New Product

OT prod
Product Capacity RT prod
Demand estimation
Out
Forecasting sourcing
Production
plan
Machine

Rush
order Disaggretion Quality &
Maintenance
Material and
Inventory
Scheduling

production

Use
 Forecasting

2014 25
2015 32
2016 24
2017 28
2018 26
2019 27
2020 ?

F=27 Simple Avg of all data

F=26.25 Avg of last four years
F=28 Increase in last 2 data
F=30 Other factor
F=26 Increase/decrease
F=27 Avg of last 3 data
F=26.833 Weighted Avg
F=26 Remove 32 and avg.

𝐹 =𝑎+𝜀
A= level or constant

𝜀 = 𝑛𝑜𝑖𝑠𝑒 𝑜𝑟 𝑖𝑛ℎ𝑒𝑟𝑒𝑛𝑡 𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒

𝑥1+𝑥2+𝑥3+⋯…+𝑥𝑛
1. Simple Avg=
𝑛
𝑤1𝑥1+𝑤2𝑥2+⋯….+𝑤𝑛𝑥𝑛
2. Weighted Avg Method= 𝑤1+𝑤2+⋯…+𝑤𝑛
3. Kth period moving Avg Method

Time series forecasting Model

Causal Models (Cause and effect analysis)

Exponential Smoothing Model

𝐹𝑡+1 =∝ 𝐷𝑡 + (1−∝)𝐹𝑡
∝= 𝑠𝑚𝑜𝑜𝑡ℎ𝑖𝑛𝑔 𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡
𝐹7 =∝ 𝐷6 + (1−∝)𝐹6
𝐹6 =∝ 𝐷5 + (1−∝)𝐹5
𝐹2 =∝ 𝐷1 + (1−∝)𝐹1
Let’s Assume ∝= .2, ;F1=27 (simple Avg), 25, 32, 24, 28, 26, 27

F2=26.6;
 𝐹3 =∝ 𝐷2 + (1−∝)𝐹2

F3=0.2*32+(1-.2)*26.6=27.68; F4=26.94, F5=27.15; F6=26.92,F7=26.94

𝐹7 =∝ 𝐷6 + (1−∝)𝐹6
𝐹7 =∝ 𝐷6 + (1−∝)(∝ 𝐷5 + (1−∝)𝐹5 )
𝐹7 =∝ 𝐷6 + (1−∝) ∝ 𝐷5 +(1-∝)^2𝐹5 )

𝐹7 =∝ 𝐷6 + (1−∝) ∝ 𝐷5 +∝ (1−∝)2 𝐷4 + ⋯ … +∝ (1−∝)5 𝐷1 + (1−∝)6 𝐹1

=0.2D6+.16d5+….+

Infinite GP series,

=∝ +(1−∝) ∝ +∝ (1−∝)2 + ⋯ … +∝ (1−∝)5 + (1−∝)6 … + 𝑖𝑛𝑖𝑓𝑖𝑛𝑖𝑡𝑦 − − − −𝑑𝑒𝑛𝑜𝑚𝑖𝑛𝑎𝑡𝑜𝑟

a/1-r

∝/(1 − (1−∝)=1

∝ should satisfy two condition

∝> 0, ∝< 1
0 <∝< 1
∝= 2/(𝑛 + 1)
26, 28, 29, 32, 34, 35, 40

Simple Avg method=F8=32

Linear Regression Model

Suppose we have following data:

1 26
2 28
3 29
4 31
5 32
6 35
7

Chart Title
40

35

30

25

20

15

10

0
0 1 2 3 4 5 6 7

∑6𝑒=1 𝑒 2 minimise

Y=a+bt

y-a-bt

𝑒𝑡 = 𝑦𝑡 − 𝑎 − 𝑏𝑡
Minimize sum of square error

∑ 𝑒𝑡 2 = ∑(𝑦𝑡 − 𝑎 − 𝑏𝑡)2

Partially differ the above equation wrt a

−2 ∑(𝑦𝑡 − 𝑎 − 𝑏𝑡) =0……(1)

Partially diff w r t b

−2 ∑ 𝑡(𝑦𝑡 − 𝑎 − 𝑏𝑡) = 0……(2)

Expand above 2 equ

Expand above 2 equ

∑ 𝑦 = 𝑛𝑎 + 𝑏 ∑ 𝑡……(1a)

∑ 𝑌𝑡 = 𝑎 ∑ 𝑡 + 𝑏 ∑ 𝑡 2 …..(2a)

Yt t Y*t t^2
26 1 26 1
28 2 56 4
29 3 87 9
31 4 124 16
32 5 160 25
35 6 210 36
Summation=181 21 663 91

181=6a+21b

663=21a+91b

a=24.266; b=1.685

F7=a+bt

F7=24.266+1.68*7=36.02.

Linear Regression Model

In case of constant data

Y=C

𝑒 2 = ∑(𝑦 − 𝑐)2

∑𝑦
𝑐=
𝑛
HOLT’s Model

𝐹𝑡+1 = 𝑎𝑡 + 𝑏𝑡 forecast for the next period

𝑎𝑡 =∝ 𝐷𝑡 + (1−∝)(𝑎𝑡−1 + 𝑏𝑡−1 )
𝑏𝑡 = 𝛽(𝑎𝑡 − 𝑎𝑡−1 ) + (1 − 𝛽)𝑏𝑡−1
Data: 26, 28, 29, 31, 32, 35; ∝= .2; 𝛽 = 0.3

A1=D1=26
B1=35-26/6-1=1.8

F2=a1+b1= 26+1.8=27.8

𝑎2 =∝ 𝐷2 + (1−∝)(𝑎1 + 𝑏1 )=0.2*28+0.8*27.8=27.84

𝑏2 = 𝛽(𝑎2 − 𝑎1 ) + (1 − 𝛽)𝑏1 =.3*(27.84-26)+.7*1.8=1.81

F3=a2+b2=27.84+1.81=29.652.

Period t Dt at bt Ft
1 26 26 1.8
2 28 27.84 1.812 27.8
3 29 29.52 1.77 29.67
4 31 31.23 1.75 31.29
5 32 32.729 1.69 32.99
6 35 34.592 1.72 34.49
7 36.32

Seasonality Model

Year 1 Y2 Y3
Q1 53 58 62
Q2 22 25 27
Q3 37 40 44
Q4 45 50 56
157 173 189

Seasonality Index

Year 1 Y2 Y3 Avg
Q1 53/157=.34 58/173=.34 62/189=.33 0.336
Q2 22/157=0.14 25/173=.14 27/189=.14 0.14
Q3 37/157=0.23 40/173=.23 44/189=.23 0.23
Q4 45/157=0.28 50/173=.29 56/189=.30 0.29
1 1 1

Total Demand forgiven 3 years is 157, 173, 189

∑ 𝑦 = 𝑛𝑎 + 𝑏 ∑ 𝑡……(1a)

∑ 𝑌𝑡 = 𝑎 ∑ 𝑡 + 𝑏 ∑ 𝑡 2 …..(2a)

Yt t Y*t t^2
157 1 157 1
173 2 346 4
189 3 567 9
519 6 1070 14
a = 141; b=16

y=a+bt= F4=141+(16*4)=205

Year 1 Y2 Y3 Avg Y4
Q1 53/157=.34 58/173=.34 62/189=.33 0.336 205*0.336=69
Q2 22/157=0.14 25/173=.14 27/189=.14 0.14 205*.14=29
Q3 37/157=0.23 40/173=.23 44/189=.23 0.23 205*.23=47
Q4 45/157=0.28 50/173=.29 56/189=.30 0.29 205*.29=59
1 1 1

Causal Model

𝒚 = 𝒂 + 𝒃𝒙
∑ 𝑦 = 𝑛𝑎 + 𝑏 ∑ 𝑥……(1a)

∑ 𝑌𝑡 = 𝑎 ∑ 𝑥 + 𝑏 ∑ 𝑥 2 …..(2a)

𝒚 = 𝒂 + 𝒃𝒙𝟏 + 𝒄𝒙𝟐

𝒚 = 𝒂𝒙𝒃

Goodness of Forecasting Model

1) Mean Absolute deviation(MAD)

2) Mean squared deviation
3) Mean absolute percentage deviation
4) Tracking Signal

Data: 30, 32, 31, 30

Simple Avg Method=30.75

Absolute deviation=(|𝟑𝟎 − 𝟑𝟎. 𝟕𝟓| + |𝟑𝟐 − 𝟑𝟎. 𝟕𝟓| + |𝟑𝟏 − 𝟑𝟎. 𝟕𝟓| + |𝟑𝟎 − 𝟑𝟎. 𝟕𝟓|) = 𝟑
MAD=3/4

𝒆 𝒕 = 𝑫𝒕 − 𝒇𝒕
𝒏
𝟏
𝑴𝑨𝑫 = ∑|𝒆𝒊 |
𝒏
𝒊
𝑺𝑫 = (𝟑𝟎 − 𝟑𝟎. 𝟕𝟓)𝟐 + (𝟑𝟐 − 𝟑𝟎. 𝟕𝟓)𝟐 + (𝟑𝟏 − 𝟑𝟎. 𝟕𝟓)𝟐 + (𝟑𝟎 − 𝟑𝟎. 𝟕𝟓)𝟐 = 𝟐. 𝟕𝟓

MSD=2.75/4=
𝟏 𝟐
𝑴𝑺𝑫 = 𝒏 ∑𝒏𝒊 𝒆𝒊
 𝒏
𝟏 |𝒆𝒊 |
𝑴𝑨%𝑫 = ∑ ( ) ∗ 𝟏𝟎𝟎
𝒏 𝑫𝒊
𝒊
|𝟑𝟎−𝟑𝟎.𝟕𝟓| |𝟑𝟐−𝟑𝟎.𝟕𝟓| |𝟑𝟏−𝟑𝟎.𝟕𝟓| |𝟑𝟎−𝟑𝟎.𝟕𝟓|
=(( 𝟑𝟎
) ∗ 𝟏𝟎𝟎 + ( 𝟑𝟐
) ∗ 𝟏𝟎𝟎 + ( 𝟑𝟏
) ∗ 𝟏𝟎𝟎 + ( 𝟑𝟏
) ∗ 𝟏𝟎𝟎) =

Data: 30, 32, 31, 30

2) Now apply 2 moving avg method
F=30.5
MAD=3/4
MSD=3/4

Tracking Signal= SFE/MAD

𝒆 𝒕 = 𝑫𝒕 − 𝒇𝒕
SFE=∑𝒏𝒊 𝒆𝒊
 Inventory management

We need to answer two important Question

1) How much to order---- order quantity(Q)

2) When to order……reorder Level (R)= Lead time * Daily Demand

Classification of Inventory Models

1. Single period inventory Management

2. Multi period IM

Demand classification

1. Deterministic demand
2. Probabilistic demand
a. Inventory under risk
b. Inventory under Uncertainity

Different cost involved

1. Cost of Item (C) --------Q*C

2. Ordering Cost------- (Co)
a. Payroll cost
b. Transportation cost
c. Inspection Cost
d. Reject and Rework cost
e. Cost of follow up
f. Delay cost
3. Carrying Cost or Holding cost (Cc)= i*C
a. Cost of space
b. Person Payroll
c. Power and accessories
d. Special Requirement cost
e. Obsolete or unused item
f. Pilferage
g. Interest
4. Cost of Backordering or shortage
a. Loss of profit associated with sell
b. Loss of opportunity
c. Cost of additional capacity to make this item
d. Cost of reschedule
e. Cost of underutilization or idle resources
f. Cost of increased freight
g. Loss of customer good will.

Model 1: Single Item Continuous Demand no shortage Instantaneous replenishment

 Qty

Time

D= 10,000, No. of working days=250, one shift=8 hrs

Daily Demand= 10,000/250=40, per hr. 40/8=5, min demand 5/60

Annual demand for this item= D/year and Know

Q= ordering quantity

No. of orders per year=D/Q

Every time when we place an order ,

Total Ordering Cost= (D/Q)*Co [ Rs/yr]

Total Inventory Carrying Cost= Avg Inventory*Cc= Q/2*Cc [Rs/unit/year]

Area of triangle/Time= ½*Q*T/T= Q/2

Cost of item= D*C [Rs/yr]

Total Annual cost= item cost+Ordering cost+Carrying cost

TC= D*C+D/Q*Co+Q/2*Cc……………1
𝒅 𝑻𝒄 𝑫 𝑪𝒄
= 𝟎 = − 𝟐 ∗ 𝑪𝒐 + =𝟎
𝒅𝑸 𝑸 𝟐

𝟐𝑫𝑪𝒐
Economic Order Quantity= 𝑸∗ = √ 𝑪𝒄
(Willson Model)……….2

Subsi. The value of Q* in eq 1

 𝑫 ∗ 𝑪𝒐√𝟐𝑫𝑪𝒐
𝑪𝒄
𝑻𝑪 = + ∗ 𝑪𝒄
𝟐𝑫𝑪𝒐 𝟐
√
𝑪𝒄

√𝑫𝑪𝒐𝑪𝒄 √𝑫𝑪𝒐𝑪𝒄
+
√𝟐 √𝟐
TC= 𝑻𝑪 = √𝟐𝑫𝑪𝟎𝑪𝒄 +D*C
TC

Cos Cc

Co

Q* Q

Example

D=10,000/yr; Co= Rs300/order; C= Rs 20/unit; i=20%, find out the EOQ and TC, no of orders

𝟐𝑫𝑪𝒐
𝑸∗ = √
𝑪𝒄

𝑪𝒄 = 𝒊 ∗ 𝑪= 20*20%= 4 Rs/unit / year

𝟐∗𝟏𝟎𝟎𝟎𝟎∗𝟑𝟎𝟎
𝑸∗ = √ = 1224.74
𝟒

TC= √𝟐𝑫𝑪𝟎𝑪𝒄 +D*C= 204898.98

= 4898.98+ 200000

No of orders= D/Q= 10,000/1225=8.16= 8 orders

Q= 1225

Q TCo (D/Q*Co) TCc (Q/2*Cc) Total (TCc+TCo)

1225 2448.9 2450 4898.98
1200 2500 2400 4900
 1300 2307.69 2600 4907.69
2000 1500 4000 5500
4000 750 8000 8750
1000 3000 2000 5000

IInd Model: Single item, continues demand, Ins. Repl. With backordering and shortage

Im
Q
ax

T Tim
eee
S

One cycle=T= t1+t2

TC= TCo+TCc+TSc+Item cost

Annual demand= D

No. of order= D/Q

TC= D/Q*Co+Imax/2
𝐷 𝐼𝑚𝑎𝑥 𝑡1 𝑆 𝑡2
𝑇𝐶 = ∗ 𝐶𝑜 + ∗ ∗ 𝐶𝑐 + ∗ ∗ 𝐶𝑠 + 𝐷 ∗ 𝐶
𝑄 2 𝑡1 + 𝑡2 2 𝑡1 + 𝑡2
From similar Triangle property

𝑡1 𝐼𝑚𝑎𝑥 𝐼𝑚𝑎𝑥
𝑡1+𝑡2
= 𝐼𝑚𝑎𝑥+𝑆 = 𝑄
;
𝑡2 𝑆 𝑆
= =
𝑡1 + 𝑡2 𝐼𝑚𝑎𝑥 + 𝑆 𝑄
 𝐷 𝑆^2
𝑇𝐶 = ∗ 𝐶𝑜 + (𝐼_max)^2/2𝑄 ∗ 𝐶𝑐 + ∗ 𝐶𝑠 + 𝐷 ∗ 𝐶
𝑄 2𝑄
𝐷 𝑆^2
𝑇𝐶 = ∗ 𝐶𝑜 + (𝑄 − 𝑆)^2/2𝑄 ∗ 𝐶𝑐 + ∗ 𝐶𝑠 + 𝐷 ∗ 𝐶
𝑄 2𝑄
Partially diff. w.r.t Q&S
𝑄 ∗ 𝐶𝑐
𝑆=
𝐶𝑐 + 𝐶𝑠

2𝐷𝐶𝑜(𝐶𝑐 + 𝐶𝑠)
𝑄′ = √
𝐶𝑐 ∗ 𝐶𝑠

Example= D=10,000/yr; Co= Rs300/order; C= Rs 20/unit; i=20%, Cc= Rs 4/ unit/yr, Cs=

Rs25/unit/year find out the EOQ (Economic order quantity Q’), S and TC, no of orders

Q’= 1319.1 units

S=181.9

I max= Q-S=1319-181.9=1137.15

TC= 4548.72

TC= 2274.43+1960.61+313.36

Q* Q’
1224.74 1319
TC= 4898.98 TC=4548.72

Total ordering cost= the sum of the CC+ backordering cost

III – single item production –consumption model (without backordering)

Annual Demand= D/ year

Production rate= P/year

Production rate> Demand (P>D)

Ima
x

P-D
D

T1 T
T2

Setup cost= Rs Co/ setup; Cset

Q= economic batch qty (EBQ)

Let assume we produce Q qty everytime we do set the m/c

No of setup= D/ Q

Setup cost= D/Q* Co

Inventory carrying cost= Im/2*Cc

TC= Total Setup cost+ Total inventory carrying cost

TC= D/Q*Co+Im/2*Cc

Im= (P-D)*t1; Im= D*t2

Q= P*t1
𝑰𝒎 (𝒑 − 𝑫)𝒕𝟏
=
𝑸 𝑷𝒕𝟏
𝑫
𝑰𝒎 = 𝑸(𝟏 − )
𝑷
 𝑫 𝑸 𝑫
𝑻𝑪 = ∗ 𝑪𝒐 + (𝟏 − ) ∗ 𝑪𝒄
𝑸 𝟐 𝑷
dtc/dq=0
𝑫 𝑫 𝑪𝒄
=− 𝟐
∗ 𝑪𝒐 + (𝟏 − ) ∗
𝑸 𝑷 𝟐

𝟐𝑫𝑪𝒐
𝑸 ∗= √
𝑫
𝑪𝒄(𝟏 − 𝑷 )

D= 10,000/year

P= 20,000/year

Co= 300/setup

Cc= Rs4/ unit/yr

Determine Q*, Imax, t1, t2, no. of setup and TC

Q*=1732.05

Im= 866.02

IV – single item production –consumption model (with shortage/backordering)

Im

P-D
D

T4 T1

T2 Time
T3

TC= Total Setup cost+ Total inventory cost+ Total Shortage cost

Q= quantity to be produced
𝑫 𝑰𝒎(𝒕𝟐 + 𝒕𝟑) 𝑺(𝒕𝟒 + 𝒕𝟏)
𝑻𝒄 = 𝑪𝒐 + ∗ 𝑪𝒄 + ∗ 𝑪𝒔
𝑸 𝟐𝑻 𝟐𝑻
Im=(P-D)t2=Dt3; S=(P-D)t1=Dt4; T=t1+t2+t3+t4

Q=p(t1+t2)= DT

Im+S= (P-D)(t1+t2)

Im+S= Q/P(P-D)= Q(1-D/P)….1

Im=(P-D)t2=Dt3

Pt2= D(t2+t3)
𝑷𝒕𝟐 𝑫(𝒕𝟐+𝒕𝟑) 𝑷𝒕𝟐 (𝒕𝟐+𝒕𝟑) 𝑷𝒕𝟐 𝑷𝑰𝒎
𝑻
= 𝑻
; 𝑫𝑻 = 𝑻
= 𝑸
= 𝑸(𝑷−𝑫)

S=(P-D)t1=Dt4
𝑷𝒕𝟏 𝑫(𝒕𝟏 + 𝒕𝟒)
=
𝑻 𝑻
𝑷𝒕𝟏 (𝒕𝟏 + 𝒕𝟒) 𝑷𝒕𝟏 𝑷𝑺
= = =
𝑫𝑻 𝑻 𝑸 𝑸(𝑷 − 𝑫)

𝑫 𝑫 𝑺𝟐
𝑻𝒄 = 𝑪𝒐 + (𝑰𝒎𝟐 )/𝟐𝑸(𝟏 − ) ∗ 𝑪𝒄 + ∗ 𝑪𝒔
𝑸 𝑷 𝑫
𝟐𝑸(𝟏 − 𝑷 )

𝑫 𝑫 𝑫 𝑺𝟐
𝑻𝒄 = 𝑪𝒐 + (𝑸 (𝟏 − ) − 𝑺)𝟐 )/𝟐𝑸(𝟏 − ) ∗ 𝑪𝒄 + ∗ 𝑪𝒔
𝑸 𝑷 𝑷 𝑫
𝟐𝑸(𝟏 − 𝑷 )

Partially diff w.r.t Q and S and equate it zero,

𝑫
𝑸𝑪𝒄(𝟏 − 𝑷 )
𝑺=
(𝑪𝒄 + 𝑪𝒔)

𝟐𝑫𝑪𝒐(𝑪𝒄 + 𝑪𝒔)
𝑸∗𝑩𝑶)𝑷𝑶𝑸 = √
𝑫
𝑪𝒄𝑪𝒔(𝟏 − 𝑷 )

D= 10,000/year

P= 20,000/year

Co= 300/setup

Cc= Rs4/ unit/yr

Cs=25rs/unit/yr

Determine Q*, S, Imax, t1, t2, no. of setup and TC

Q*=1865.47, S=128.65; TC=3216.38))) POQ with BO

Q*=1732.05, TC= 3464.10)))))) POQ with no BO

Discount Model (All Qunatity discount Model)

EOQ== D=10,000/yr; Co= Rs300/order; C= Rs 20/unit; i=20%, find out the EOQ and TC, no of orders

𝟐𝑫𝑪𝒐
𝑸∗ = √
𝑪𝒄

𝑪𝒄 = 𝒊 ∗ 𝑪= 20*20%= 4 Rs/unit / year

𝟐∗𝟏𝟎𝟎𝟎𝟎∗𝟑𝟎𝟎
𝑸∗ = √ 𝟒
= 1224.74

TC= √𝟐𝑫𝑪𝟎𝑪𝒄 +D*C= 204898.98

Suppose Vendor gives discount at Q>=2000, discount is of 2% on item cost

TC= D*C+D/Q*Co+Q/2*Cc

Cc= i*C
𝟏𝟎𝟎𝟎𝟎 𝟐𝟎𝟎𝟎
𝑻𝑪 = 𝟐𝟎𝟎𝟎
∗ 𝟑𝟎𝟎 + 𝟐 ∗(20*98%)*20%+10,000*20*98%

TC=1500+0.98*20*.2+

TC=201420

Q=3000, TC=20340

Q>=5000, discount of 3%

TC= 201300

Q=1000, 0.5%
So the point at which there is a discount is called Price break point