate resources into general terms - Part of a larger production planning system

Short-term scheduling

The objective of scheduling is to allocate and prioritize demand (generated by either forecasts or customer orders) to available facilities

Average number of Jobs in the system

Total Flow Time / Total job work (processing) time

Forecasting Approaches: Quantitative Methods

Used when situation is 'stable' and historical data exist - Existing products - Current technology Involves mathematical techniques - e.g., forecasting sales of color televisions

Forecasting Approaches: Qualitative Methods

Used when situation is vague and little data exist - New products - New technology Involves intuition, experience - e.g., forecasting sales on Internet

Weighted Moving Average

Used when some trend might be present - Older data usually less important Weights based on experience and intuition (Weight for period n)(demand in period n)/weights

Capacity Options: Using part-time workers

Useful for filling unskilled or low skilled positions, especially in services

mathematical approaches

Useful for generating strategies Transportation method of linear programming - Produces an optimal plan - works well for inventories, overtime, subcontracting - does not work when nonlinear or negative factors are introduced

coefficient of correlation

a measure of correlation that ranges in value from -1.00 to +1.00

tracking signal

a measurement of how well a forecast is predicting actual values = cumulative error/MAD

finite loading

assigns work up to the capacity of the work station - All work gets done - Due dates may be pushed out

Disaggregation

breaks the aggregate plan into greater detail; results in a master production schedule

tangible costs

easily measured costs such as utilities, labor, materials, taxes

Exponential Soothing with Trend Adjustment

forecast including trend = Exponentially smoothed forecast + Exponentially smoothed trend

Location Strategy Objective

maximize the benefit of location to the firm Options: 1) Expanding existing facilities 2) Maintain existing and add sites 3) Closing existing and relocating

Intangible costs

not as easy to quantify and include education, public transportation, community, quality-of-life

Mean Squared Error (MSE)

sum(Forecast Errors)^2/n

Mean Absolute Deviation (MAD)

sum(actual-forecast)/n

Center of Gravity Point

sum(x_i*Q_i)/sum(Q_i)

Mean Absolute Percent Error (MAPE)

sum[100*(actual(i)-forecast(i))/actual(i)]/n

flow time

the time between the release of a job to a work center until the job is finished

Utilization Metric

total job work (processing) time / sum of total flow time

Average Job Lateness

total late days / number of jobs