CHAPTER 1: Introduction to Operations The Transformation Process

Management

Operations Management
●​ What is operations?
○​ The part of a business
organization that is
responsible for producing
goods or services
●​ How can we define operations Feedback
management? ●​ Measurements taken at various
○​ The management of systems points in the transformation process
or processes that create
goods and/or provide Control
services ●​ The comparison of feedback against
previously established standards to
Good or Service? determine if corrective action is
●​ Goods are physical items that needed
include raw materials, parts,
subassemblies, and final products Goods-service Continuum
○​ Automobile ●​ Products are typically neither purely
○​ Computer service- or purely goods-based
○​ Oven
○​ Shampoo
●​ Services are activities that provide
some combination of time, location,
form or psychological value
○​ Air travel
○​ Education
Illustrations of the transformation process
○​ Haircut
○​ Legal counsel

Supply Chain
●​ Supply chain – a sequence of
activities and organizations involved
in producing and delivering a good
or service
Manufacturing vs. Service Basic Functions of the Business
1.​ Degree of customer contact Organization
2.​ Labor content of jobs
3.​ Uniformity of input
4.​ Uniformity of output
5.​ Measurement of productivity
6.​ Production and delivery
7.​ Quality assurance
8.​ Amount of inventory
9.​ Evaluation of work Function Overlap
10.​Ability to patent design ●​ Finance and operations
○​ Budgeting
Typical differences between production of ○​ Economic analysis of
goods and provision of services investment proposals
○​ Provision of funds
●​ Marketing & operations
○​ Demand data
○​ Product and service design
○​ Competitor analysis
○​ Lead time data

Why Study Operations Management?

●​ Every aspect of business affects or
is affected by operations
●​ Many service jobs are closely
related to operations
○​ Financial services
○​ Marketing services
○​ Accounting services
○​ Information services
●​ Through learning about operations
and supply chains you will have a
better understanding of: OM and Supply Chain Career Opportunities
○​ The world you live in ●​ Operations manager
○​ The global dependencies of ●​ Supply chain manager
companies and nations ●​ Production analyst
○​ Reasons that companies ●​ Schedule coordinator
succeed or fail ●​ Production manager
○​ The importance of working ●​ Industrial engineer
with others ●​ Purchasing manager
●​ Inventory manager
●​ Quality manager
Process Management ○​ Capacity planning
○​ Locating facilities
○​ Facilities and layout
○​ Scheduling
○​ Managing inventories
○​ Assuring quality
○​ Motivating employees
○​ And more . . .

Supply and Demand Roles of the Operations Manager

●​ The Operations function consists of
all activities directly related to
producing goods or providing
services.
●​ A primary function of the operations
manager is to guide the system by
decision making.
○​ System design decisions
○​ System operation decisions

System Design Decisions

Process Variation ●​ System design
○​ Capacity
○​ Facility location
○​ Facility layout
○​ Product and service planning
○​ Acquisition and placement of
equipment
●​ These are typically strategic
decisions that
●​ Variations can be disruptive to ○​ usually require long-term
operations and supply chain commitment of resources
processes. ○​ determine parameters of
●​ They may result in additional costs, system operation
delays and shortages, poor quality,
and inefficient work systems System Operation Decisions
●​ System operation— These are
Scope of Operations Management generally tactical and operational
●​ The scope of operations decisions
management ranges across the ○​ Management of personnel
organization. ○​ Inventory management and
●​ The operations function includes control
many interrelated activities such as: ○​ Scheduling
○​ Forecasting ○​ Project management
 ○​ Quality assurance attention can be
●​ Operations managers spend more focused on the most
time on system operation decision important aspects of
than any other decision area the real-life system
○​ They still have a vital stake in ●​ Physical Model – miniature airplane
system design ●​ Schematic Model – drawing of a city
●​ Mathematical Model – Inventory
OM Decision Making optimization
●​ Most operations decisions involve
many alternatives that can have Understanding Models
quite different impacts on costs or ●​ Keys to successfully using a model
profits in decision making
●​ Typical operations decisions include: ○​ What is its purpose?
○​ What: What resources are ○​ How is it used to generate
needed, and in what results?
amounts? ○​ How are the results
○​ When: When will each interpreted and used?
resource be needed? When ○​ What are the model’s
should the work be assumptions and limitations?
scheduled? When should
materials and other supplies Benefits of Models
be ordered? 1.​ Generally easier to use and less
○​ Where: Where will the work expensive than dealing with the real
be done? system
○​ How: How will the product or 2.​ Require users to organize and
service be designed? How sometimes quantify information
will the work be done? How 3.​ Increase understanding of the
will resources be allocated? problem
○​ Who: Who will do the work? 4.​ Enable managers to analyze “What
if?” questions
General Approach to Decision Making 5.​ Serve as a consistent tool for
●​ Modeling is a key tool used by all evaluation and provide a
decision makers standardized format for analyzing a
○​ Model - an abstraction of problem
reality; a simplification of 6.​ Enable users to bring the power of
something mathematics to bear on a problem
○​ Common features of models:
■​ They are Model Limitations
simplifications of ●​ Quantitative information may be
real-life phenomena emphasized at the expense of
■​ They omit qualitative information
unimportant details of ●​ Models may be incorrectly applied
the real-life systems and the results misinterpreted
they mimic so that
 ○​ This is a real risk with the ○​ The business organization is
widespread availability of a system composed of
sophisticated, computerized subsystems
models placed in the hands ■​ Marketing subsystem
of uninformed users ■​ Operations
●​ The use of models does not subsystem
guarantee good decisions ■​ Finance subsystem
●​ The systems perspective
Quantitative Approaches ○​ Emphasizes
●​ A decision-making approach that interrelationships among
frequently seeks to obtain a subsystems
mathematically optimal solution ○​ Main theme is that the whole
○​ Supported by computer is greater than the sum of its
calculations parts
○​ Often work together with ○​ The output and objectives of
qualitative approaches the organization take
precedence over those of
Metrics and Trade-Offs any one subsystem
●​ Performance metrics
○​ All managers use metrics to Establishing Priorities
manage and control ●​ In nearly all cases, certain issues or
operations items are more important than
■​ Profits others
■​ Costs ●​ Recognizing this allows managers to
■​ Quality focus their attention to those efforts
■​ Productivity that will do the most good
■​ Flexibility ○​ Pareto Phenomenon - a few
■​ Inventories factors account for a high
■​ Schedules percentage of occurrence of
■​ Forecast accuracy some event(s)
●​ Analysis of trade-offs ■​ The critical few
○​ A trade-off is giving up one factors should receive
thing in return for something the highest priority
else ■​ This is a concept that
■​ Carrying more is appropriately
inventory (an applied to all areas
expense) in order to and levels of
achieve a greater management
level of customer
service Historical Evolution of OM
●​ Industrial Revolution
Systems Perspective ●​ Scientific management
●​ System - a set of interrelated parts ●​ Human relations movement
that must work together
 ●​ Decision models and management management activities from
science work activities
●​ Influence of Japanese ○​ Emphasis was on
manufacturers maximizing output

Industrial Revolution Human Relations Movement

●​ Pre-Industrial Revolution ●​ The human relations movement
○​ Craft production - System in emphasized the importance of the
which highly skilled workers human element in job design
use simple, flexible tools to ○​ Lillian Gilbreth – applications
produce small quantities of of psychology
customized goods ○​ Elton Mayo – Hawthorne
●​ Some key elements of the industrial studies on worker motivation,
revolution 1930
○​ Began in England in the ○​ Abraham Maslow –
1770s motivation theory, 1940s;
○​ Division of labor - Adam hierarchy of needs, 1954
Smith, 1776 ○​ Frederick Hertzberg – Two
○​ Application of the “rotative” Factor Theory, 1959
steam engine, 1780s ○​ Douglas McGregor – Theory
○​ Cotton gin and X and Theory Y, 1960s
interchangeable parts - Eli ○​ William Ouchi – Theory Z,
Whitney, 1792 1981
●​ Management theory and practice did
not advance appreciably during this Decision Models and Management Science
period ●​ F.W. Harris – mathematical model
for inventory management, 1915
Scientific Management ●​ Dodge, Romig, and Shewart –
●​ Movement was led by efficiency statistical procedures for sampling
engineer, Frederick Winslow Taylor and quality control, 1930s
○​ Believed in a “science of ●​ Tippett – statistical sampling theory,
management” based on 1935
observation, measurement, ●​ Operations Research (OR) Groups –
analysis and improvement of OR applications in warfare
work methods, and economic ●​ George Dantzig – linear
incentives programming, 1947
○​ Management is responsible
for planning, carefully Influence of Japanese Manufacturers
selecting and training ●​ Refined and developed
workers, finding the best way management practices that
to perform each job, increased productivity
○​ achieving cooperation ○​ Credited with fueling the
between management and “quality revolution”
workers, and separating ○​ Just-in-Time production
Historical summary of operations ○​ Product and service design
management ○​ Consumer education
programs
○​ Disaster preparation and
response
○​ Supply chain waste
management
○​ Outsourcing decisions

Ethical Issues in Operations

●​ Ethical issues that may arise in
many aspects of operations
management:
○​ Financial statements
○​ Worker safety
○​ Product safety
○​ Quality
○​ The environment
Operations Today ○​ The community
●​ Technology Management ○​ Hiring and firing workers
●​ Global competition ○​ Closing facilities
●​ Working with fewer resources ○​ Workers’ rights
●​ Revenue management
●​ Agility The Need for Supply Chain Management
●​ In the past, organizations did little to
Key Issues for Operations Managers Today manage the supply chain beyond
●​ Economic conditions their own operations and immediate
●​ Innovating suppliers which led to numerous
●​ Quality problems problems
●​ Risk management ○​ Oscillating inventory levels
●​ Cyber-security ○​ Inventory stockouts
●​ Competing in a global economy ○​ Late deliveries
○​ Quality problems
Environmental Concerns
●​ Sustainability Supply Chain Issues
●​ Using resources in ways that do not 1.​ The need to improve operations
harm ecological systems that 2.​ Increasing levels of outsourcing
support human existence 3.​ Increasing transportation costs
●​ Sustainability measures often go 4.​ Competitive pressures
beyond traditional environmental 5.​ Increasing globalization
and economic measures to include 6.​ Increasing importance of e-business
measures that incorporate social 7.​ The complexity of supply chains
criteria in decision making 8.​ The need to manage inventories
●​ All areas of business will be affected
CHAPTER 2: Competitiveness, Strategy, ●​ Functional strategies
and Productivity ●​ Tactics

Competitiveness
●​ How effectively an organization
meets the wants and needs of
customers relative to others that
offer similar goods or services
●​ Organizations compete through
some combination of their marketing
and operations functions
○​ What do customers want?
○​ How can these customer
needs best be satisfied?

Marketing’s Influence
●​ Identifying consumer wants and/or
needs
●​ Pricing and quality
●​ Advertising and promotion Mission
●​ Mission
Why Some Organizations Fail ○​ The reason for an
1.​ Neglecting operations strategy organization’s existence
2.​ Failing to take advantage of ●​ Mission statement
strengths and opportunities and/or ○​ States the purpose of the
failing to recognize competitive organization
threats ○​ The mission statement
3.​ Too much emphasis on short-term should answer the question
financial performance at the of “What business are we
expense of R&D in?”
4.​ Too much emphasis on product and
service design and not enough on
process design and improvement
5.​ Neglecting investments in capital
and human resources
Goals
6.​ Failing to establish good internal
●​ The mission statement serves as the
communications and cooperation
basis for organizational goals
7.​ Failing to consider customer wants
●​ Goals
and needs
○​ Provide detail and the scope
of the mission
Hierarchical Planning
■​ Goals can be viewed
●​ Mission
as organizational
●​ Goals
destinations
●​ Organizational strategies
 ○​ Goals serve as the basis for organization a competitive
organizational strategies edge
■​ To be effective, core
Strategies competencies and
●​ Strategy strategies need to be
○​ A plan for achieving aligned
organizational goals
■​ Serves as a roadmap Sample Operations Strategies
for reaching the
organizational
destinations
●​ Organizations have
○​ Organizational strategies
■​ Overall strategies that
relate to the entire
organization
■​ Support the
achievement of
organizational goals
and mission
○​ Functional level strategies Strategy Formulation
■​ Strategies that relate ●​ Effective strategy formulation
to each of the requires taking into account:
functional areas and ○​ Core competencies
that support ○​ Environmental scanning
achievement of the ■​ SWOT: Strengths,
organizational Weaknesses,
strategy Opportunities, and
Threats
Tactics and Operations ●​ Successful strategy formulation also
●​ Tactics requires taking into account:
○​ The methods and actions ○​ Order qualifiers -
taken to accomplish Characteristics that
strategies customers perceive as
○​ The “how to” part of the minimum standards of
process acceptability for a product or
●​ Operations service to be considered as a
○​ The actual “doing” part of the potential for purchase
process ○​ Order winners -
Characteristics of an
Core Competencies organization’s goods or
●​ Core competencies services that cause it to be
○​ The special attributes or perceived as better than the
abilities that give an competition
Environmental Scanning with countries where the
●​ Environmental scanning is products and services are
necessary to identify sold
○​ Internal factors
■​ Strengths and Operations Strategy
weaknesses ●​ The approach, consistent with
○​ External factors organization strategy, that is used to
■​ Opportunities and guide the operations function
threats
Strategic OM Decision Areas
Key External Factors
1.​ Economic conditions
2.​ Political conditions
3.​ Legal environment
4.​ Technology
5.​ Competition
6.​ Customers
7.​ Suppliers
8.​ Markets

Key Internal Factors

1.​ Human resources Quality-Based Strategies
2.​ Facilities and equipment ●​ Strategy that focuses on quality in all
3.​ Financial resources phases of an organization
4.​ Customers ○​ Pursuit of such a strategy is
5.​ Products and services rooted in a number of factors:
6.​ Technology ■​ Trying to overcome a
7.​ Other poor quality
reputation
Mission and Strategies ■​ Desire to maintain a
●​ Supply Chain Strategy quality image
○​ How the organization should ■​ A desire to catch up
work with suppliers and with the competition
policies relating to customer ■​ A part of a cost
relationships and reduction strategy
sustainability
●​ Sustainability Strategy Time-Based Strategies
○​ Work with governmental ●​ Time-based strategies
regulations and interest ○​ Strategies that focus on the
groups to achieve reduction of time needed to
sustainability goals accomplish tasks
●​ Global Strategy ■​ It is believed that by
○​ Work with international reducing time, costs
suppliers/producers and also are lower, quality is
 higher, productivity is ○​ Monitor results
higher, time-to-market
is faster, and The Balanced Scorecard
customer service is
improved
●​ Areas where organizations have
achieved time reductions:
○​ Planning time
○​ Product/service design time
○​ Processing time
○​ Changeover time
○​ Delivery time
○​ Response time for
complaints

Agile Operations
●​ A strategic approach for competitive Productivity
advantage that emphasizes the use ●​ Productivity
of flexibility to adapt and prosper in ○​ A measure of the effective
an environment of change use of resources, usually
●​ Involves the blending of several core expressed as the ratio of
competencies: output to input
○​ Cost ●​ Productivity measures are useful for
○​ Quality ○​ Tracking an operating unit’s
○​ Reliability performance over time
○​ Flexibility ○​ Judging the performance of
an entire industry or country
The Balanced Scorecard Approach
●​ A top-down management system Why Productivity Matters
that organizations can use to clarify ●​ High productivity is linked to higher
their vision and strategy and standards of living
transform them into action ○​ As an economy replaces
○​ Develop objectives manufacturing jobs with
○​ Develop metrics and targets lower productivity service
for each objective jobs, it is more difficult to
○​ Develop initiatives to achieve maintain high standards of
objectives living
○​ Identify links among the ●​ Higher productivity relative to the
various perspectives competition leads to competitive
■​ Finance advantage in the marketplace
■​ Customer ○​ Pricing and profit effects
■​ Internal business ●​ For an industry, high relative
processes productivity makes it less likely it will
■​ Learning and growth be supplanted by foreign industry
Some examples of partial productivity
measures Service Sector Productivity
●​ Service sector productivity is difficult
to measure and manage because
○​ It involves intellectual
activities
○​ It has a high degree of
variability
●​ A useful measure related to
productivity is process yield
○​ Where products are involved
■​ Ratio of output of
good product to the
quantity of raw
material input
○​ Where services are involved,
process yield measurement
is often dependent on the
particular process:
■​ Ratio of cars rented
to cars available for a
given day
■​ Ratio of student
acceptances to the
total number of
students approved for
admission
Factors Affecting Productivity ○​ The level of demand may be
a function of some structural
variation such as trend or
seasonal variation
●​ Accuracy
○​ Related to the potential size
of forecast error

Forecasts in Business Organizations

●​ Accounting. New product/process
cost estimates, profit projections,
cash management.
●​ Finance. Equipment/equipment
replacement needs, timing and
Improving Productivity amount of funding/borrowing needs.
1.​ Develop productivity measures for ●​ Human resources. Hiring activities,
all operations including recruitment, interviewing,
2.​ Determine critical (bottleneck) and training; layoff planning,
operations including outplacement counseling.
3.​ Develop methods for productivity ●​ Marketing. Pricing and promotion,
improvements e-business strategies, global
4.​ Establish reasonable goals competition strategies.
5.​ Make it clear that management ●​ MIS. New/revised information
supports and encourages systems, internet services.
productivity improvement ●​ Operations. Schedules, capacity
6.​ Measure and publicize planning, work assignments and
improvements workloads, inventory planning,
7.​ Don’t confuse productivity with make-or-buy decisions, outsourcing,
efficiency project management.
●​ Product/service design. Revision of
CHAPTER 3: Forecasting current features, design of new
products or services.
Forecasting
●​ Forecast – a statement about the Forecast Uses
future value of a variable of interest ●​ Plan the system
○​ We make forecasts about ●​ Generally involves long-range plans
such things as weather, related to:
demand, and resource ○​ Types of products and
availability services to offer
○​ Forecasts are important to ○​ Facility and equipment levels
making informed decisions ○​ Facility location
●​ Plan the use of the system
Two Important Aspects of Forecasts
●​ Expected level of demand
 ○​ Generally involves short- and Steps in the Forecasting Process
medium-range plans related 1.​ Determine the purpose of the
to: forecast
■​ Inventory 2.​ Establish a time horizon
management 3.​ Obtain, clean, and analyze
■​ Workforce levels appropriate data
■​ Purchasing 4.​ Select a forecasting technique
■​ Production 5.​ Make the forecast
■​ Budgeting 6.​ Monitor the forecast errors
■​ Scheduling
Forecasting Approaches
Features Common to All Forecasts ●​ Qualitative forecasting
1.​ Techniques assume some ○​ Qualitative techniques permit
underlying causal system that the inclusion of soft
existed in the past will persist into information such as:
the future ■​ Human factors
2.​ Forecasts are not perfect ■​ Personal opinions
3.​ Forecasts for groups of items are ■​ Hunches
more accurate than those for ○​ These factors are difficult, or
individual items impossible, to quantify
4.​ Forecast accuracy decreases as the ●​ Quantitative forecasting
forecasting horizon increases ○​ These techniques rely on
hard data
Forecasts Are Not Perfect ○​ Quantitative techniques
●​ Forecasts are not perfect: involve either the projection
○​ Because random variation is of historical data or the
always present, there will development of associative
always be some residual methods that attempt to use
error, even if all other factors causal variables to make a
have been accounted for. forecast

Elements of a Good Forecast Qualitative Forecasts

●​ The forecast ●​ Forecasts that use subjective inputs
○​ Should be timely such as opinions from consumer
○​ Should be accurate surveys, sales staff, managers,
○​ Should be reliable executives, and experts
○​ Should be expressed in ○​ Executive opinions
meaningful units ■​ A small group of
○​ Should be in writing upper-level managers
○​ Technique should be simple may meet and
to understand and use collectively develop a
○​ Should be cost-effective forecast
○​ Salesforce opinions
 ■​ Members of the sales Time-Series Behaviors
or customer service ●​ Trend
staff can be good ●​ Seasonality
sources of ●​ Cycles
information due to ●​ Irregular variations
their direct contact ●​ Random variation
with customers and
may be aware of Trends and Seasonality
plans customers may ●​ Trend
be considering for the ○​ A long-term upward or
future downward movement in data
○​ Consumer surveys ■​ Population shifts
■​ Since consumers ■​ Changing income
ultimately determine ●​ Seasonality
demand, it makes ○​ Short-term, fairly regular
sense to solicit input variations related to the
from them calendar or time of day
■​ Consumer surveys ○​ Restaurants, service call
typically represent a centers, and theaters all
sample of consumer experience seasonal demand
opinions
○​ Other approaches Cycles and Variations
■​ Managers may solicit ●​ Cycle
opinions from other ○​ Wavelike variations lasting
managers or staff more than one year
people or outside ■​ These are often
experts to help with related to a variety of
developing a forecast. economic, political, or
■​ The Delphi method is even agricultural
an iterative process conditions
intended to achieve a ●​ Irregular variation
consensus ○​ Due to unusual
circumstances that do not
Time-Series Forecasts reflect typical behavior
●​ Forecasts that project patterns ■​ Labor strike
identified in recent time-series ■​ Weather event
observations ●​ Random Variation
○​ Time-series – a time-ordered ○​ Residual variation that
sequence of observations remains after all other
taken at regular time behaviors have been
intervals accounted for
●​ Assume that future values of the
time-series can be estimated from Time-Series Forecasting - Naïve Forecast
past values of the time-series ●​ Naïve forecast
 ○​ Uses a single previous value
of a time series as the basis
for a forecast
■​ The forecast for a
time period is equal to
the previous time
period’s value
○​ Can be used with
■​ A stable time series
■​ Seasonal variations
■​ Trend
●​ As new data become available, the
forecast is updated by adding the
newest value and dropping the
oldest and then re-computing the
average
●​ The number of data points included
in the average determines the
model’s sensitivity
○​ Fewer data points
used—more responsive
○​ More data points used—less
Time-Series Forecasting - Averaging responsive
●​ These techniques work best when a
series tends to vary about an
average
○​ Averaging techniques
smooth variations in the data
○​ They can handle step
changes or gradual changes
in the level of a series
○​ Techniques
■​ Moving average
■​ Weighted moving
average
■​ Exponential Weighted Moving Average
smoothing ●​ The most recent values in a time
series are given more weight in
Moving Average computing a forecast
●​ Technique that averages a number ○​ The choice of weights, w, is
of the most recent actual values in somewhat arbitrary and
generating a forecast involves some trial and error
 Techniques for Seasonality
●​ Seasonality – regularly repeating
movements in series values that can
be tied to recurring events
○​ Expressed in terms of the
amount that actual values
Exponential Smoothing deviate from the average
●​ A weighted averaging method that is value of a series
based on the previous forecast plus ○​ Models of seasonality
a percentage of the forecast error ■​ Additive- Seasonality
is expressed as a
quantity that gets
added to or
subtracted from the
time-series average
in order to incorporate
seasonality
■​ Multiplicative-
Seasonality is
expressed as a
percentage of the
average (or trend)
amount which is then
used to multiply the
value of a series in
Linear Trend order to incorporate
●​ A simple data plot can reveal the seasonality
existence and nature of a trend
●​ Linear trend equation Associative Forecasting Techniques
●​ Associative techniques are based on
the development of an equation that
summarizes the effects of predictor
variables
○​ Predictor variables –
variables that can be used to
 predict values of the variable ○​ A measure of the strength
of interest and direction of relationship
■​ Home values may be between two variables
related to such ○​ Ranges between -1.00 and
factors as home and +1.00
property size, ●​ r2, square of the correlation
location, number of coefficient
bedrooms, and ○​ A measure of the percentage
number of bathrooms of variability in the values of y
that is “explained” by the
Simple Linear Regression independent variable
●​ Regression – a technique for fitting a ○​ Ranges between 0 and 1.00
line to a set of data points
○​ Simple linear regression – Simple Linear Regression Assumptions
the simplest form of 1.​ Variations around the line are
regression that involves a random
linear relationship between 2.​ Deviations around the average value
two variables (the line) should be normally
■​ The object of simple distributed
linear regression is to 3.​ Predictions are made only within the
obtain an equation of range of observed values
a straight line that
minimizes the sum of Issues to Consider:
squared vertical ●​ Always plot the line to verify that a
deviations from the linear relationship is appropriate
line (i.e., the least ●​ The data may be time-dependent
squares criterion) ○​ If they are
■​ use analysis of time
Least Squares Line series
■​ use time as an
independent variable
in a multiple
regression analysis
●​ A small correlation may indicate that
other variables are important

Forecast Accuracy and Control

●​ Allowances should be made for
forecast errors
○​ It is important to provide an
Correlation Coefficient indication of the extent to
●​ Correlation, r which the forecast might
deviate from the value of the
variable that actually occurs
 ●​ Forecast errors should be monitored ●​ Tracking forecast errors and
○​ Error = Actual – Forecast analyzing them can provide useful
○​ If errors fall beyond insight into whether forecasts are
acceptable bounds, performing satisfactorily
corrective action may be ●​ Sources of forecast errors:
necessary ○​ The model may be
inadequate due to
Forecast Accuracy Metrics ■​ omission of an
important variable
■​ a change or shift in
the variable the
model cannot handle
■​ the appearance of a
new variable
○​ Irregular variations may have
occurred
○​ Random variation
Forecast Error Calculation ●​ Control charts are useful for
identifying the presence of
non-random error in forecasts
●​ Tracking signals can be used to
detect forecast bias

Control Chart Construction

Choosing a Forecasting Technique

●​ Factors to consider
○​ Cost
○​ Accuracy
Monitoring the Forecast ○​ Availability of historical data
 ○​ Availability of forecasting
software
○​ Time needed to gather and
analyze data and prepare a
forecast
○​ Forecast horizon

Operations Strategy
●​ The better forecasts are, the more
able organizations will be to take
advantage of future opportunities
and reduce potential risks
○​ A worthwhile strategy is to
work to improve short-term
forecasts
■​ Accurate up-to-date
information can have
a significant effect on
forecast accuracy:
●​ Prices
●​ Demand
●​ Other
important
variables
●​ Reduce the time horizon forecasts
have to cover
●​ Sharing forecasts or demand data
through the supply chain can
improve forecast quality