PRODUCTION AND OPERATION MANAGEMENT

CONTENTS Chapter 1. Operations function & evolution of POM

A. An Overview B. Produces the organizations physical goods and services C. Distinction between Manufacturing and service organizations D. What points assume importance in this regard? E. Historical evolution of POM

Chapter 2. Framework for managing operations

Strategic role of operations Primary basis of competition A. Trends in operations management Macro Perspective B. Behavioral management Careers in POM

Chapter 3. Operations Strategy

A. Strategic planning B. Strategic (long-term) decisions C. The role of a linkage mechanism in this regard D. The role of a linkage mechanism in this regard

Chapter 4 Forecasting Models

A. What is Forecasting? Types of forecasts Forecasting Approaches

Chapter5. Weighted Moving Averages

A. The concept of Weighted Moving Averages Exponential Smoothing The least square method

1. OPERATIONS FUNCTION & EVOLUTION OF POM An Overview

To put the things in the right perspective, let me start by giving you an overviewthe shape of things to come, At the onset of the 1980s, while Japan's productivity continued its healthy surge the leaders of business and government worldwide were alarmed that productivity" stagnating in the United States. What had happened to the giant of commerce and industry? What led to its lethargy? What have we learned in the ensuing years? What can be done to restore its stately posture? Answers to these questions reside in the way we manage our organizations and their operations. While U.S. productivity waned, Americans grew increasingly concerned about other related issues: maintaining adequate energy sources, protecting the environment and meeting the demand for goods and services at home and abroad. These facts continue to impose complex demands on our organizations. Today management faces unparalleled challenges from a society more educated, affluent, demanding, and concerned than ever before, and from international competition keener than ever before. Never before have these challenges-and the costs of failure-been greater.

What is operations system?

Let us now turn our attention to an operation system.

Can you define it?

Well, essentially two characteristics

Produces the organizations physical goods and services

Let us first understand the reasons for what many feel over-emphasis on operations management. The complexities of our contemporary world have heightened our dependence on organizations and the people who manage them, yet often we fail to understand and appreciate the process of management. Moreover, as we've learned from foreign competitors, we have seriously neglected the operations of our organizations. We have taken for granted our preeminence as capable producers. No longer can we afford to do so. We need to reexamine the processes by which goods and services are created and to revitalize the ways that we manage the human and material resources for doing so. This book aims to meet these needs. It presents the concepts, terminology, problems, and opportunities that comprise operations management.

What is conversion process?

All of us, I am sure, are aware of the conversion process.

Can we say it is a: Change process. Changes/ converts inputs into outputs. Inputs are What led to its lethargy? What have we learned in the ensuing years? What can be done to restore its stately posture? e- land, labor, capital? Output is-well, goods and services, what else?

Time to consider an example

Can you tell me how the operations system works for lets say a farm? Start thinking, Organize your thoughts and Focus on the components, one by one. (Got it? Good.)

Inputs
-what are they going to be? Well, quite a few. i.e. Land Farmer labor Tractors Combines Plows Buildings Management skills of farmer

On a farm the operations system is the transformation that occurs when the farmer's inputs (land, equipment, labor, etc.) are converted into such outputs as corn, wheat, or milk. The exact form of the conversion process varies from industry to industry, but it is an economic phenomenon that exists in every industry. Economists refer to this transformation of resources into goods and services as the production. Inputs go into what you call Transformation/conversion process. But there would be something called Random fluctuations. Can you think of examples of Random fluctuations?

Moving over outputs.

Tell me the produce of a farm. Outputs of farm are easy to comprehend i.e. Grain

Meat products while in others it is a service (insurance, health care for the, elderly) What do such diverse organization Taken in this context, the operations system (function) of an organization is the part that produces the organization's products. In some organizations the product is a physical good (refrigerators, breakfast cereal), while in others it is a service (insurance, health care for the elderly).

Distinction between Manufacturing and service organizations

A conversion process that includes manufacturing (or production) yields a tangible output: a product. In contrast, a conversion process that includes service yields an intangible output: A deed, A performance, An effort Consider McDonnell Douglas Corporation (MDC), an aerospace firm and the United States' largest defense contractor. Subsidiary Douglas Aircraft Company produces airplanes, clearly a product. Yet other MDC components, such as the Information Systems Group (ISG), provide services. ISG, for example, delivers computer services to hospitals, architects, and other businessesservices such as programming, data analysis, and data storage using ISG's computers. Other MDC components launch spacecraft, provide contract research services, assemble missiles, and design and manufacture fighter aircraft. This mixture of service and manufacturing is typical of most aerospace firms. What points assume importance in this regard? The relevant points are: Nature of output (Tangible/Intangible) Consumption of output Nature of work/jobs Degree of consumer contact Customer participation in conversion Measurement of performance

The conversion of inputs into outputs varies considerably with the technology used. By technology, we mean the level of scientific sophistication in plant, equipment, skills, and product (or service) in the conversion (transformation) process. A soft-drink bottling operation, for example, features highly mechanized, capital-intensive conversion process.. A scientific research laboratory utilizes highly trained, professional scientists and specialized equipment. Other industries use lowskilled labor, minimal equipment, and simple processes to provide products and services.

We have already seem above how a Service-oriented businesses such as dental health clinic utilizes custom-tailored conversion of the unique combination of tools, chemicals, customer situations, and professional skill that provide the output of quality dental care for the patient. To oversimplify, manufacturing is characterized by tangible outputs (products), Outputs that customers consume over time, jobs that use less labor and more equipment, little customer contact, no customer participation in the conversion process (in production), and sophisticated methods for measuring production activities and resource consumption, as products are made. Service, on the other hand, is characterized by intangible outputs, outputs that customers consume immediately, jobs that use more labor and less equipment, direct customer contact, frequent customer participation in the conversion process, and elementary methods for measuring conversion activities and resource consumption. Some service is equipment-based-computer programming services, railroad services, and telephone services-whereas other service is people-based-tax accounting services, hair styling and golf instruction. Let's look a little closer at the extent to which customers participate in the conversion process. In service operations, managers sometimes find it useful to distinguish between output and throughput types of customer participation. Output is a generated service; throughput is an item going through the process. In a pediatrics clinic the output is the medical service to the child who by going through the conversion process. is also the throughput. At a fast-food restaurant, in contrast the customer does not go through the conversion process. The outputs are hamburgers and French fries served in a hurry(both goods and services). While the throughputs are the food items as they are prepared and converted, the customer is neither a throughput nor an output. Both the clinic and the restaurant provide services, even though the outputs and throughputs differ considerably.

Historical evolution of POM

Till 1930s: scientific management & F.W.Taylor 1930s-50s: Production management 1970s: Operations management For over two centuries operations management has been recognized as an important factor in a country's economic well being. Progressing through a series of names -manufacturing management, production management, and operations management-all of which describe the same general discipline, the evolution of the term reflects the evolution of modern operations management. The traditional view of manufacturing management began in the eighteenth century when Adam Smith recognized the economic benefits of specialization of labor. He recommended breaking jobs down into subtasks and reassigning workers to specialized tasks in which they would become highly skilled and efficient. In the early twentieth century, Frederick W. Taylor implemented Smith's theories and crusaded for scientific management throughout the vast manufacturing complex of his day. Till about 1930, the traditional view prevailed, and many techniques we still use-- today were developed. Production management became the more widely accepted term from the 1930s through the 1950s. As Frederick Taylor's-work became more widely known, managers developed techniques that focused on economic efficiency in manufacturing. Workers were "put under a microscope" and studied in great detail to eliminate wasteful efforts and achieve greater efficiency. At this same time, however, management also began discovering that workers have multiple needs, not just economic needs. Psychologists, sociologists, and other social scientists began to study people and human behavior in the work environment. In addition, economists, mathematicians, and computer scientists contributed newer, more sophisticated analytical approaches.

With the 1970s emerge two distinct changes in our views. The most obvious of these, reflected in the new name-operations management-was a shift in the service and manufacturing sectors of the economy. As the service sector became more prominent, the change from "production" to "operations" emphasized the broadening of our field to service organizations. The second, more subtle change was the beginning of an emphasis on synthesis, rather than just analysis, in management practices. Spearheaded most notably by Wickham Skinner, American industry was awakened to its ignorance of the operations function as a vital weapon in the organization's overall competitive strategy. Previously preoccupied with an intensive analytical orientation and an emphasis on marketing and finance, managers had failed to integrate operations activities coherently into the highest levels of strategy and policy. Today, the operations function is experiencing a renewed role as a vital strategic element. Consequently, organizational goals are better focused to meet consumers' needs throughout the world.

Table 1: Historical Summary of OM

Year 1910s Concept Principles of scientific management Industrial psychology Moving assembly line Economic lot size 1930s Quality control Hawthorne studies of worker motivation Tool Formalized time-study and work-study concepts Motion study Activity scheduling chart EOQ applied to inventory control Sampling inspection and statistical tables for quality control Activity sampling for work analysis 1940s Multidisciplinary team approaches to complex system problems Extensive development of operations research tools Simplex method of linear programming Originator Frederick W. Taylor (U S.) Frank and Lillian Gilbreth (U.S.) Henry Ford and Henry L. Gantt (U.S.) F. W. Harris (U.S.) Walter Shewhart, H. F. Dodge, and H.G. Roming (U.S.) Elton Mayo (U.S.) and L. H. C. Tippett (England) Operations research groups (England) and George B. Dantzig (U.S.) Many researchers in the U.S. and Western Europe

195060s

Simulation, waiting-line theory, decision theory, mathematical programming, project

Scheduling techniques of PERT and CPM 1970 s Widespread use Shop scheduling, inventory Led by computer manufacturers, in of computers in control, forecasting. Project particular, IBM; Joseph Orlicky business management, MRP andOliver Wight were the major MRP innovators (U.S.) Service quality Mass production in the service and productivity sector McDonalds restaurants

1980 s

Manufacturing strategy paradigm

Manufacturing as a competitive Harvard Business School faculty weapon (U.S.)

JIT, TQC, and Kanban, poka-yokes, CIM, FMS, Tai-Ichi Ohno of Toyota Motors factory automation CAD/CAM, robots, etc. (Japan), W. E. Deming and J. M. Juran (U.S.), and engineering Synchronous Bottleneck analysis, OPT, theory disciplines (U.S., Germany, and Japan) manufacturing of constraints Eliyahu M. Goldratt (Israel) 1990 s Total quality Baldrige quality award, ISO management 9000, quality function development, value and concurrent engineering continuous improvement paradigm Radical change paradigm National Institute of Standards and Technology. American Society of Quality Control (U. S.), and International Organization for Standardization (Europe) Michael Hammer and consulting firms (U.S.) major

Business reengineering

process Internet, World Wide Web SAP/R3, client/server software

U.S. government, Netscape Communication Corporation, and Microsoft Corporation SAP (Germany), Oracle (U.S.)

Electronic enterprise Supply management chain

2000s

Ecommerce

Internet, World Amazon, eBay, America Online, Yahoo! Wide Web

Systems view of operations

Before we focus our attention on the systems view, let us first attempt to define a system: What is a system? Collection of objects related by regular interaction and interdependence. What is operations management? Management of conversion processes. Converts inputs into outputs (as explained earlier)

Classical school
Scientific management Process orientation

Behavioral school Human relations Social systems

Modeling school Decision-making Systems theory Mathematical modeling What then is a system?

In a very general sense, a system is a collection of objects related by regular interaction and interdependence. Systems can vary from the large-nationwide communications networks, for example--a system for processing paperwork in an office, to help people communicate about system, proper systems are required to be installed in place. A systems model of the organization identifies the subsystems, or subcomponents, that make up the organization. A business firm might well have finance, marketing, accounting, personnel, engineering, purchasing, and physical distribution systems in addition co the operations system. These systems arent independent but are interrelated co one another in many vital ways. We have chosen to show production/operations with major interactions between finance and marketing and lesser interactions with other functions. Decisions made in the production/ operations subsystem often affect the behavior and performance of other subsystems. Finally, we should understand that the boundaries separating the various subsystems are not clear and distinct.

Where do the responsibilities of production/operations end and those of physical distribution begin? The answers to such questions are often unclear and sometimes never resolved.

What is mathematical modeling all about?

You all know very well what modeling is all about and what a model really is? Some of you might also be aware of the effect it has on others.

Mathematical Models
Mathematical models show the functional relationships among different variables by using mathematical symbols and equations. In any equation, x. y. and similar symbols arc used to express precise functional relationships among the variables. The context in which we use the term Mathematical models refers to the creation of mathematical representations of management problems and organizations in order to determine outcomes of proposed courses of action. In spite of their utility, we must recognize models for what they are-artificial representations of things that are real. As such, they fall short of fully duplicating their real world counterparts. This incompleteness of models should not be interpreted as a strictly negative feature. In fact, it can be desirable, because it clears away extraneous elements and concentrates on the heart of the problem. The modeling process can give us a simplified version of the situation, representation in which all the minor considerations have been stripped away so the major factors are clearly visible. Thus, Mathematical modeling refers to the creation of mathematical representations of management problems and organizations in order to determine outcomes of proposed courses of action. They show functional relationship among variables by using mathematical symbols and equations.

Types of mathematical models

Commonly two types of mathematical models are used:

Optimization models
Optimization Operations managers often use models to help analyze problems and suggest solutions. To assist, they often find it helpful to use an algorithm, a prescribed set of steps (a procedure) that attains a goal. In optimization models, for example, we want to find the best solution (the goal), and an Optimization algorithm identifies the steps for doing so. In operations management we strive for optimization algorithms as aids in problem solving.

Heuristic models
Heuristics In other cases, a heuristic approach is used. A heuristic is a way (a strategy) of using rules of thumb or defined decision procedures to attack a problem. In general, when we use heuristics we do not expect to obtain the best possible solution to a problem; instead, we hope for a

satisfactory solution quickly. Formally developed heuristic procedures are called heuristic algorithms. They are useful for problems for which optimization algorithms have not yet been developed.

Right perspective
You get a simplified version of the situation-a representation in which all the minor considerations have been stripped away so the major factors are clearly visible.

Problem Classification
Since the operations analyst encounters many different kinds of problems, it is a good idea to have convenient starting point, or frame of reference, for initiating the analysis. Classifying problems into different types makes it easier to select models and criteria to use in the analysis. We'll consider two ways of classifying problems: by the degree to which the outcome is uncertain. and by the degree to which the decisions arc interdependent.

Element of Chance and Uncertainty

When we know for sure what the outcome of each decision will be, we are dealing with a problem under conditions of certainty. When a decision has more than one possible outcome and we know the likelihood of each outcome, we are dealing with a problem under conditions of risk. Finally, when a decision has more than one possible outcome and we do not know the likelihood of each outcome, we are dealing with a problem under conditions of uncertainty. Some examples may clarify these conditions of certainty, risk, and uncertainty. Focus on the systems view of a contemporary business organization given below:

Points to ponder
What is Operations Management? Defined Operations management (OM)is defined as the design, operation, and improvement of the systems that create and deliver the firms primary products and services The McGraw-Hill Companies, Inc., 2004

What is a Production System? Defined

A production systemic defined as a user of resources to transform inputs into some desired outputs The McGraw-Hill Companies, Inc., 2004

Transformations
Physicalmanufacturing Locationaltransportation Exchangeretailing Storagewarehousing

Physiological--health care Informational--telecommunications The McGraw-Hill Companies, Inc., 2004

What is a Service and what is a Good?

If you drop it on your foot, it wont hurt you. (Good or service?) Services never include goods and goods never include services.(True or false?) The McGrawHill Companies, Inc., 2004

2. FRAMEWORK FOR MANAGING OPERATIONS Introduction

The lesson introduces you to the Framework for managing operations. You learn to appreciate the strategic role that operations management plays in the contemporary business and the trends in its analysis.

OM visited once more

Operations management is the effective Management of the conversion process, which converts land, labor, capital, and management inputs into desired Outputs or goods and services. The operations manager's job is to manage the process of converting inputs into desired outputs. Our definition of operations management is, then, the management of the conversion process, which converts land, labor, capital, and management inputs into desired outputs of goods and services. In doing so, the manager uses various approaches from the classical, behavioral, and modeling views of management.

Strategic role of operations

The strategic roles could be summarized as under: Economy and efficiency of conversion operations are secondary goals. Primary goals related to market opportunities. Identify the potential within the industry. Develop overall organizational strategy.

Operating managers are concerned with many different problem areas: cost control in brokerage houses, quality of services in hospitals, and rates of production output in furniture factories. Although operations managers occupy positions at several levels of their organizations, and although they work in different kinds of organizations, they all share certain kinds of problems as a study conducted at Boston University, reveals the kinds of activities 160 executives are concerned with in U.S. and Canadian firms. The respondents- managers or directors of operations, plant managers, divisional general managers, vice presidents, and others with related duties stated that many of their firms most prominent activities for improving operations and to do with planning, organizing and controlling the operation system and its conversion process. You should have come to understand that the basic downward flow of strategy has strong effects influences leading to managing conversion operations and results. The general thrust of the process is guided by competitive and market conditions in the industry, which provide the basis for determining the organization's strategy. The following points assume significance: Where is the industry now? Where will it be in the future? What are the existing and potential markets? What market gaps exist? Social systems

A careful analysis of market segments and the ability of our competitors and us to meet the needs of these segments will determine the best direction for focusing an organization's efforts. After assessing the potential within an industry, an overall organizational strategy must be developed, including some basic choices of the primary basis for competing. In doing so, priorities are established among the following four characteristics: Quality (product attributes) Cost efficiency (low product price) Dependability (reliable, timely delivery of orders to customers) Flexibility (responding rapidly with new products or changes in volume)

In recent years, we have learned that most organizations cannot be best on all these dimensions and, by trying to do so, they end up doing nothing well. Furthermore, when a

competency exists in one of these areas, opting for / exploring available and different options can lead to a downfall in effectiveness (meeting the primary objectives). Time is emerging as a critical dimension of competition in both manufacturing and service industries. In any industry the firm with the fastest response to customer demands has the potential to achieve an overwhelming market advantage. Its importance to companies like say, Copeland corporation can not be over emphasized. In an era of time-based competition, a firm's competitive advantage is defined not by cost but by the total time required to produce a product or service. Firms able to respond quickly have reported growth rates over three times the industry average and double the profitability. Thus the payoff for quick response is market dominance. These basic strategic choices, then, Set the tone for the shape of the operations function, Set the tone for the content of the operations function, and what it accomplishes.

A conversion process designed for one type of focus is often ill suited for success in another system.

Primary basis of competition

Let us now turn our attention to the main bases open to a modern organization on which it can effectively compete. Could you think of some examples? Establish priorities amongst the following four key characteristics:

Quality:
Product performance

Cost efficiency:
Low product price

Dependability:
Reliable Timely delivery

Flexibility:
Response time New products Changes in output volume

Operations objectives

What is a firms operational objective? Overall objective: To provide conversion capabilities for meeting the organisations goals.

Subgoals:
Product characteristics Service characteristics Process characteristics Product quality Service quality

Efficiency-on 3-d plane i.e.

Labour cost and effective employee relations Cost control of operations Cost control in facility utilization

Customer service-has 2 aspects i.e.

Meeting customer demand Meeting delivery deadline

Adaptability The overall objective of the operations subsystem is to provide conversion capabilities for meeting the organization's goals and strategy. The sub goals of the operations subsystem, then, must specify the following: Product/service characteristics Process characteristics Product/service quality Efficiency

Effective employee relations and cost control of labor (b) Cost control of material Cost control in facility utilization

Customer service (schedule)

(a) Producing quantities to meet expected demand (b) Meeting the required delivery date for goods or services

Adaptability for future survival

The priorities among these operations sub goals and their relative emphases should be directly related to the organization's mission. Relating these six operations sub goals to the broader strategic choices above, it is clear that quality, efficiency, and dependability (customer service) are encompassed in the sub goals. Flexibility encompasses Adaptability but also relates to product/service and process characteristics. As we shall discuss in the future lectures, once choices about product and process are made, boundaries for meeting the other operations objectives are set. Trade-offs and Alternatives in POM The operations sub goals-that is, the objectives-can be attained through the decisions that are made in the various operations areas. Each decision involves important tradeoffs between choices about product and process versus choices about quality, efficiency, schedule, and adaptability. Consider the late-1980s and early-1990s- recall the popularity of frozen yogurt desserts as an alternative to ice cream. Once a decision is made to sell yogurt in ice cream-type parlors, many choices must be made. The important issues are: Where should facilities be located? How large should they be? What degree of automation should be used? How skilled must labor be to operate the automated equipment? Will the frozen yogurt be produced on site? How do these decisions impact quality, efficiency, schedule (customer service), and adaptability? Are we prepared for changes in product or service, or do these decisions lock in our operations?

These arc examples of the tough, crucial tradeoffs that are at the heart of understanding the choices that must be made when planning strategically and tactically Let us now discuss what you call trends in operations management.

Trends in operations management

Operations alternatives and Tradeoffs Shifts in economic activity

Global perspective: emergence of services sector General model for managing operations

Are people doing the same kinds of work today that they have done in the past? The question is important because operations management can usually be found where economic activity is increasing. We can appreciate , looking over the past few decades, how there has been an employment shift from agriculture and other extractive (mining and contract construction) industries to the service sector: agriculture decreased from 38 percent of the employed workers during 1900s to 3 percent in 1989 and the office workers increased from 28 percent in 1900 to 70 percent in 1989. The percentage of workers employed in industry has dwindled steadily. Will this trend continue? It is quire possible that the percentage of workers in the service sector will gradually continue to grow, but this growth most likely will be relatively slow. The most recent data predict workers shifting from industry to the service sector, while the percentage of agricultural workers will remain around 3 percent. It is interesting to note that the largest sector of the U.S. economy today is in services. Of the 47.6 million people employed in the United States in 1960s, 18.1 million were employed in services. In 1989, 117.3 million people were employed, 82.1 million in services. The fastest growing service sector has been government.

Look at the table given below:

The total labor force has increased some 69 million workers-64.0 million of whom work in the service sector. Consequently, consumer expenditures have also shifted towards services. Increasing economic activity in the service sector suggests that many of you may find yourselves employed in service industries. In the discussions during the class, we take the position that operations management concepts, skills, and techniques are transferable across the industry/service sectors and within industries and services. Our examples and explanations therefore apply to both kinds of operations, even if only one is mentioned. I would be failing in my duty as an instructor, if I dont discuss the Macro Perspective

Macro Perspective
Not all nations are shifting from industrialization to a manufacturing/service base as described above for the U.S. economy-many are not yet industrialized. There are three major

industrialized world economic regions with reasonable balances in terms of production and consumption: the Pacific Rim, North America, and Western Europe. Outside these regions production often lags behind demand. Supply is limited. Many nations are simply poor and are unable to produce effectively and therefore cannot compete in a world economy. One region under transition is Eastern Europe. In fact, all socialist cultures throughout the world seem to be in transition. Operations Management Highlight and focuses on the issues related to operations management in socialist cultures. As you can see, managing in capitalist democracies such as Canada or the United States is very different. Lets do a very quick recap of: CLASSICAL Management Classical management deals with the three primary theories of management, Emphasizing efficiency at the production core, the separation of planning and doing work, and management principles and functions Operations Management is concerned with labor efficiency, especially- when labor is costly. To determine how efficient labor is in a given situation, management sets an individual standard, a goal reflecting an average worker's output per unit of time under normal working conditions; say that the standard in a cafeteria is the preparation of 200 salads per hour. If labor input produces 150 salads per hour, how efficient is the salad operation? As you are fully aware, Classical management has contributed the scientific management and process orientation theories to the operations manager's knowledge. The basis of scientific management is a focus on economic efficiency at the production core of the organization. Of central importance is the belief that rationality on the part of management will yield economic efficiency. Economic efficiency, a term that many organizations still use today, refers to a ratio of outputs to inputs. Organization efficiency refers to a ratio of outputs to land, capital, or labor inputs. The school of process management, also referred to as the administrative or functional approach to management, was developed in the early 1900s. Management is viewed as a continuous process of planning, organizing, and controlling. Planning includes all activities that establish a course of action. These activities guide future decision-making. Organizing includes all activities that establish a structure of tasks and authority. Controlling includes all activities that ensure that actual performance is in accordance with planned performance.

Behavioral management
It is one of the primary theories of management, emphasizing human relations and the behavioral sciences. Human relations Phenomenon recognized by behavioral scientists that people are complex and have multiple needs and that the subordinate-supervisor relationship directly affects productivity. The school of behavioral management began in the 1920s with a human relations movement that emerged quite unexpectedly from a typical scientific management research study. The study intended to measure how changes in the work environment affected output. Some social scientists on the research team, however, observed that

Changes in output were often due to factors other than physical changes in the work environment. Workers seemed to respond favorably to the attention and interest the experimenters had shown toward the workers, and productivity increased. This research spawned a new attitude that seriously undermined the scientific management man-as-machine concept. Behavioral management theories espouse that people in their work environment, as elsewhere, are extremely complex. Applied psychologists have developed behavioral science theories of the individual; social psychologists, sociologists, and cultural anthropologists have developed social systems theories of groups of people at work. Operations Management explores how employee behavior is of critical concern to the operations manager.

Behavioral science
A science that explores how human behavior is affected by leadership, motivation, communication, interpersonal relationships, and attitude change; Modeling management One of the primary theories of management, emphasizing decision-making, systems, and mathematical modeling. Modeling Management The school of modeling management is concerned with decision-making and systems theory, and mathematical modeling of these theories. The decision-making orientation considers making decisions to be the central purpose of management. Advocates of systems theory stress the importance of studying organizations from a "total systems" point of view. According to this school, identifying subsystem relationships, predicting effects of changes in the system, and properly implementing system change are all part of managing the total organization. With its foundations in operations research and management science, mathematical modeling focuses on creating mathematical representations of management problems and organizations. For a particular problem, the variables are expressed mathematically, and the model is used to demonstrate different Making jobs more interesting We must continuously strive to make the job more interesting. Can you think of ways to make this course delivery more interesting and challenging? Think about it and let me know. Meanwhile, lets concentrate on issue at hand.

One partial solution, for example, may be to increase the participation in the work place. According to the National Association of Suggestion Systems (NASS), employee participation programs in the United States made jobs more satisfying and in the process saved organizations $2.2 billion in 1988 alone. NASS distinguishes eight types of suggestion systems: suggestion boxes, improvement teams, organization surveys, work redesign, quality of work life, participative goal setting, gain sharing, and welfare programs. We will look more closely at work redesign in Chapter 8, examining popular approaches such as job enrichment, a job-characteristics approach, quality of work life, and the Japanese-style management focusing on Hito No Wa (harmony and teamwork among all people). Are these work redesign efforts effective and are they being used?

An abundant number of studies support the conclusion that employees perform better and are more satisfied in their jobs when work redesign is implemented. Yet it is not clear whether work redesign is the cause for improvement or other simultaneous changes are the causes-for example, a change to group work, new layouts, different equipment, or new pay systems and pay levels. Canadian companies particularly are benefiting from a wide range of innovative ways of organizing, rewarding, and managing workers. A nationwide survey conducted from 1985 to 1986 provided ample evidence that the use of innovative pay systems (pay for knowledge, gain sharing, profit sharing), job sharing, job enrichment, semi-autonomous work groups, and other programs to improve employee participation and satisfaction are sharply increasing. There is no evidence that this increase is only part of a "cycle of participation" that will taper off, as some experts have suggested. Planning for operations management are the activities that establish a course of action and guide future decision-making. The operations manager defines the objectives for the operations subsystem of the organization, and the policies, programs, and procedures for achieving the objectives. This stage includes clarifying the role and focus of operations in the organization's overall strategy. It also involves product planning, facilities designing, and using the conversion process. Organizing Activities that establish a structure of tasks and authority; Operations managers establish a structure of roles and the flow of information within the operations subsystem. They determine the activities required to achieve the operations subsystem's goals and assign authority and responsibility for carrying them out. Controlling Activities that assure that actual performance is in accordance with planned performance. It hence seeks to ensure that the plans for the operations subsystem are accomplished, the operations manager must also exercise control by measuring actual outputs and comparing them to planned outputs. Controlling costs, quality, and schedules is at the very heart of operations management. Behavior Operations managers are concerned with how their efforts to plan, organize, and control affect human behavior. They also want to know how- the behavior of subordinates can affect management's planning, organizing, and controlling actions. In operations we are interested in the behavior of managers as well especially their decision- making behavior. Models As operations managers plan, organize, and control the conversion process, they encounter many problems and must make many decisions. They can frequently simplify these difficulties by using models. Types of models and examples of their uses would be discussed as we progress further during our interaction. Let us try to find out the likely problems to be faced by the operations manager.

Problems of the operations manager

Operating managers are concerned with many different problem areas: Cost control in brokerage houses, Quality of services in hospitals, Rates of production output in furniture factories, Effectively consolidating the operations resulting from mergers,

Developing flexible supply chains to enable mass customization of products and services, Managing global supplier, production, and distribution networks, Enhancing value-added services,

Making efficient use of Internet technology, to name a few

Although operations managers occupy positions at several levels of their organizations, and although they work in different kinds of organizations, they all share certain kinds of problems. As explained earlier, a study conducted at Boston University, reveals the kinds of problems U.S. and Canadian firms managers are likely to face. One of several theories of classical management emphasizes economic efficiency at the production core through management by rationality, the economic motivation of workers, and the separation of planning and doing work.

Careers in POM
Remember that there arc three major industrialized world economic regions with reasonable balances in terms of patterns of production and consumption: the Pacific Rim, North America, and Western Europe. Outside these regions production often lags behind demand. Supply is limited. Many nations are simply poor and are unable to produce effectively and therefore cannot compete in a world economy. One region under transition is Eastern Europe. In fact, all socialist cultures throughout the world seem to be in transition. If your career objectives are to advance to a top management position, operations is a reasonable avenue to travel. One Fortune survey of (he 500 largest U.S. individual companies found that chief executive officers had a production/operations career emphasis 18.6 percent of the time.4 Besides the top position in the organization, generally a vice president or similar officer is responsible for production/operations. How might you gain such a position? What entry positions allow you to gain experience for promotion within operations? A Relevant Example Recently, two guests visited an undergraduate operations management class. Responding to student questions on careers, one guest, the personnel manager at a new Quaker Oats Company manufacturing facility, stressed an interest in management, operations management, and industrial engineering students for entry first line foreman positions. As she explained, the jobs were in a clean, modern facility with good opportunity for line or staff advancement. The second guest, the operations vice president at Boatmen's Bank of Kansas City, stressed an interes operations management majors for entry positions in operations analysis, a staff function directly supporting bank operations. After six months to two years, operations analysts typically move to line supervisory positions. In both cases, promotion was available within operations and to other functions (marketing, finance, etc.) as well. Your choice of career deserves reasoned thought and direction. We suggest that in making career choices in production/operations management you consider 1. Opportunity for advancement, professional development, and visibility in the organization 2. Job satisfaction

3. Monetary rewards 4. Quality of life (climate, entertainment, etc.); 5. Work group characteristics 6. Individual needs and desires (location, health considerations etc.) Operations management career decisions are amenable to change. Although you might have to learn new technology in a major job change, operations management skills are generally transferable across "services and manufacturing and within each sector. Professional organizations and journals occasionally summarize career opportunities in their operations management areas, thus providing a good source of information.

Points to ponder
Core services are basic things that customers want from products they purchase.-Core Services Value-added services differentiate the organization from competitors and build relationships that bind customers to the firm in a positive way -Value-Added Services

Current Issues in OM
Effectively consolidating the operations resulting from mergers Developing flexible supply chains to enable mass customization of products and services Managing global supplier, production and distribution networks Increased commoditization of suppliers Achieving the Service Factory Enhancing value added services Making efficient use of Internet technology Achieving good service from service firms

3. OPERATIONS STRATEGY Strategic planning

Strategic planning is the process of thinking through the current mission of the organization and the current environmental conditions facing it, and then setting forth a guide for tomorrows decisions and results. Operations strategy is concerned with setting broad policies and plans for using the resources of the firm to best support the firms long-term competitive strategy

Strategic (long-term) decisions

Well the relevant points over here areHow will we make the product? Where do we locate the facility or facilities? How much capacity do we need? When should we add more capacity? The other types of decisions would be-

Tactical (intermediate-term) decisions

Well, the relevant points over here areHow many workers do we need? When do we need them? Should we work overtime or put on a second shift? When should we have material delivered? Should we have material delivered? Should we have a finished goods inventory? Dear friends, let us now move over to:-

Operational Planning & Control (short-term) decisions

Well, the relevant points over here are- What jobs do we work on today or this week? Who do we assign to what tasks? What jobs have priority?

An operation strategy can be viewed as part of a planning process that coordinates operational goals with those of the larger organization. Since the goals of the larger organization change over time, the operations strategy must be designed to anticipate future needs. An operations strategy involves decisions that relate to: the design of a process; and,

the infrastructure needed to support the process. Process design includes: 1. the selection of appropriate technology; 2. sizing the process over time; 3. the role of inventory in the process; and, 4. Locating the process. Infrastructure decisions involve: 1. the logic associated with the planning and control systems; 2. quality assurance and control approaches; 3. work payment structures; and, 4. The organization of the operations function.

Now then, what is a strategy?

Strategy is a common vision that unites an organization, provides consistency in decisions, and keeps the organization moving in the right direction. Strategy formulation consists of four basic steps: Defining a primary task. The primary task is usually expressed in a firms mission statement. The mission may be accompanied by a vision statement that describes what the organization sees itself becoming. Assessing core competencies. Core competency is what a firm does better than anyone else, its distinctive competence. Based on experience, knowledge, and know-how, core competencies represent sustainable competitive advantages. For this reason, products and technologies are seldom core competencies. The advantage they provide is short-lived, and other companies can readily purchase, emulate or improve on them. Core competencies are more likely to be processes, a companys ability to do certain things better than a competitor. Thus, while a particular product is not a core competence, the process of developing new products is. Core competencies are not static. They should be nurtured, enhanced, and developed over time. Close contact with the customer is essential to ensuring that a competence does not become obsolete. Determining order winners and order qualifiers.

A firm is in trouble if the things it does best are not important to the customer. Thats why its essential to look toward customers to determine what influences their purchase decision. Order qualifiers are the characteristics of a product or service that qualify it to be considered for purchase by a customer. An order winner is the characteristic of a product or service that wins orders in the marketplace-the final factor in the purchasing decision. For example, when purchasing a CD player, customers may determine a price range (order qualifier) and then choose the product with the most features (order winner) within that price range.

Or they may have a set of features in mind (order qualifiers) and then select the least expensive CD player (order winner) that has all the required features. It is important for a firm to meet the order qualifiers and excel on the order winner. If it does not, perhaps a segment of the market could be targeted that more closely matches the firms expertise. Or the firm could begin developing additional competencies that are more in tune with market needs. Positioning the firm. No firm can be all things to all people. Strategic positioning involves making choices choosing one or two important things on which to concentrate and doing them extremely well. A firms positioning strategy defines how it will compete in the marketplace-what unique value it will deliver to the customer. An effective positioning strategy considers the strengths and weaknesses of the organization, the needs of the marketplace, and the position of competitors. Senior management, with input and participation from different levels of the organization, develops a corporate strategic plan in concurrence with the firms mission and vision, customer requirements, and business conditions. The strategic plan focuses on the gap between the firms vision and its current position.

It identifies and prioritizes what needs to be done to close the gap and provides direction for formulating strategies in the functional areas of the firm, such as marketing, operations, and finance. It is important that strategy in each of the functional areas be internally consistent as well as consistent with the firms overall strategy. Corporate strategy coordinates the firms overall goals with its core competencies. Firms succeed by taking advantage of what they do particularly well that is, the organizations unique strengths. Core competencies are the unique resources and strengths that an organizations management considers while formulating strategy. These competencies include the following: Workforce: A well-trained and flexible workforce allows organizations to respond to market needs in a timely fashion. This competency is particularly important in service organizations, where the customer comes in direct contact with the employees. Facilities: Having well-located facilities-offices, stores, and plants is a primary advantage because of the long lead time needed to build new ones. Expansion into new products or services may be accomplished quickly. In addition, flexible facilities that can handle a variety of products or services at different levels of volume provide a competitive advantage. Market and Financial Know-How: An organization that can easily attract capital from stock sales, market and distribute its products, or differentiate its products from similar products on the market has a competitive edge. Systems and Technology: Organizations with expertise in information systems will have an edge in industries that are data and information intensive, such as banking. Particularly advantageous is expertise in Internet technologies and applications such as business-toconsumer and business-to-business systems. Having the patents on a new technology is also a big advantage.

A Study by Porter.

A study by Porter (1990) showed that companies achieving international leadership employed strategies that took advantage of their core competencies. They achieved competitive advantage by designing new products, installing new production technologies, adapting training programs, using quality control techniques, and improving supplier relationships. The same is true today except that the Internet has caused many companies to reevaluate their core competencies. Based on the corporate strategy, a market analysis categorizes the firms customers, identifies their needs, and assesses competitors strengths. An interface between marketing and operations is necessary to provide a business with an understanding of its markets from both perspectives. Terry Hill has coined the terms order winners and order qualifiers to describe marketing-oriented priorities that are key to competitive success: An order-winner is a criterion that differentiates the products or services of one firm from another. Depending on the situation, the order-winning criterion may be the cost of the product (price), product quality, or other priorities. An order qualifier is a screening criterion that permits a firms products to even be considered as possible candidates for purchase. Professor Hill relates a firm must re-qualify the order qualifiers everyday it is in business.

It is important to remember that the order-winning and order-qualifying criteria may change over time. This information is used to develop competitive priorities which are the operating advantages that the firms processes must possess to outperform competitors. Priorities needed to remain competitive are different for different companies. Keys to success in operations strategy lie in identifying what the priority choices are, in understanding the consequences of each choice, and in the trade-offs involved. From the early work of C. Wickham Skinner at the Harvard Business School and the more recent work of Terry Hill at the London Business School, a few basic operations priorities have been identified as: o Cost o Product quality and reliability o Delivery speed o Delivery reliability o Ability to cope with changes in demand o Flexibility and new product introduction speed o Other criteria: technical liaison and support, meeting a launch date, supplier after-sale support.

Central to the concept of operations strategy during the late 1960s and 1970s was the notion of operations focus and trade-offs. The underlying logic was that an operation could not excel simultaneously on all performance measures. Management had to decide which parameters of performance were critical to the firms success, and then concentrate or focus the resources of the firm on those particular characteristics. For those firms with large existing manufacturing strategies, Skinner suggested the creation of a Plant-within-a-plant (PWP) concept, in which different locations within the facility would be allocated to different product lines, each with their own operations strategy. Events in the world marketplace during the 1970s and 1980s-specifically, the growing intensity in competition-forced these companies to reexamine the concept of operations strategy, especially in terms of the so-called necessary trade-offs. Managers began to realize that they did not really have to make trade-offs between these different strategies. What emerged instead was a realization of the need to establish priorities as dictated by the marketplace. Further, it was recognized that these priorities will change over time.

This calls for another interesting research findings conducted at Boston University. Let me explain. According to a research undertaken at Boston University, called the Manufacturing Futures Survey, as manufacturing firms continue to improve their performance, the requirements for being competitive also change. The results of four surveys are indicated below:

From the above, it appears that quality alone does not satisfy customers any longer. The customer is looking for the combination of quality and related criteria (conformance quality, delivery speed, and product reliability) at a low price. A currently used term for this combination of customer requirements is value. Value to the customer means buying a product with the most important attributes at the lowest price possible. To improve value, we must either improve upon those criteria that are most important to the customer, reduce cost to the customer, or do both.

The competitive priorities and the directives from corporate strategy provide input for the functional strategies, or the goals and long-term plans of each functional area. A Company that is considered to be world class recognizes that its ability to compete in the marketplace depends on developing an operations strategy that is properly aligned with its mission of serving the customer. A companys competitiveness refers to its relative position in comparison to other firms in the local or global marketplace. Effective strategies can be achieved in two ways-by performing different activities from those of competitors or by performing the same activities better. Operations play an important role in either approach. It can provide support for a differentiated strategy, and it can serve as a firms distinctive competence in executing similar strategies better than competitors. The operations function helps strategy evolve by creating new and better ways of delivering a firms competitive priorities to the customer. Once a firms competitive priorities have been established, its operating system must be configured and managed to provide for those priorities. This involves a whole series of interrelated decisions. Basically, operations strategy links long- and short-term operations decisions to corporate strategy. Continuous cross-functional interaction must occur in implementing operations strategy. For example, operations needs feedback from marketing to determine how much capacity to allocate to various product lines, and operations must work with finance regarding the timing of funding of increased capacity. Thus, in identifying the operational capabilities needed for the future, the operations manager must work closely with the managers of other functional areas.

The role of a linkage mechanism in this regard

Operations strategy must be linked vertically to the customer and horizontally to other parts of the enterprise. The general process is that customer needs related to new-product or currentproduct requirements give rise to performance priorities that then become the required priorities for operations. The operations priorities are linked to enterprise capabilities because operations cannot satisfy customer needs without the involvement of R&D and distribution and without the direct or indirect support of financial management, human resource management, and information management. Given its performance requirements, an operations division use its capabilities (as well as those of its suppliers) to achieve those requirements-that is, to win orders. These capabilities include technology, systems, and people. CIM, JIT, and TQM represent fundamental concepts and tools used in each of the three areas.

Main objectives of manufacturing strategy development

The main objectives of manufacturing strategy development are: To translate required priorities (typically obtained from marketing) into specific performance requirements for operations, and To make the necessary plans to assure that operations (and enterprise) capabilities are sufficient to exploit them.

The steps for developing priorities are:

1. Segment the market according to the product group. 2. Identify the product requirements, demand patterns, and profit margins of each group. 3. Determine the order winners and order qualifiers for each group. 4. Convert order winners into specific performance requirements. Through its strategic planning process, each functional area is responsible for identifying ways to develop the capabilities it will need to carry out functional strategies and achieve corporate goals. This input, along with the current status and capability of each area, is fed back into the corporate strategic planning process to indicate whether corporate strategy should be modified.

A quality productivity strategy

Improving quality is one important way to maintain a competitive position in todays markets. Quality can be promoted to customers and employees. Consumers want quality products and services, and employees at all levels in the organization like to be associated with a winner. Most people associate high quality with a winning competitive position. Although employees may balk when they are encouraged to work more productively (because they feel they are being told to work faster) very few, if any, will argue with quality as goal. From an economic perspective, when quality is emphasized and subsequently improved, waste is decreased or eliminated. Hours are not wasted reworking products. Material is not thrown away. Operations costs are reduced. At the same time, the customer receives products and services that are fit for use. Moreover, prices can be lowered to share this productivity gain with customers, thereby stimulating an increase in the firms market share. Or, alternatively, the higher-quality product (as compared with competitors product offerings) can command a premium price and temporarily secure a market niche. Market niche is often temporary since high price invites competitors. To employees, these results mean increased job security because of a sound competitive position. Stockholders can benefit through higher overall a winner a message some firms and managers seem to understand better than others. Conversion process is the central element of the production and operations function. The work of operations management revolves around conversion, where resource inputs are converted or transformed into useful products and services. This conversion process is present in most organizations, but it is distinctly different for a bank, an aerospace firm, or a public utility. The basic technologies of operations differ among industries as well as within various organizations in any one industry. In the public utility, for example, the firm requires engineering skills to design facilities, maintenance skills for various mechanical and electrical applications, and operating skills for larger pieces of equipment used in operations. The blending of labour, land, capital and management and the scientific expertise needed for this task are at the very heart of technology in operations.

In some instances, machinery is substituted for hard labour. Mechanization is the process of bringing about the use of equipment and machinery in production and operations. In a bank for example, some jobs such as reconciling checking accounts and preparing statements are mechanized. Other tasks, such as the interview in which information is gathered by a loan officer to start the loan process, are not mechanized. Well friends, all of us are aware that the Organizations today face decisions about which technology to use and the degree of mechanization. Many of the challenges for improved productivity and quality are answered by managers and owners as they adopt more sophisticated technologies and increased mechanization. Competitors who effectively substitute capital and equipment for labour to lower operating costs may increase market share very quickly.

Example.
For example, highly mechanized companies in Japan and Korea caused the U.S. steel industry to lose market shares. On the other hand, mechanization, when it is unnecessary or inappropriate, may be quite costly. A firm may be saddled with high fixed costs relative to other companies in the industry. Management may be unable to reduce variable costs of manufacturing sufficiently to recover the costs of mechanization.

Two issues that warrant

Urgent attention Value engineering and value analysis The purpose of value analysis/value (VA/VE) engineering is to simplify products and processes. Its objective is to achieve equivalent or better performance at a lower cost while maintaining all functional requirements defined by the customer. VA/VE does this by identifying and eliminating unnecessary cost. Technically, VA deals with products already in production and is used to analyze product specifications and requirements. Purchasing departments use VA as a cost reduction technique. Performed before the production stage, value engineering is considered a cost-avoidance method. In practice, however, there is a looping back and forth between the two for a given product. This occurs because new materials, processes, and so forth require the application of VA techniques to products that have previously undergone VE. The VA/VE analysis approach involves brainstorming such questions as: Does the item have any design features that are not necessary? Can two or more parts be combined into one? How can we cut down the weight? Are there non-standard parts that can be eliminated?

Productivity Measurement
Productivity is a common measure of how well a country, industry, or business unit is using its resources (or factors of production). Since operations management focuses on making the best use

of the resources available to a firm, productivity measurement is fundamental to understanding operations-related performance. In its broadest sense, productivity is defined as Productivity = Inputs Outputs To increase productivity, we want to make this ratio of outputs to inputs as large as practical. Productivity is a relative measure, and needs to be compared with something else. Productivity comparison can be made in two ways. First, a company can compare itself with similar operations within its industry, or it can use industry data when such data are available. For example, comparing productivity among the different stores in a franchise, Another approach is to measure productivity over time within the same operation. Here we would compare our productivity in one time period with that of the next Productivity may be expressed as partial measures, multifactor measures, or total measures. If we are concerned with the ratio of output to a single input, we have a partial productivity measure. If we want to look at the ratio of output to a group of inputs (but not all inputs), we have a multifactor productivity measure. If we want to express the ratio of all outputs to all inputs, we have a total factor measure of productivity that might be used to describe the productivity of an entire organization or even a nation.

Numerical Example of Productivity Measures

Exercise 1.
Ritu Brar makes fashionable garments. During a particular week employees worked 360 hours to produce a batch of 132 garments, of which 52 were seconds (meaning that they were flawed). Seconds are sold for Rs90 each at Brars Factory Outlet Store. The remaining 80 garments are sold to retail distribution, at Rs200 each. What is the labour productivity ratio?

Solution
Value of output (52 defective X Rs90/defective) + (80 garments X Rs200/garment) = Rs20,680 Labour hours of input = 360 hours Labour productivity = Input/Output = hoursRs360680,20 = Rs57.44 in sales per hour.

4. FORECASTING MODELS What is Forecasting?

We all know a very critical aspect of managing any organization is the planning for the future. Hence, Forecasting is the art and science of predicting future events. Forecasts are required throughout an organization and at all levels of decision making in order to plan for the future and make effective decisions. The principal use of forecasts in operations management is in predicting the demand for manufactured products and services for time horizons ranging from several years down to 1 day. Depending on the planning horizon, forecasting can be classified in three ways: Short range forecasting (Up to 1 year) Medium range forecasting

(Up to 3 years) Long range forecasting

(More than 3 years) o How about a forecast of todays weather? o You see light Excellent o We march ahead then.

Types of forecasts
In general, a contemporary business organization employs three distinct types of forecasts.

These are given under:

1) Economic forecasts 2) Technological forecasts 3) Demand forecasts Economic forecasts address the business cycle by predicting inflation rates, money supplies, housing starts, and other planning indicators. Technological forecasts are concerned with rates of technological progress, which can result in the birth of exciting new products, requiring new plants and equipment.

Demand forecasts are projections of demand for a companys products or services. These forecasts, also called sales forecasts, drive a companys production, capacity, and scheduling systems and serve as inputs to financial, marketing, and personnel planning.

What is the strategic importance of forecasting?

Forecasting plays a very important role in the following areas: Human resource management (Hiring, training and laying-off workers all depend on anticipated demand.) Capacity planning

(When capacity is inadequate, the resulting shortages can mean undependable delivery, loss of customers, and loss of market share.) Supply chain management

(Good supplier relations and the ensuing price advantages for materials and parts depend on accurate forecasts.)

Forecasting Approaches
Its a bit like the story of three blind (sorry, visually impaired) men and an elephant. Perception. It seems, plays a very important role in this respect. There are numerous approaches to forecasting depending on the need of the decision maker. Broadly speaking, these can be categorized in two ways: Quantitative forecasting Qualitative forecasting

When to use qualitative methods?

In general, we should consider using qualitative forecasting techniques when one or more of the following conditions exist:

1. Little or no historical data on the phenomenon to be forecast exist. 2. The relevant environment is likely to be unstable during the forecast horizon. 3. The forecast has a long time horizon, such as more than three to five years.

What are different Qualitative Methods of forecasting?

The various Qualitative Methods in vogue are as follows: Jury of executive opinion This method takes the opinions of a small group of high-level managers, often in combination with statistical models, and results in a group estimate of demand. Sales force composite In this approach, each salespeople estimates what sales will be in his or her region. These forecasts are then reviewed to ensure they are realistic, then combined at the district and national levels to reach an overall forecast. Delphi method This is an iterative group process. There are three different types of participants in the Delphi process: decision makers, staff personnel, and respondents. The decision makers usually consist of a group of five to ten experts who will be making the actual forecast. The staff personnel assist the decision makers by preparing, distributing, collecting, and summarizing a series of questionnaires and survey results. The respondents are a group of people whose judgments are valued and are being sought. This group provides inputs to the decision makers before the forecast is made.

Consumer market survey This method takes input from customers or potential customers regarding their future purchasing plans. It can help not only in preparing a forecast but also in improving product design and planning for new products. Nave approach It assumes that demand in the next period is the same as demand in the most recent period. In other words, if sales of a product, say, Reliance WLL phones, were 100 units in January, we can forecast that Februarys sales will also be 100 phones. Does this make any sense? It turns out that for some product lines, selecting this nave approach is a cost-effective and efficient forecasting model.

To illustrate, let us see how theses techniques are put into practice. In the following practical problem, we would examine the role of forecasting as applicable to POM in practice. We shall see how Delphi method of forecasting is applied. POM in practice- Forecasting with the Delphi method* American Hoist and Derrick is a manufacturer of construction equipment, with annual sales of several million dollars. Their sales forecast is an actual planning figure and is used to develop the master production schedule, cash flow projections, and work-force plans. On of the important components of their forecasting process is the use of the Delphi method of judgmental forecasting. In 1975, top management wanted an accurate 5-year forecast of their sales in order to plan for expansion of production capacity. The Delphi method was used in conjunction with regression models and exponential smoothing in order to generate a forecast. A panel of 23 key personnel was established, consisting of those who had been making subjective forecasts, those who had been using them or were affected by the forecasts, and those who had a strong knowledge of the market and corporate sales. Three rounds of the Delphi method was performed, each requesting estimates of: Gross national product; Construction equipment industry shipments; American Hoist and Derrick construction equipment group shipments; and American Hoist and Derrick corporate value of shipments.

As the Delphi technique progressed, responses for each round were collected, analyzed, and summarized, and reported back to the panel. In the third-round questionnaire, not only were the responses of the first two rounds included, but in addition related facts, figures, and views of external experts wee sent. As a result of the Delphi experiment, the 1995sales forecast error was less than 0.33 percent; in 1996 the error was under 4 percent. This was considerable improvement over previous forecast errors of plus or minus 20 percent. In fact, the Delphi forecasts were more accurate than regression models or exponential smoothing which had forecast errors of 10 to 15 percent. An additional result of the exercise was educational in nature. Managers developed a uniform outlook on business conditions and corporate sales volume and thus had a common base for decision making. Adapted from Applied Production and Operations Management (James R. Evans et al), West publishing Company

Quantitative Methods
The chief Quantitative methods are: 1. Moving averages 2. Exponential smoothing Time series models 3. Trend projection

4. Linear regression Causal model The time series models of forecasting predict on the basis of the assumption that the future is a function of the past. In other words, they look at what has happened over a period of time and use a series of past data to make a forecast. If we are predicting weekly sales of washing machine, we use the past weekly sales for washing machine in making the forecast. A causal model incorporates into the model the variables or relationships that might influence the quantity being forecast. A causal model for washing machine sales might include relationships such as new housing, advertising budget, and competitors prices. Moving over to a structured approach to forecasting, let me introduce the basic steps involved in this process:-

Steps in Forecasting
There are eight steps to a forecasting system. 1. Determine the use of the forecast (What objectives are we trying to achieve?) 2. Select the items that are to be forecasted 3. Determine the time horizon of the forecast (Is it short, medium, or long range? 4. Select the forecasting model 5. Gather the data needed to make the forecast 6. Validate the forecasting model 7. Make the forecast 8. Implement the results

Time Series Forecasting

A time series is based on a sequence of evenly spaced (weekly, monthly, quarterly, and so on) data points. Forecasting time series data implies that future values are predicted only from past values and that other variables, no matter how potentially valuable, are ignored.

Decomposition of a Time Series

There are four main ways of decomposing the time series: Trend Seasonality

Cycles Random variations

Two general forms of time series models are used in statistics. The most widely used is a multiplicative model, which assumes that demand is the product of the four components: Demand = T, RCS T denotes Trend S denotes Season C denotes Cycles R denotes random variables An additive model provides an estimate by adding the components together. It is stated as: Demand = T + S + C + R

Moving Averages
Moving averages are useful if we can assume that market demands will stay fairly steady over time. Moving average can be defined as the summation of demands of total periods divided by the total number of periods. Mathematically, Moving average = Demand in previous n periods / n where n is the number of periods in the moving average for example, four, five, or six months, respectively, for a four -, five -, or six period moving average. To make the calculation of moving average more clear, we take the sales of Washing machine at Arvee Electronics.

Month

Actual units

Washing

machine

sales, Three-month average

moving

January February March April May June July August Septembe r October

10 12 13 16 19 23 26 30 28 18 16 (10 + 12 + 13) / 3 = 11.67 (12 + 13 + 16) / 3 = 13.67 (13 + 16 + 19) / 3 = 16 (16 + 19 + 23) / 3 = 19.33 (19 + 23 + 26) / 3 = 22.67 (23 + 26 + 30) / 3 = 26.33 (26 + 30 + 28) / 3 = 28 (30 + 28 + 18) / 3 = 25.33 (28 + 18 +16) / 3 = 20.67

November 14 December

5. WEIGHTED MOVING AVERAGES The concept of Weighted Moving Averages

The importance of forecasting, Different qualitative methods of forecasting and Started with quantitative approach of forecasting

What is Weighted Moving Averages?

When there is a detectable trend or pattern, weights can be used to place more emphasis on recent values. This makes the techniques more responsive to changes since more recent periods may be more heavily weighted. Deciding which weights to use requires some experience and a bit of luck. Choice of weights is somewhat arbitrary since there is not set formula to determine them. Mathematically, Weighted Moving average = (weight for period n) x (Demand in period n) / weights

An Example of assignment of weight is

Time in the past 4 years ago 3 years ago 2 years ago Last year Weightage 0.05 0.25 0.3 0.4

Let us now again consider the example of Arvee Electronics to forecast washing machine sales by weighting the past three months as follows:

Weights applied Period

3 Last month 2 Two months ago 1 Three months ago 6 Sum of weights

Month Actual Washing machine sales, units January February March April May June July August September October November December 10 12 13 16 19 23 26 30 28 18 16 14

Three-month weighted moving average

(1 x 10 + 2 x 12 + 3 x 13) / 6 = 12.16 (1 x 12 + 2 x 13 + 3 x 16) / 6 = 14.33 (1 x 13 + 2 x 16 + 3 x 19) / 6 = 17 (1 x 16 + 2 x 19 + 3 x 23) / 6 = 20.5 (1 x 19 + 2 x 23 + 3 x 26) / 6 = 23.83 (1 x 23 + 2 x 26 + 3 x 30) / 6 = 27.5 (1 x 26 + 2 x 30 + 3 x 28) / 6 = 28.33 (1 x 30 + 2 x 28 + 3 x 18) / 6 = 23.33 (1 x 28 + 2 x 18 + 3 x 16) / 6 = 18.67

In this particular forecasting situation, you can see that weighting the latest month more heavily provides a much more accurate projection.Both simple and weighted moving averages are effective in smoothing out sudden fluctuations in the demand pattern in order to provide stable estimates. Moving averages do, however, have three problems. First, increasing the size of n (the number of periods averaged) does smooth out fluctuations better, but it makes the method less sensitive to real changes in the data. Second, moving averages cannot pick up trends very well. Since they are averages, they will always stay within past levels and will not predict a change to either a higher or lower level. Finally, moving averages require extensive records of past data. Exponential Smoothing A new forecast is based on the forecast of the previous period. The following relationship exists between the two: New forecast = Last periods forecast + (Last periods actual demand last periods forecast) Where, denotes a weight, or smoothing constant. This can be written mathematically as

Ft = Ft-1 + (At-1 Ft-1 ) 0 1 Ft = New forecast F t-1 = Previous forecast = Smoothing constant (0 <= <= 1) At-1 = Previous periods actual demand
As an illustration of the exponential smoothing model, let us consider the 12 weeks data on number of gallons of gas sold by Indraprastha Gas Limited at Nehru Place. With no forecast available for period 1 we begin our calculations by letting F1 equal the actual value of the time series in period 1. That is, with Y1 = 17, we will assume F1 = 17 simply to get the exponential smoothing computations started. The following table shows the detailed calculations for = .2 and = .5: Week Sales t 1 2 3 4 5 6 7 8 9 10 11 12 (1000s of gallons) Ft using = .2 17 21 19 23 18 16 20 18 22 20 15 22 17 17 + .2(17 17) = 17 17 + .2(21 17) = 17.8 17.8 + .2(19 17.8) = 18.04 18.04 + .2(23 18.04) = 19.03 19.03 + .2(18 19.03) = 18.83 18.83 + .2(16 18.83) = 18.26 18.26 + .2(20 18.26) = 18.61 18.61 + .2(18 18.61) = 18.49 18.49 + .2(22 18.49) = 19.19 19.19 + .2(20 19.19) = 19.35 19.35 + .2(22 19.35) = 18.48 Ft using = .5 17 17 + .5(17 17) = 17 17 + .5(21 17) = 19 19 + .5(19 19) = 19 19 + .5(23 19) = 21 21 + .5(18 21) = 19.5 19.5 + .5(16 19.5) = 17.75 17.75 + .5(20 17.75) = 18.88 18.88 + .5(18 18.88) = 18.44 18.44 + .5(22 18.44) = 20.22 20.22 + .5(20 20.22) = 20.11 20.11 + .5(22 20.11) = 21.06 Exponential forecast smoothing Exponential forecast smoothing

Selecting the smoothing constant

The exponential smoothing approach is easy to use, and has been successfully applied in many organizations. Selection of a suitable constant is the pre-requisite for the success of smoothing technique. The overall accuracy of a forecasting model can be determined by comparing the forecasted values with the actual or observed values. The forecast error is defined as:

Forecast error = Demand Forecast

An important consideration in using any forecasting method is the accuracy of the forecast. Forecast errors and the squares of forecast errors can be used to develop measures of accuracy. Now we will discuss different measures of forecast error.

Measures of forecast error 1. Mean absolute deviation (MAD) (all of us are, in varying measures-dont you agree-MAD i.e.-but lets save Sigmund Freud for some other time-)
This is computed by taking the sum of the absolute values of the individual forecast errors and dividing by the number of periods of data (n): MAD = |Forecast errors| / n Week t 1 2 3 4 5 6 7 8 9 10 11 12 Actual Sales (1000s of gallons) 17 21 19 23 18 16 20 18 22 20 15 22 Rounded forecast with = .2 17 17 18 18 19 19 18 19 18 19 19 18 0 4 1 5 1 3 2 1 4 1 4 4 17 17 19 19 21 20 18 19 18 20 20 21 0 4 0 4 3 4 2 1 4 0 5 1 Absolute deviation for = .2 Rounded forecast with = .5 Absolute deviation for = .5

Sum of absolute deviations 30 28

MAD = | Deviations| / n = 2.5 2.33

On the basis of this analysis, a smoothing constant of = .5 is preferred to = .2 because its MAD is smaller.

2. Mean squared error (MSE) is another way of measuring overall forecast error. MSE is the average of the squared differences between the forecasted and observed values. The formula is:
MSE = (Forecast errors)2 / n

Trend Projections.
This technique fits a trend line to a series of historical data points and then projects the line into the future for medium - to long range forecasts. Several mathematical trend equations can be developed (for example, exponential and quadratic), but in this class we will discuss a linear (straight line) trends only. Linear trend line can be fitted by the method of least square method. This approach results in a straight line that minimizes the sum of the squares of the vertical differences from the line to each of the actual observations. The figure 3.1 illustrates the least squares approach.

Figure 3.1The least squares method for finding the best-fitting line

The least square method

A least squares line is described in terms of its y intercept (the height at which it intercepts the y axis) and its slope (the angle of the line). If we can compute y intercept and slope, we can express the line as = a + bx ^y ^y = Computed value of the variable to be predicted (called the dependent variable) a = y axis intercept

b = slope of the regression line x = independent variable (which is time here) The slope b is found by b = ( xy n ) / (x2 n xyx2) We can compute the y intercept a as follows: a = - b ^yx Let us take an example to make the things more clear.

Example
The demand for electrical power at Delhi over the period 1990 1996 is shown below, in megawatts. Let us fit a straight line trend to these data and forecast 1997 demand Year 1990 1991 1992 1993 1994 1995 1996 Electrical power 74 79 80 90 105 142 122 demanded Year Time period Electrical power demand y x2 x 199 0 199 1 199 2 199 3 199 4 199 5 199 6 x = 28 y = 692 x2 = 140 xy = 3063 1 2 3 4 5 6 7 74 79 80 90 105 142 122 1 4 9 16 25 36 49 74 158 240 360 525 852 854 xy

=x4728==nx, y = = 692/7 = 98.86 b = 22xnxxynxy = 295/ 28 = 10.54 a = - b = 98.86 10.54(4) = 56.7 yx Hence, the least squares trend equation is y ^ = 56.70 + 10.54x. To project demand in 1997, we first denote the year 1997 in our new coding system as x = 8. Then we estimate the demand in 1997 as 56.7 + 10.54(8) = 141.02, or 141 megawatts

Seasonal Variations in Data

Time series forecasting involves looking at the trend of data over a series of time observations. Sometimes, however, recurring variations at certain seasons of the year make a seasonal adjustment in the trend line forecast necessary. Demand for coal and fuel oil, for example, usually peaks during cold winter months. Analyzing data in monthly or quarterly terms usually makes it easy by several common methods. We will take the following example to compute seasonal factors from historical data.

Example
Monthly sales of IBM notebook computers at Bangalore are shown below for 1999-2000

Total average demand = 1128

Average monthly demand = 1128/ 12 = 94 Seasonal index = Average 1999 2000 demand / Average monthly demand Using these seasonal indices, if we expected the 2001 annual demand for computers to be 1200 units, we would forecast the monthly demand as follows: Month Jan Feb Mar Apr May Jun Demand (1200/12) x .957 = 96 (1200/12) x .851 = 85 (1200/12) x .904 = 90 Month Jul Aug Sep Demand (1200/12) x 1.117 = 112 (1200/12) x 1.064 = 106 (1200/12) x .957 (1200/12) x .851 (1200/12) x .851 (1200/12) x .851 = 96 = 85 = 85 = 85

(1200/12) x 1.064 = 106 Oct (1200/12) x 1.309 = 131 Nov (1200/12) x 1.223 = 122 Dec

Now we will consider another example to show how indices that have already been prepared can be applied to adjust trend line forecasts.

Example
The president of Jack and Jill Chocolate Shop has used time series regression to forecast retail sales for the next four quarters. The sales estimates are Rs1,00,000, Rs1,20,000, Rs1,40,000, and Rs1,60,000 for the respective quarters. Seasonal indices for the four quarters have been found to be 1.30, .90, .70, and 1.15, respectively. To compute a seasonalized or adjusted sales forecast, we just multiply each seasonal index by the appropriate trend forecast:

Quarter I: Y1 = (1.30)(Rs1,00,000) = Rs1,30,000 Quarter II: YII = (.90)(Rs1,20,000) = Rs1,08,000 Quarter III: YIII = (.70)(Rs1,40,000) = Rs98,000 Quarter IV: YIV = (1.15)(Rs1,60,000) = Rs1,84,000