Module 2

Module 2
Balancing supply with demand
Upon completion of this module, students will be able to:
 Explain the nature of demand.
 Understand the strategic role of forecasting.
 Distinguish between qualitative and quantitative forecasting
and perform basic quantitative calculations.
 Outline how capacity is measured and appreciate the
Outcomes
dilemma faced by management in matching variable
demand with variable capacity.
 Calculate various aggregate planning scenarios.
 Identify various strategies for balancing supply with
demand.
 Evaluate the application of yield management.
 Evaluate queues and waiting lines.

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Unit 3
Demand management and
forecasting
Upon completion of this unit students will be able to:
 Define demand management.
 Explain the nature of demand.
 Understand the strategic role of forecasting.
 Distinguish between qualitative and quantitative
forecasting.
Outcomes
 Explain forecast accuracy.
 Define forecast value added.
 Perform basic quantitative calculations on forecasting.
 Define and calculate seasonal indices.
 Use regression analysis to develop long-term trends.
 Discuss other approaches to forecasting.

Reflection 2.1
Reflection 2.1
Excluding the changing behaviours demonstrated by the customer,
what factors would influence demand?
Reflection

Reflection 2.1 feedback

A number of factors influence demand such as changes in
technology, competitor initiatives or pricing levels. Forecasting
helps firms to focus attention on the factors that influence demand
and establish a relationship between those factors and the actual
demand.

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Unit 3

Reflection 2.2
Reflection 2.2
Think of three or four reasons why a forecast value would be
inaccurate.
Reflection

Reflection 2.2 feedback

Forecast inaccuracy can be attributed to the following causes:
 The forecasting model or method used may not be suitable
for the demand being monitored.
 The information in the forecasting process may arrive too
late to be of significant value.
 True demand is not being captured and it is being confused
with sales data.
 Appropriate data is not being used. This feature develops
when individuals are left to source information for
themselves and then this data is consolidated in some way
at an organisational level.
 Forecasts are calculated from the past data that may not
hold for projected data points.

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Activity 2.1
Use the data in the following table to calculate mean absolute
deviation MAD.

Demand       Forecast        Deviation      Abs deviation 

Month
D F (D‐F ) |D‐F |
Activity
Jan 500 550 ‐50 50
Fe b 550 600 ‐50 50
Mar 420 490 ‐70 70
Apr 500 530 ‐30 30
May 610 530 80 80
Jun 600 550 50 50
Jul 680 610 70 70
Aug 670 670 0 0
Se p 720 690 30 30
Oct 750 730 20 20
Sum 6000 5950 50 450
Ave 600 595 5 45

Activity 2.1 feedback

Calculate the absolute deviation between demand values and
forecast values for each month. Add them up and find the average
(mean) value. This is the mean absolute deviation (MAD).

MAD =
 DF 
450
 45
n 10

Thus the actual demand is, on average, 45 units from the forecast
value.

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Unit 3

Activity 2.2
Use the data in the following table to calculate bias.

Demand       Forecast        Deviation      Abs deviation 

Month
D F (D‐F ) |D‐F |
Jan 500 550 ‐50 50
Fe b 550 600 ‐50 50
Activity Mar 420 490 ‐70 70
Apr 500 530 ‐30 30
May 610 530 80 80
Jun 600 550 50 50
Jul 680 610 70 70
Aug 670 670 0 0
Se p 720 690 30 30
Oct 750 730 20 20
Sum 6000 5950 50 450
Ave 600 595 5 45

Activity 2.2 feedback

Bias is found by calculating the algebraic difference between
demand value and forecast value for each period. To make sure that
the algebraic sign is correct, ensure you subtract forecast from
demand (D – F). The sum of the algebraic differences is divided by
the sum of the demand values and expressed as a percentage.

bias =
(D F)x100
D
(6000 5950)x100

6000
 0.833%

Thus the forecasting model has a bias in favour of demand of 0.833

per cent.

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Activity 2.3
Use the data in the following table to calculate mean absolute
percentage deviation MAPD and mean absolute percentage
variation MAPV.

Activity

Demand       Forecast       Abs deviation  Abs variance     

Month  D/n
D F |D‐F | |D ‐( D/n )|
Jan 500 550 50 600 100
Fe b 550 600 50 600 50
Mar 420 490 70 600 180
Apr 500 530 30 600 100
May 610 530 80 600 10
Jun 600 550 50 600 0
Jul 680 610 70 600 80
Aug 670 670 0 600 70
Se p 720 690 30 600 120
Oct 750 730 20 600 150
Sum 6000 5950 450 860
Average 600 595 45 86

Activity 2.3 feedback

MAPD is the mean of the absolute deviation between actual
demand value and forecast value divided by the mean of the
demand values expressed as a percentage. In this formula
description, both numerator and denominator calculate average
values using the number of observations. In the formula, the
number of observations, n, could appear in numerator and
denominator and cancels each other out.

MAPD =
 D‐F x 100  450 x 100  7.5%
D 6000

Mean absolute percentage variation (MAPV) is the average of the

absolute deviation between actual demand value and mean demand
value divided by the mean demand expressed as a percentage.

 D  n
D
x 100
860 x100
MAPV =   14.33%
 D 6000

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Unit 3

Thus the mean absolute deviation is 7.5 per cent of the mean
demand (MAPD) and the variability of demand (MAPV) is 14.33
per cent.

Activity 2.4
Calculate the forecast for month six using a three-month simple
moving average given historical demand for months one to five
as follows: 120, 130, 110, 135, and 145.

Activity

Activity 2.4 feedback

In this example n = 3 and t = 6.

n  3 ,  t  6
sum  of  actual  demand  values  for the chosen  number  of  periods
Ft 
chosen  number  of  periods
D t  n  ......  D t  2  D t  1

n
D3  D4  D5

3
110  135  145

3
 130

Thus, the forecast for month six using a three-month simple

moving average is 130.

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Activity 2.5
Calculate the forecast for month six using a five-month simple
moving average given historical demand for months one to five
as follows: 120, 130, 110, 135, and 145.

Activity

Activity 2.5 feedback

In this example n = 5 and t = 6.

n  5 ,  t  6
sum  of  actual  demand  values  for  chosen  number  of  periods
Ft 
chosen  number  of  periods
D t  n  ......  D t  2  D t  1

n
D1  D2  D3  D 4  D5

5
120  130  110  135  145

5
 128

Thus, the forecast for month six using a five-month simple moving
average is 128.

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Unit 3

Activity 2.6
Calculate the forecast for month six using a three-month weighted
moving average given historical demand for months one to five
as follows: 120, 130, 110, 135, and 145. Apply weights of 0.2,
0.3 and 0.5. (In other words, apply weights of 20 per cent, 30 per
cent and 50 per cent.)
Activity

Activity 2.6 feedback

In this example n = 3, t = 6.

 n  3,  t  6 ,   w3  0.2, w 4  0.3,   w5  0.5,  sum of the weights    1

sum of (each periodʹ s demand value x each periodʹ s weight)
Ft 
sum of the weights
D w  .....  D t  2 wt  2  D t  1 wt  1
Ft  t  n t  n
wt  n  .....  wt  2  wt  1
F6  (D 3   x  W3 )    (D 4   x  W4 )    (D 5   x  W5 )
F6  (110   x   0.2)      (135   x   0.3)      (145   x   0.5)    
 135

In this example, the sum of the weights adds up to 1. Thus, the

forecast for month six using a three-month weighted moving
average is 135 units

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Activity 2.7
Calculate the forecast for month six using exponential smoothing
given historical demand for months one to five as follows: 120,
130, 110, 135, and 145. Use an alpha factor  equal to 0.2 and
you are given a forecast for month five equal to 130.
Activity

Activity 2.7 feedback

t  6 , F5  130 ,  D 5  145 ,    0.2
Ft    Ft  1       (Dt‐1     Ft  1 )
 130  0.2 x (145  130)
 133

Thus, the forecast for month six using exponential smoothing with
 equal to 0.2 is 133.

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Unit 3

Activity 2.8

2
Month Demand x y xy x
January 115 1 115 115 1
Fe bruary 123 2 123 246 4
March 132 3 132 396 9
April 130 4 130 520 16
May 140 5 140 700 25
June 150 6 150 900 36
Sum 21 790 2877 91
Average 3.5 131.6667

Given the six months sales data in the following table, develop a
trend line using least squares regression analysis. Use the trend
line to forecast the next three months.

Activity

Activity 2.8 feedback

The data as supplied has demand data for six months. The monthly
demand is the independent variable and is assigned to the x-axis.
The months in the x-axis are numbered 1 to 6. The y-axis is for the
dependent variable and this is the observed demand.

In order to calculate a, b and the trend line, the values for xy and x2
are required as shown in the table above.

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 C4: Operations Management

 xy  2877 ,  x  21,  y  790,  x

n  6, 2
 91

n xy  ( x  y )
b
n  x  ( x )
2 2

6x2877  21x790

6 x91  21 2
 6.4

 xy  2877 ,  x  21,  y  790,  x

n  6, 2
 91

a
y b x
n n
 131.67  6.4x3.5
 109.27

yˆ  109.27  6.4 x           trend line equation

By using Excel the calculations can be automated. The Excel

software requires the data analysis add-in and the calculation is
initiated using the Data menu followed by Data Analysis and then
Regression. For the Input Y Range select the column of y-values
and for the Input X Range select the column of x-values. The
output report contains more data than is immediately required and
the pertinent values are shown below.

SUMMARY OUTPUT
Coefficients
Inte rce pt 109.27
x 6.4

Substituting x=7, x=8 and x=9 into the trend line equation provides
the forecast values as shown below.

Month x Forecast
July 7 154
August 8 160
Se pte mbe r 9 167

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Unit 3

Activity 2.9
Using the observed demand data for two years is shown in the
following table; perform a regression analysis on deseasonalised
demand to forecast demand for the winter season in year three.

Observed 
Year Season
demand
Activity 1 autumn 205
winte r 140
spring 375
summe r 570
2 autumn 475
winte r 270
spring 685
summe r 960
Sum of de mand 3680
Ave rage  de mand 460

Activity 2.9 feedback

Start by calculating the seasonal indices for autumn, winter, spring
and summer.

The period average demand for autumn is (205 + 475) / 2 = 340

The period average demand for winter is (140 + 270) / 2 = 205

The period average demand for spring is (375 + 685) / 2 = 530

The period average demand for summer is (570 + 960) /2 = 765

The average demand for all periods can be calculated as 3680/8 and
is given as 460.
period average demand
seasonal index  
average demand for all periods
340
seasonal  index for autumn   0.7391
460
205
seasonal  index for winter   0.4457
460
530
seasonal  index for spring   1.1522
460
765
seasonal  index for summer   1.6630
460

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 C4: Operations Management

Calculate the deseasonalised demand for each season by dividing

the observed demand by the seasonal index for that period as
shown in the following table. Then calculate the extended fields for
xy and x2 as shown in the following table.

Observed  Seasonal  Deseasonalised  2

Year Season x xy x
demand index demand y
1 autumn 205 1 0.7391 277.3644 277.3644 1
winte r 140 2 0.4457 314.1126 628.2252 4
spring 375 3 1.1522 325.4643 976.3929 9
summe r 570 4 1.6630 342.7541 1371.0164 16
2 autumn 475 5 0.7391 642.6735 3213.3675 25
winte r 270 6 0.4457 605.7886 3634.7316 36
spring 685 7 1.1522 594.5148 4161.6036 49
summe r 960 8 1.6630 577.2700 4618.1600 64
3680 36 8 3679.9423 18880.8616 204

n  8 ,    xy  18880.8616 ,   x  36 ,   y  3679.9423 ,   x 2

 204

b
n  xy  ( x y)
n  x  ( x )
2 2

8   x   18880.8616  36 x 3679.9423

8 x 204  36 2
 55.2648

a
y b x
n n
 460  55.2648 x 4.5
 211.308                                               yˆ  211.308  55.2648 x

Now calculate b, a and the best estimate of ŷ = a + bx.

Thus the trend line for deseasonalised data is ŷ = a + bx = 211.308

+ 55.2648x.

Now substitute x = 10 corresponding to winter in the third year to

get the deseasonalised value for that period.

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Unit 3

when x  10 , the deseasonalised value for winter in the third year is

yˆ  211.308  55.2648 x
 211.308  55.2648 x 10
 763.956

By using a program such as Excel, the calculations to get the

regression line can be automated. The Excel software requires the
data analysis add-in and the calculation is initiated using the Data
menu followed by Data Analysis and then Regression.

For the Input Y Range select the column of y-values and for the
Input X Range select the column of x-values. The output report
contains more data than is immediately required and the pertinent
values are shown in the following table.

SUMMARY OUTPUT
Coefficients
Inte rce pt 211.308
x 55.2648

The deseasonalised forecast for winter in the third year is:

yˆ  211.308  55.2648 x  763.956

Now multiply by the deseasonalised forecast by the seasonal index

to calculate the seasonalised forecast for winter in the third year:

763.956 x 0.4457 = 340.4952 = 340 (0 dp)

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 C4: Operations Management

Activity 2.10
Work through the following questions. You may need to go back
and re-read the unit to help you.
1. Describe the four components of demand.

Activity 2. Explain the difference between qualitative and quantitative

forecasting.
3. Describe the strategic importance of forecasting.
4. Describe the use of MAPD and MAPV.
5. Explain how forecasting performance might be measured.
6. Explain the expression, “Forecasting is about understanding
variation”.
7. What is the difference between seasonal variation and cyclical
variation?
8. Discuss seasonal variation of demand and how an organisation
can respond.
9. Explain how the seasonal index is calculated.
10. What strategies are used by airlines, hotels and rental car
companies to influence demand?

Activity 2.10 feedback

All answers are in the learning material.

27
Unit 4

Unit 4

Capacity planning and

management
Upon completion of this unit students will be able to:
 Outline how capacity is measured and appreciate the
dilemma faced by management in matching variable
demand with variable capacity.
 Calculate various aggregate planning scenarios.
 Discuss the strategic planning process.
Outcomes
 Identify various strategies for balancing supply with
demand.
 Evaluate the application of yield management.
 Discuss flexibility.
 Appreciate the customers psychology in relation to queuing.
 Discuss queues and waiting lines.

Reflection 2.3
Imagine you are about to launch a new venture. It may be a factory,
a restaurant, a medical centre, a retail store, a transport company, a
school or a hospital (to name a few examples).
Reflection All production and service organisations usually occupy one or
more facilities at one or more locations. For this new venture, the
following strategic decisions need to be resolved:
1. Where will each facility be located?
2. How large, or small, will each facility need to be?
3. What process technology will be installed at each location?
4. Will the physical size of the facility be sufficient in the short
term, medium term and long term?
5. When should capacity increments be installed?
6. What happens if the available capacity is too much?
7. What happens if it is too small?

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 C4: Operations Management

Reflection 2.3 feedback

All of these questions have a major bearing on the success, or
otherwise, of the organisation. If you are capable of getting it right,
you will find yourself in an enviable position of being able to
capitalise on every opportunity that comes your way (assuming you
want to take it) and thus maximise revenues and profits. If you get
it wrong, you may find yourself searching for additional capacity at
a premium price or being left with excess capacity that you are
unable to sell.

Reflection 2.4
For the most part, the production planner is given a sales forecast
and has to use a pure strategy or a combination of strategies.
Think of three or four capacity or supply planning decisions that
Reflection the production planner could use to increase/decrease the available
capacity.

Reflection 2.4 feedback

 Hiring additional staff and making staff redundant.
 Working variable days a week.
 Working overtime.
 Varying the level of inventory.
 Varying the number of orders in the backlog.
 Varying the length of the queue of customers.
 Using subcontractors to supply additional capacity.
 Outsourcing parts of the business to free up resources.
 Adding or removing temporary capacity.
 Adding or removing permanent capacity.
These are reactive measures and the controllability of these factors
depends on union agreements, employment contracts, employment
legislation, short-term constraints on physical capacity levels,
customer requirements and preferences and the amount of money
that can be tied up in inventories.

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Unit 4

Activity 2.11
The data in the following table represents the demand forecast for
12 months commencing January for an organisation.

Month Demand forecast 

Activity Jan 4400

Fe b 3200
Mar 4000
Apr 5400
May 6600
Jun 5000
Jul 4000
Aug 3000
Se p 4800
Oct 6400
Nov 7000
De c 6200
60000

The organisation currently employs 25 employees. For planning

purposes, each employee is capable of making 200 units a month.
The cost of hiring additional staff is $600 per employee and the
cost of making an employee redundant is $300. A storage charge of
$1 per unit is made for inventory on hand at the end of each month.
This is to cover the cost of warehousing.
(Please note that the dollar amounts are nominal for planning
purposes and no attempt has been made to quantify the actual costs
in this example.)
Plan 1: Develop a production plan using a level production
strategy.
Plan 2: Develop a production plan using a chase capacity strategy.
Plan 3: Develop a production plan using six months at 4800 and
six months at 5200.

Activity 2.11 feedback

Plan 1: Develop a production plan using a level production
strategy.

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 C4: Operations Management

Start this plan by calculating the level production rate. The annual
demand is 60,000 and there are 12 monthly periods so that makes
5000 units per month.
In January, the beginning inventory is zero, the production is 5000
and demand is 4400, therefore the ending inventory is 600 units.
In February, the beginning inventory (following on from January)
is 600, the production is 5000 and demand is 3200, therefore the
ending inventory is 2400 units.
In March, the beginning inventory (following on from February) is
2400, the production is 5000 and demand is 4000, therefore the
ending inventory is 3400 units.
Continue like this for the rest of the year.

Beginning  Ending  Number 

Demand  Redundant 
Month inventory  Production  inventory  of  New staff
forecast staff
on hand on hand employees
Jan 0 5000 4400 600 25
Feb  600 5000 3200 2400 25
Mar  2400 5000 4000 3400 25
Apr 3400 5000 5400 3000 25
May 3000 5000 6600 1400 25
Jun 1400 5000 5000 1400 25
Jul 1400 5000 4000 2400 25
Aug  2400 5000 3000 4400 25
Sep 4400 5000 4800 4600 25
Oct 4600 5000 6400 3200 25
Nov 3200 5000 7000 1200 25
Dec  1200 5000 6200 0 25
60000 60000 28000

The inventory storage cost is $28,000, the cost of employing new

staff is zero, and the cost of terminating staff is zero to give a total
cost for this plan of $28,000.
Plan 2: Develop a production plan using a chase capacity
strategy.
In this plan the production rate varies to match the demand pattern
and the number of employees is increased or decreased to match
the production rate.
In January, the demand forecast is 4400, so production is set to
match that rate. Beginning inventory on hand is zero, production
matches demand forecast, so the ending inventory on hand is zero.
To produce 4400 we need 22 staff (200 units per employee per

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Unit 4

month) so three employees are made redundant. Their employment

contract would specify the temporary nature of their employment.
In February, the demand forecast is 3200, so production is set to
match that rate. Beginning inventory on hand is zero, production
matches demand forecast, so the ending inventory on hand is zero.
To produce 3200 we need 16 staff (200 units per employee per
month) so six employees are made redundant.
In March, the demand forecast is 4000, so production is set to
match that rate. Beginning inventory on hand is zero, production
matches demand forecast, so the ending inventory on hand is zero.
To produce 4000 we need 20 staff (200 units per employee per
month) so four employees are hired.
The remaining months are calculated in a similar fashion.

Beginning  Ending  Number 

Demand  Redundant 
Month inventory  Production  inventory  of  New staff
forecast staff
on hand on hand employees
Jan 0 4400 4400 0 22 3
Feb  0 3200 3200 0 16 6
Mar  0 4000 4000 0 20 4
Apr 0 5400 5400 0 27 7
May 0 6600 6600 0 33 6
Jun 0 5000 5000 0 25 8
Jul 0 4000 4000 0 20 5
Aug  0 3000 3000 0 15 5
Sep 0 4800 4800 0 24 9
Oct 0 6400 6400 0 32 8
Nov 0 7000 7000 0 35 3
Dec  0 6200 6200 0 31 4
60000 60000 0 37 31

The inventory storage cost is zero, the cost of employing new staff
is $22,200, the cost of terminating staff is $9,300 to give a total
cost for this plan of $31,500.
Plan 3: Develop a production plan using six months at 4800 and
six months at 5200.
The calculations for this strategy follow the same pattern as plan 1
and 2 except that the production rate is set at 4800 for the first six
months and then increases to 5200 for the rest of the year. This
represents a starting position in trying to optimise the plan. The
number of employees is increased or decreased to match the
production rate.

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 C4: Operations Management

Beginning  Ending  Number 

Demand  New  Redundant 
Month inventory  Production  inventory  of 
forecast employees employees
on hand on hand employees
Jan 0 4800 4400 400 24 1
Feb  400 4800 3200 2000 24
Mar  2000 4800 4000 2800 24
Apr 2800 4800 5400 2200 24
May 2200 4800 6600 400 24
Jun 400 4800 5000 200 24
Jul 200 5200 4000 1400 26 2
Aug  1400 5200 3000 3600 26
Sep 3600 5200 4800 4000 26
Oct 4000 5200 6400 2800 26
Nov 2800 5200 7000 1000 26
Dec  1000 5200 6200 0 26
60000 60000 20800 2 1

The inventory storage cost is $20,800, the cost of employing new

staff is $1,200, the cost of terminating staff is $300 to give a total
cost for this plan of $22,300.

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Unit 4

Activity 2.12
When you are waiting in a queue, it often feels like you are
waiting for a very long time. Make a list of possible reasons why
a customer perceives the wait time is longer than it actually is.

Activity

Activity 2.12 feedback

Johnson and Clark identified that the customer often perceives that
the time in the queue is longer than it really is. They observed the
following:
 Unoccupied time feels longer than occupied time.
 Pre-process waits feel longer than in-process waits.
 Anxiety makes the wait seem longer.
 Uncertain waits are longer than known, finite waits.
 Unexplained waits seem longer than explained waits.
 Unfair waits are longer than equitable waits.
 The more valuable the service, the longer the customer
waits.
 Solo waiting feels longer than group waiting.
 Uncomfortable waits feel longer than comfortable waits.
 New or infrequent users feel they wait longer

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Activity 2.13
1. What does the term “capacity” mean?
2. How does capacity differ from capability?
3. Why is capacity management strategically important?

Activity 4. The management of capacity for services is more difficult than

for manufacturing. Why?
5. Describe the capacity considerations for a hospital and identify
how this is different from a manufacturing unit.
6. What are the possible consequences of demand rate being
different from design capacity rate?
7. What is yield management?
8. What industries use yield management and why?
9. Describe three strategies for expanding capacity.

Activity 2.13 feedback

All answers are in the learning material.

35
Unit 4

Assignment 1
There are three questions in this assignment.

Assignment

Question 1 40 marks
a. Lowering prices can increase demand for products or services,
but it also reduces profit margins if the product or service
cannot be produced at lower cost. Briefly discuss how an
operations manager should approach his or her job when
competing on cost.
b. Quality is a dimension of a product or service that is defined by
the customer. Today, more than ever, quality has important
market implications. Briefly discuss how an operations
manager should approach his or her job when competing on
quality.
c. As the saying goes, “time is money.” Some companies do
business at “Internet speed”, while others thrive on consistently
meeting delivery promises. Briefly discuss how an operations
manager should approach his or her job when competing on
time.
d. Flexibility is a characteristic of a firm’s operations that enables
it to react to customer needs quickly and efficiently. Some
firms give top priority to flexibility. Briefly discuss how an
operations manager should approach his or her job when
competing on flexibility.

Answer to Assignment Question 1

a. Competing on cost 10 marks
An organisation may elect to compete purely on the basis of cost. It
could achieve this by lowering prices to increase demand for
products and services. However, this approach also reduces profit
margins if the product or service cannot be produced at a lower
cost.
Cost advantage can be gained by adopting lean thinking and cutting
the cost of non-value-adding activities in the value chain. This may
require additional investment in automation, a streamlining of

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procedures, additional training and development, and usually

results in a narrower range of products or services.
A “no frills” airline competes on the basis of cost by reducing fares
for the base service — travel with no checked bags, no free food
and receive just music entertainment. A customer can obtain a very
cheap fare if the travel portion is all they want. If, however, the
customer wants more than that they can pay extra for checked bags,
food and drinks and video on demand.
Guide to marker: Look for what the operations manager should
do when competing on cost.
Some students may suggest the manager should buy the cheapest,
but this is not necessarily competing on cost. When competing on
cost the firm delivers exactly what the customer wants (no more
than the minimum requirement) and the process for delivery aims
to eliminate unnecessary cost elements. Therefore the manager
should implement lean thinking ideas.
b. Competing on quality 10 marks
An organisation may elect to compete purely on the basis of
quality. Two aspects of quality have to be considered: high
performance design which includes superior features, close
tolerances, and greater durability, and consistent quality which
measures the frequency with which the product meets design
specifications.
Customers want products that consistently conform to the
specifications they contracted for, have come to expect, or saw
advertised. An organisation can achieve product differentiation by
developing expertise in product quality and process quality. The
aim is to provide superior performance products that meet the
specifications and are reliable.
Car companies such as Toyota and BMW compete on the basis of
quality since the concepts of quality feature at the top of their
priority lists. Note that both these companies will argue that they
compete on other issues and not solely on quality.
Guide to marker: Look for what the operations manager should
do when competing on quality. This means the manager should
ensure that the product design includes all features required by the
customer and the production process is close to error-free.
c. Competing on time 10 marks
An organisation may elect to compete purely on the basis of time.
This involves a short delivery time which is the elapsed time
between receiving a customer’s order and filling it. Firms can
shorten delivery lead times by storing inventory or having excess
capacity. It also involves on-time delivery which measures the

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frequency with which delivery-time promises are met.

Organisations measure on-time delivery as the percentage of orders
shipped when promised.
On-time delivery requires the product or service to be delivered at
the first customer-requested delivery time. Firms may convince
themselves they are meeting delivery promises by shipping goods
out the door on or before the delivery promise date and time.
However, the customer does not see it this way. Customers want
the product or service and they will measure on-time delivery as
being the actual time the product is delivered to their location.
International courier companies use parcel tracking technology to
identify the exact location of all their deliveries and they promise
delivery on time. Their technology reduces the chance of losing a
parcel or misdirecting it.
Another aspect of competing on the basis of time is product
development speed which measures how quickly a new product is
introduced. This includes the elapsed time from idea generation
through to final design and production. Getting a new product to
market first gives a firm an edge on the competition and this is
difficult to overtake in a rapidly changing business environment.
Guide to marker: Look for what the operations manager should
do when competing on time. This means that the manager is
improving processes to reduce lead times, delivery times and new
product development times.
d. Competing on flexibility 10 marks
An organisation may elect to compete purely on the basis of
flexibility. Flexibility allows a firm to change volumes quickly or
change products quickly to suit customer requirements. This is also
referred to as customisation, which is the ability to accommodate
the unique needs of each customer and changing product designs.
Products are tailored to individual preferences. Customisation
implies the operating system must be flexible to handle specific
customer needs and changes in designs. Volume flexibility is the
ability to accelerate the production rate quickly to handle large
fluctuations in demand. The time between peaks may be years as in
the construction industry, months as with a ski resort, or hours as
with a postal sorting firm.
Dell computers are a good example of competing on flexibility. At
the time a customer places an order for a Dell computer the actual
computer does not physically exist. Dell has the manufacturing
capability to assemble exactly what the customer wants and ship it
to them within a few days. They facilitate this flexibility by pricing
the configurations in favour of the components they can deliver. If
a component (memory, hard drive or screen) is in short supply they
will offer that component at a higher price and customers will be

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encouraged to choose another component at a lower price and the

alternative may be at a higher specification, which is even better.
Guide to marker: Look for what the operations manager should
do when competing on flexibility. This means improving processes
to reduce batch sizes and reducing set-up times, arranging for
suppliers to deliver frequently and generally moving towards
batches of one.

Question 2 30 marks
a. Provide three questions that should be considered when
developing the objectives of a forecast.
b. Name three different models that could be developed and tested
during the forecasting process.
c. What does “applying the model” mean?
d. Explain, using an example, the forecasting step “considering
real-world constraints on the model’s application”.
e. Explain how one might “revise and evaluate the forecast”.
f. What is the most important rule of forecasting, and what should
we be trying to achieve?

Answer to Assignment Question 2

a. Provide three questions that should be considered when
developing the objectives of a forecast. 6 marks
What is the purpose of the forecast?
What variables are to be forecast?
Who will use the forecast?
What is the time frame for the forecast – long or short term?
How accurate should the forecast be?
When is the forecast needed?
b. Name three different models that could be developed and tested
during the forecasting process. 6 marks
Moving average
Weighted moving average
Exponential smoothing
Regression analysis.
c. What does “applying the model” mean? 4 marks

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After the model is tested, historical data about the problem are
collected. These data are applied to the model, and the forecast
is obtained. Great care should be taken so that the proper data
are used and the model is applied correctly.
d. Explain, using an example, the forecasting step “considering
real-world constraints on the model’s application”. 4 marks
A model may predict that sales will double in the next three
years. Management therefore expands the plant, but does not
think about the impact this increase will have on the
distribution system. What if the company cannot move the
increased volume? What about raw material availability, and
actions such as price-cutting by competitors.
e. Explain how one might “revise and evaluate the forecast”.
4 marks
The technical forecast should be tempered with human
judgement. What relationships might have changed?
f. What is the most important rule of forecasting, and what should
we be trying to achieve? 6 marks
Forecasts are always wrong, and it is better to plan for this by
having a range as a forecast, than a definitive number. This will
make it easier to have contingency plans drawn up. With
forecasting we are trying to minimise the size of the forecast
deviation.

Question 3: 30 marks
The actual number of guests staying at an exclusive lodge has been
as follows:
Quarter Year Actual
Summer 1 73
Autumn 1 104
Winter 1 168
Spring 1 74
Summer 2 65
Autumn 2 82
Winter 2 144
Spring 2 52
Summer 3 89
Autumn 3 146
Winter 3 205
Spring 3 98
Total 1300

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a. Calculate seasonal indices using the above data.

b. Deseasonalise the above data, and determine the regression
equation.
c. Using the regression equation determine the forecasts for year
four.

Answer to Assignment Question 3

The actual number of guests staying at an exclusive lodge has been
as follows:

Actual Deseas.
Quarter Year Guests Seas. Ave Seas. Index Demand
Summer 1 73 75.6667 0.6985 104.5154
Autumn 1 104 110.6667 1.0215 101.8072
Winter 1 168 172.3333 1.5908 105.6093
Spring 1 74 74.6667 0.6892 107.3661
Summer 2 65 0.6985 93.0617
Autumn 2 82 1.0215 80.2711
Winter 2 144 1.5908 90.5222
Spring 2 52 0.6892 75.4464
Summer 3 89 0.6985 127.4229
Autumn 3 146 1.0215 142.9217
Winter 3 205 1.5908 128.8685
Spring 3 98 0.6892 142.1875 Deseas. Seas.
Total 1300 Forecast Forecast
0.6985 13 130.5345 91
Total Average 108.333333 1.0215 14 133.9500 137
1.5908 15 137.3655 219
Slope 3.4155 0.6892 16 140.7810 97
y-intercept 86.133

a. Calculate seasonal indices using the above data.

10 marks
0.6985
1.0215
1.5908
0.6892
b. Deseasonalise the above data, and determine the regression
equation. 10 marks
Deseasonalised data is column six above.
Y = 86.133 + 3.4155 (four decimal places)
c. Using the regression equation determine the forecasts for year
four. 10 marks
Forecast data is column eight above.

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