Forcasting

© 2008 Prentice Hall, Inc. 4 – 1
Operations
Management
ForecastingForecasting

What is Forecasting?What is Forecasting?
 Process ofProcess of
predicting a futurepredicting a future
eventevent
 Underlying basis ofUnderlying basis of
all businessall business
decisionsdecisions
 ProductionProduction
 InventoryInventory
 PersonnelPersonnel
 FacilitiesFacilities
??

 Short-range forecastShort-range forecast
 Up to 1 year, generally less than 3 monthsUp to 1 year, generally less than 3 months
 Purchasing, job scheduling, workforcePurchasing, job scheduling, workforce
levels, job assignments, production levelslevels, job assignments, production levels
 Medium-range forecastMedium-range forecast
 3 months to 3 years3 months to 3 years
 Sales and production planning, budgetingSales and production planning, budgeting
 Long-range forecastLong-range forecast
 33++
yearsyears
 New product planning, facility location,New product planning, facility location,
research and developmentresearch and development
Forecasting Time HorizonsForecasting Time Horizons

Distinguishing DifferencesDistinguishing Differences
Medium/long rangeMedium/long range forecasts deal withforecasts deal with
more comprehensive issues and supportmore comprehensive issues and support
management decisions regardingmanagement decisions regarding
planning and products, plants andplanning and products, plants and
processesprocesses
Short-termShort-term forecasting usually employsforecasting usually employs
different methodologies than longer-termdifferent methodologies than longer-term
forecastingforecasting
Short-termShort-term forecasts tend to be moreforecasts tend to be more
accurate than longer-term forecastsaccurate than longer-term forecasts

Influence of Product LifeInfluence of Product Life
CycleCycle
 Introduction and growth require longerIntroduction and growth require longer
forecasts than maturity and declineforecasts than maturity and decline
 As product passes through life cycle,As product passes through life cycle,
forecasts are useful in projectingforecasts are useful in projecting
 Staffing levelsStaffing levels
 Inventory levelsInventory levels
 Factory capacityFactory capacity
Introduction – Growth – Maturity – Decline

Types of ForecastsTypes of Forecasts
 Economic forecastsEconomic forecasts
 Address business cycle – inflation rate,Address business cycle – inflation rate,
money supply, housing starts, etc.money supply, housing starts, etc.
 Technological forecastsTechnological forecasts
 Predict rate of technological progressPredict rate of technological progress
 Impacts development of new productsImpacts development of new products
 Demand forecastsDemand forecasts
 Predict sales of existing products andPredict sales of existing products and
servicesservices

Strategic Importance ofStrategic Importance of
ForecastingForecasting
 Human Resources – Hiring, training,Human Resources – Hiring, training,
laying off workerslaying off workers
 Capacity – Capacity shortages canCapacity – Capacity shortages can
result in undependable delivery, lossresult in undependable delivery, loss
of customers, loss of market shareof customers, loss of market share
 Supply Chain Management – GoodSupply Chain Management – Good
supplier relations and pricesupplier relations and price
advantagesadvantages

Seven Steps in ForecastingSeven Steps in Forecasting
 Determine the use of the forecastDetermine the use of the forecast
 Select the items to be forecastedSelect the items to be forecasted
 Determine the time horizon of theDetermine the time horizon of the
forecastforecast
 Select the forecasting model(s)Select the forecasting model(s)
 Gather the dataGather the data
 Make the forecastMake the forecast
 Validate and implement resultsValidate and implement results

Forecasting ApproachesForecasting Approaches
 Used when situation is vagueUsed when situation is vague
and little data existand little data exist
 New productsNew products
 New technologyNew technology
 Involves intuition, experienceInvolves intuition, experience
 e.g., forecasting sales on Internete.g., forecasting sales on Internet
Qualitative MethodsQualitative Methods

Forecasting ApproachesForecasting Approaches
 Used when situation is ‘stable’ andUsed when situation is ‘stable’ and
historical data existhistorical data exist
 Existing productsExisting products
 Current technologyCurrent technology
 Involves mathematical techniquesInvolves mathematical techniques
 e.g., forecasting sales of colore.g., forecasting sales of color
televisionstelevisions
Quantitative MethodsQuantitative Methods

Qualitative Forecasting Methods
Qualitative
Forecasting
Models
Market
Research/
Survey
Sales
Force
Composite
Executive
Judgement
Delphi
Method
Smoothing

Overview of QualitativeOverview of Qualitative
MethodsMethods
 Jury of executive opinionJury of executive opinion
 Pool opinions of high-level experts,Pool opinions of high-level experts,
sometimes augment by statisticalsometimes augment by statistical
modelsmodels
 Delphi methodDelphi method
 Panel of experts, queried iterativelyPanel of experts, queried iteratively

Overview of QualitativeOverview of Qualitative
MethodsMethods
 Sales force compositeSales force composite
 Estimates from individualEstimates from individual
salespersons are reviewed forsalespersons are reviewed for
reasonableness, then aggregatedreasonableness, then aggregated
 Consumer Market SurveyConsumer Market Survey
 Ask the customerAsk the customer

 Involves small group of high-level expertsInvolves small group of high-level experts
and managersand managers
 Group estimates demand by workingGroup estimates demand by working
togethertogether
 Combines managerial experience withCombines managerial experience with
statistical modelsstatistical models
 Relatively quickRelatively quick
 ‘‘Group-think’Group-think’
disadvantagedisadvantage
Jury of Executive OpinionJury of Executive Opinion

Sales Force CompositeSales Force Composite
 Each salesperson projects his orEach salesperson projects his or
her salesher sales
 Combined at district and nationalCombined at district and national
levelslevels
 Sales reps know customers’ wantsSales reps know customers’ wants
 Tends to be overly optimisticTends to be overly optimistic

Delphi MethodDelphi Method
 Iterative groupIterative group
process,process,
continues untilcontinues until
consensus isconsensus is
reachedreached
 3 types of3 types of
participantsparticipants
 Decision makersDecision makers
 StaffStaff
 RespondentsRespondents
Staff
(Administering
survey)
Decision Makers
(Evaluate
responses and
make decisions)
Respondents
(People who can
make valuable
judgments)

Consumer Market SurveyConsumer Market Survey
 Ask customers about purchasingAsk customers about purchasing
plansplans
 What consumers say, and whatWhat consumers say, and what
they actually do are often differentthey actually do are often different
 Sometimes difficult to answerSometimes difficult to answer

Overview of QuantitativeOverview of Quantitative
ApproachesApproaches
1.1. Naive approachNaive approach
2.2. Moving averagesMoving averages
3.3. ExponentialExponential
smoothingsmoothing
4.4. Trend projectionTrend projection
5.5. Linear regressionLinear regression
Time-SeriesTime-Series
ModelsModels
AssociativeAssociative
ModelModel

Trend
Seasonal
Cyclical
Random
Time Series ComponentsTime Series Components

Components of DemandComponents of DemandDemandforproductorservice
| | | |
1 2 3 4
Year
Average
demand over
four years
Seasonal peaks
Trend
component
Actual
demand
Random
variation
Figure 4.1Figure 4.1

 Persistent, overall upward orPersistent, overall upward or
downward patterndownward pattern
 Changes due to population,Changes due to population,
technology, age, culture, etc.technology, age, culture, etc.
 Typically several yearsTypically several years
durationduration
Trend ComponentTrend Component

 Regular pattern of up andRegular pattern of up and
down fluctuationsdown fluctuations
 Due to weather, customs, etc.Due to weather, customs, etc.
 Occurs within a single yearOccurs within a single year
Seasonal ComponentSeasonal Component
Number of
Period Length Seasons
Week Day 7
Month Week 4-4.5
Month Day 28-31
Year Quarter 4
Year Month 12
Year Week 52

 Repeating up and down movementsRepeating up and down movements
 Affected by business cycle,Affected by business cycle,
political, and economic factorspolitical, and economic factors
 Multiple years durationMultiple years duration
 Often causal orOften causal or
associativeassociative
relationshipsrelationships
Cyclical ComponentCyclical Component
00 55 1010 1515 2020

 Erratic, unsystematic, ‘residual’Erratic, unsystematic, ‘residual’
fluctuationsfluctuations
 Due to random variation orDue to random variation or
unforeseen eventsunforeseen events
 Short duration andShort duration and
nonrepeatingnonrepeating
Random ComponentRandom Component
MM TT WW TT FF

Naive ApproachNaive Approach
 Assumes demand in nextAssumes demand in next
period is the same asperiod is the same as
demand in most recent perioddemand in most recent period
 e.g., If January sales were 68, thene.g., If January sales were 68, then
February sales will be 68February sales will be 68
 Sometimes cost effective andSometimes cost effective and
efficientefficient
 Can be good starting pointCan be good starting point

 MA is a series of arithmetic meansMA is a series of arithmetic means
 Used if little or no trendUsed if little or no trend
 Used often for smoothingUsed often for smoothing
 Provides overall impression of dataProvides overall impression of data
over timeover time
Moving Average MethodMoving Average Method
Moving average =Moving average =
∑∑ demand in previous n periodsdemand in previous n periods
nn

JanuaryJanuary 1010
FebruaryFebruary 1212
MarchMarch 1313
AprilApril 1616
MayMay 1919
JuneJune 2323
JulyJuly 2626
ActualActual 3-Month3-Month
MonthMonth Shed SalesShed Sales Moving AverageMoving Average
(12 + 13 + 16)/3 = 13(12 + 13 + 16)/3 = 13 22
//33
(13 + 16 + 19)/3 = 16(13 + 16 + 19)/3 = 16
(16 + 19 + 23)/3 = 19(16 + 19 + 23)/3 = 19 11
//33
Moving Average ExampleMoving Average Example
1010
1212
1313
((1010 ++ 1212 ++ 1313)/3 = 11)/3 = 11 22
//33

 Used when trend is presentUsed when trend is present
 Older data usually less importantOlder data usually less important
 Weights based on experience andWeights based on experience and
intuitionintuition
Weighted Moving AverageWeighted Moving Average
WeightedWeighted
moving averagemoving average ==
∑∑ ((weight for period nweight for period n))
xx ((demand in period ndemand in period n))
∑∑ weightsweights

JanuaryJanuary 1010
FebruaryFebruary 1212
MarchMarch 1313
AprilApril 1616
MayMay 1919
JuneJune 2323
JulyJuly 2626
ActualActual 3-Month Weighted3-Month Weighted
MonthMonth Shed SalesShed Sales Moving AverageMoving Average
[(3 x 16) + (2 x 13) + (12)]/6 = 14[(3 x 16) + (2 x 13) + (12)]/6 = 1411
//33
[(3 x 19) + (2 x 16) + (13)]/6 = 17[(3 x 19) + (2 x 16) + (13)]/6 = 17
[(3 x 23) + (2 x 19) + (16)]/6 = 20[(3 x 23) + (2 x 19) + (16)]/6 = 2011
//22
Weighted Moving AverageWeighted Moving Average
1010
1212
1313
[(3 x[(3 x 1313) + (2 x) + (2 x 1212) + () + (1010)]/6 = 12)]/6 = 1211
//66
Weights Applied Period
3 Last month
2 Two months ago
1 Three months ago
6 Sum of weights

 Form of weighted moving averageForm of weighted moving average
 Weights decline exponentiallyWeights decline exponentially
 Most recent data weighted mostMost recent data weighted most
 Requires smoothing constantRequires smoothing constant ((αα))
 Ranges from 0 to 1Ranges from 0 to 1
 Subjectively chosenSubjectively chosen
 Involves little record keeping of pastInvolves little record keeping of past
datadata
Exponential SmoothingExponential Smoothing

t =t = Last period’s forecastLast period’s forecast
++ αα ((Last period’s actual demandLast period’s actual demand
–– Last period’s forecastLast period’s forecast))
FFtt = F= Ftt – 1– 1 ++ αα((AAtt – 1– 1 -- FFtt – 1– 1))
wherewhere FFtt == new forecastnew forecast
FFtt – 1– 1 == previous forecastprevious forecast
αα == smoothing (or weighting)smoothing (or weighting)
constantconstant (0(0 ≤≤ αα ≤≤ 1)1)

ExampleExample
Predicted demandPredicted demand = 142= 142 Ford MustangsFord Mustangs
Actual demandActual demand = 153= 153
Smoothing constantSmoothing constant αα = .20= .20

ExampleExample
New forecastNew forecast = 142 + .2(153 – 142)= 142 + .2(153 – 142)

ExampleExample
New forecastNew forecast = 142 + .2(153 – 142)= 142 + .2(153 – 142)
= 142 + 2.2= 142 + 2.2
= 144.2 ≈ 144 cars= 144.2 ≈ 144 cars

Common Measures of ErrorCommon Measures of Error
Mean Absolute DeviationMean Absolute Deviation ((MADMAD))
MAD =MAD =
∑∑ |Actual - Forecast||Actual - Forecast|
nn
Mean Squared ErrorMean Squared Error ((MSEMSE))
MSE =MSE =
∑∑ ((Forecast ErrorsForecast Errors))22
nn

Common Measures of ErrorCommon Measures of Error
Mean Absolute Percent ErrorMean Absolute Percent Error ((MAPEMAPE))
MAPE =MAPE =
∑∑100100|Actual|Actualii - Forecast- Forecastii|/Actual|/Actualii
nn
nn
ii = 1= 1

Seasonal Variations In DataSeasonal Variations In Data
The multiplicativeThe multiplicative
seasonal modelseasonal model
can adjust trendcan adjust trend
data for seasonaldata for seasonal
variations invariations in
demanddemand

Seasonal Variations In DataSeasonal Variations In Data
1.1. Find average historical demand for eachFind average historical demand for each
seasonseason
2.2. Compute the average demand over allCompute the average demand over all
seasonsseasons
3.3. Compute a seasonal index for each seasonCompute a seasonal index for each season
4.4. Estimate next year’s total demandEstimate next year’s total demand
5.5. Divide this estimate of total demand by theDivide this estimate of total demand by the
number of seasons, then multiply it by thenumber of seasons, then multiply it by the
seasonal index for that seasonseasonal index for that season
Steps in the process:Steps in the process:

Forecasting ErrorForecasting Error
• Forecast error is the numericalForecast error is the numerical
difference between the actualdifference between the actual
demand and the forecasted demanddemand and the forecasted demand
for a specific period of timefor a specific period of time

Limitations of ForecastingLimitations of Forecasting
• A forecast is never completelyA forecast is never completely
accurate; forecasts will alwaysaccurate; forecasts will always
deviate from the actual demanddeviate from the actual demand
• Effectiveness of a forecast must beEffectiveness of a forecast must be
measured in order to evaluatemeasured in order to evaluate
alternative forecasting methodsalternative forecasting methods

Monitoring and ControllingMonitoring and Controlling
• Compare actual data vs. sample dataCompare actual data vs. sample data
• Monitor trends (seasonal andMonitor trends (seasonal and
quarterly)quarterly)
• Notice irregular variation (outliers)Notice irregular variation (outliers)

Box–Jenkins MethodBox–Jenkins Method
Besides the smoothing techniques,
what other methods can we use to
forecast univariate data?
Using Box–Jenkins Methods
Capture the past pattern Forecast the future

Why Use The Box–JenkinsWhy Use The Box–Jenkins
Method?Method?
• When facing very complicated data patterns
such as a combination of a trend, seasonal,
cyclical, and random fluctuations:
e.g. Earning data of a corporation
e.g. Forecasting stock price
e.g. Sales forecasting
e.g. Energy forecasting (electricity,
gas)
e.g. Traffic flow of a city

Why Use the Box–JenkinsWhy Use the Box–Jenkins
Method?Method?
• When forecasting is the sole purpose of
the model.
• Very reliable especially in short term (0–
6 months) prediction; reliable in short-
to-mid (6 months–1.5years) -term
prediction.
• Confidence intervals for the estimates
are easily constructed.

ProductivityProductivity
• One of the most important responsibilities of an operationsOne of the most important responsibilities of an operations
manager is to achieve productive use of organization’s resources.manager is to achieve productive use of organization’s resources.
• ProductivityProductivity is an index that measures output (goods and services)is an index that measures output (goods and services)
relative to the input (capital, labor, materials, energy, and otherrelative to the input (capital, labor, materials, energy, and other
resources) used to produce them.resources) used to produce them.
• It is usually expressed as the ratio of output to input:It is usually expressed as the ratio of output to input:
OutputOutput
Productivity = ---------------Productivity = ---------------
InputInput

Ways to Increase ProductivityWays to Increase Productivity
• Increase output by using the same or a lesser amount of (input)Increase output by using the same or a lesser amount of (input)
resource.resource.
• Reduce amount of (input) resource used while keeping outputReduce amount of (input) resource used while keeping output
constant or increasing it.constant or increasing it.
• Use more resource as long as output increases at a greater rate.Use more resource as long as output increases at a greater rate.
• Decrease output as long as resource use decreases at a greaterDecrease output as long as resource use decreases at a greater
rate.rate.
• ProductionProduction is concerned with the activity of producing goods andis concerned with the activity of producing goods and
services.services.
• ProductivityProductivity is concerned with the efficiency and effectivenessis concerned with the efficiency and effectiveness
with which these goods and services are produced.with which these goods and services are produced.

Efficiency and EffectivenessEfficiency and Effectiveness
for productivity improvement.for productivity improvement.
• Efficiency is a necessary but not a satisfactory condition forEfficiency is a necessary but not a satisfactory condition for
productivity. In fact, both effectiveness and efficiency are necessaryproductivity. In fact, both effectiveness and efficiency are necessary
in order to be productive.in order to be productive.
• EfficiencyEfficiency is the ratio of actual output generated to the expected (oris the ratio of actual output generated to the expected (or
standard) output prescribed.standard) output prescribed.
• EffectivenessEffectiveness, on the other hand, is the degree to which the relevant, on the other hand, is the degree to which the relevant
goals or objectives are achieved.goals or objectives are achieved.
• EffectivenessEffectiveness involves first determining the relevant (right) goals orinvolves first determining the relevant (right) goals or
objectives and then achieving them.objectives and then achieving them.
– If, for example, nine out of ten relevant goals are achieved, theIf, for example, nine out of ten relevant goals are achieved, the
effectiveness is 90%. One can be very efficient and still not beeffectiveness is 90%. One can be very efficient and still not be
productive.productive.

Single Factor Approach to MeasuringSingle Factor Approach to Measuring
• CapitalCapital - Number of products produced divided by asset- Number of products produced divided by asset
valuevalue
• MaterialsMaterials - Number of products produced divided by- Number of products produced divided by
dollars spent on materialsdollars spent on materials
• Direct LaborDirect Labor - Number of products produced divided by- Number of products produced divided by
direct labor-hoursdirect labor-hours
• OverheadOverhead - Number of products produced divided by- Number of products produced divided by
dollars spent on operating costdollars spent on operating cost

Variables Affecting LaborVariables Affecting Labor
• Physical work environmentPhysical work environment
– Technology, equipment, materials, lighting, layoutTechnology, equipment, materials, lighting, layout
• Product qualityProduct quality
– Defects, scrap, reworkDefects, scrap, rework
• Employee job performanceEmployee job performance
– Employee ability, motivationEmployee ability, motivation

Employee Job PerformanceEmployee Job Performance
• Behavioral scientists believe that individuals are motivated toBehavioral scientists believe that individuals are motivated to
act in a certain way by a desire to satisfy certain needs.act in a certain way by a desire to satisfy certain needs.
Maslow ‘s hierarchy of needsMaslow ‘s hierarchy of needs
FulfillmentFulfillment
RecognitionRecognition
AffiliationAffiliation
SecuritySecurity
PhysiologicalPhysiological

What is Work Study?What is Work Study?
• Work Study is the systemeaticWork Study is the systemeatic
examination of the methods ofexamination of the methods of
carrying outcarrying out
• activities such as to improve theactivities such as to improve the
effective use of resources and to seteffective use of resources and to set
upup
• standards of performance for thestandards of performance for the
activities carried out.activities carried out.

TECHNIQUES OF WORK STUDY:TECHNIQUES OF WORK STUDY:
These are:These are:
1. METHOD STUDY1. METHOD STUDY is the systematic recording andis the systematic recording and
critical examination of ways of doing things incritical examination of ways of doing things in
order to make improvements.order to make improvements.
THUSTHUS it simplifies the job and develops moreit simplifies the job and develops more
economical method of doing it.economical method of doing it.
2.WORK MEASUREMENT2.WORK MEASUREMENT is the applicationis the application
of techniques designed to establish the time for aof techniques designed to establish the time for a
qualified worker to carry out a task at a defined ratequalified worker to carry out a task at a defined rate
of working.of working.
THUSTHUS it determines how long it should take to carryit determines how long it should take to carry
out the work.out the work.

METHODS ANALYSIS AND IMPROVEMENTMETHODS ANALYSIS AND IMPROVEMENT
• Specifying the tasks and responsibilities of a job is only the firstSpecifying the tasks and responsibilities of a job is only the first
step in the job design process.step in the job design process.
• The next step is to determine how to perform the tasks, that is,The next step is to determine how to perform the tasks, that is,
determine the bestdetermine the best work methods.work methods.
– Best work methods areBest work methods are
• the most efficient physical movements of the worker,the most efficient physical movements of the worker,
• the best sequence in which to perform movements orthe best sequence in which to perform movements or
tasks, andtasks, and
• the best way to coordinate the workers actions withthe best way to coordinate the workers actions with
those of machines and other workers.those of machines and other workers.
• This information must be conveyed to the workers throughThis information must be conveyed to the workers through
training and appropriate supervision and feedback.training and appropriate supervision and feedback.

METHODS ANALYSISMETHODS ANALYSIS
• A logical approach to deciding what tasks should be done and howA logical approach to deciding what tasks should be done and how
they should be done is called methods analysis.they should be done is called methods analysis.
• Methods analysis utilizesMethods analysis utilizes
– structured data collection,structured data collection,
– visual aids and charts, andvisual aids and charts, and
– logical procedures to help understand and improve work methods.logical procedures to help understand and improve work methods.
• Methods analysis relies on obtaining good observational andMethods analysis relies on obtaining good observational and
experimental data.experimental data.
• Methods analysis focuses primarily on the activities of individualMethods analysis focuses primarily on the activities of individual
workers or groups of related workers.workers or groups of related workers.

Work MeasurementWork Measurement
• Work measurementWork measurement is the process of establishing the time that ais the process of establishing the time that a
given task would take when performed by a qualified workergiven task would take when performed by a qualified worker
working at a defined level of performance.working at a defined level of performance.
• A qualified workerA qualified worker is one who has acquired theis one who has acquired the skill, knowledgeskill, knowledge
and other attributes to carry out the work in hand to satisfactoryand other attributes to carry out the work in hand to satisfactory
standards of quantity, quality and safetystandards of quantity, quality and safety
• Work measurementWork measurement also refers to the process of estimating thealso refers to the process of estimating the
amount of worker time required to produce one unit of output.amount of worker time required to produce one unit of output.
• AA goal of work measurementgoal of work measurement is to develop labor standards thatis to develop labor standards that
can be used for planning and controlling operations.can be used for planning and controlling operations.

Labor StandardsLabor Standards
• AA labor standardlabor standard is the number of worker-minutes required tois the number of worker-minutes required to
complete an element, operation, or product under ordinary operatingcomplete an element, operation, or product under ordinary operating
conditions.conditions.
• Labor standards are used in:Labor standards are used in:
• Cost estimationCost estimation
• Pricing of products and servicesPricing of products and services
• Incentive pay systemsIncentive pay systems
• Capacity planningCapacity planning
• Production schedulingProduction scheduling
• A labor standard can be determined using one or more of theA labor standard can be determined using one or more of the
following approaches:following approaches:
• Time studyTime study
• Work samplingWork sampling
• Predetermined time standardsPredetermined time standards

Time StudyTime Study
• Job is performed by a single worker in a fixed locationJob is performed by a single worker in a fixed location
• Job involves repetitive short cyclesJob involves repetitive short cycles
• Job is expected to continue unchanged for a long periodJob is expected to continue unchanged for a long period
• Job produces large quantities of outputJob produces large quantities of output
• Resulting time standard must be very accurateResulting time standard must be very accurate
• Analysts use stopwatches to time the operation being performedAnalysts use stopwatches to time the operation being performed
by workersby workers
• These observed times are then converted into labor standardsThese observed times are then converted into labor standards
• The labor standards are expressed in minutes per unit of outputThe labor standards are expressed in minutes per unit of output
for the operationfor the operation

BASIC PROCEDURE OF WSBASIC PROCEDURE OF WS comprise of followingcomprise of following
STEPS:STEPS:
1.1.SELECTSELECT the job/task/process to be studied.the job/task/process to be studied.
2.2.RECORDRECORD all the relevant data/facts about theall the relevant data/facts about the
selected job.selected job.
3.3.EXAMINEEXAMINE the recorded facts critically by challengingthe recorded facts critically by challenging
its purpose, place, sequence, person, andits purpose, place, sequence, person, and
method.method.
4.4.DEVELOPDEVELOP new methods,as alternative methods, ofnew methods,as alternative methods, of
doing the selected job.doing the selected job.
5.5.EVALUATEEVALUATE results of different alternative solutions.results of different alternative solutions.
6.6.DEFINEDEFINE the new method and present it to thethe new method and present it to the
concerned people.concerned people.
7.7.INSTALINSTAL the new method and provide training tothe new method and provide training to
the concerned staff .the concerned staff .
8.8.MAINTAINMAINTAIN the new standard practice and establishthe new standard practice and establish
control procedures.control procedures.

Vital inputs for:
• Manpower planning
• Reducing labour costs
• Scheduling
• Budgeting
• Designing incentive systems
Standard Time
Amount of time a qualified worker should spend to complete a
specified task, working at sustainable rate, using given methods,
tools and equipment, raw material and workplace
Most commonly used methods of work measurement:
• Time study
• Historical times
• Predetermined data
• Work sampling

Time Study
• Most widely used method of work measurement
• Especially appropriate for short, repetitive tasks
Average of a few properly trained workers’
performed time are taken as the standard
Basic steps:
• Define the task to be studied, and inform the worker(s) who will be studied
• Determine the number of cycles to be observed
• Time the job and rate the performance
• Compute the standard time
Breakdown of work into elements

Standard Elemental Time (SET)
Work Measurement
derived from a firm’s own historical time study data
• A time study department accumulates a file of elemental times that
are common to many jobs
• After a certain point, many elemental times can be retrieved from the
file
• Eliminate need for analysts to go through a complete time study to
obtain those
Predetermined Time Standards (PDTS)
published data on standard elemental times
• Commonly used system is Method-Time Measurement (MTM)
• MTM tables are based on extensive research of basic elemental times

Work Sampling
Two primary uses:
• Ratio-delay studies: concern the percentage of
worker’s time that involves unavoidable delays
appropriate for long, non-repetitive tasks
Work Measurement
is a technique for estimating the proportion of time that a worker
or machine spends on various activities and the idle time.
• Analysis of non-repetitive jobs: percentage of
time an employee spends doing various jobs

What is Supply-Chain
Management?
• Supply-chain is a term that describes how
organizations (suppliers, manufacturers,
distributors, and customers) are linked
together.
• Supply-chain management is a total system
approach to managing the entire flow of
information, materials, and services from
raw-material suppliers through factories
and warehouses to the end customer.

Basic Supply ChainBasic Supply Chain
SUPPLIER
Sewing shops in
Hong Kong
FIRM
Tommy Hilfiger
in Hong Kong
May Department Stores
in St. Louis
CUSTOMER

Extended Supply ChainExtended Supply Chain
SUPPLIER
CUSTOMER
SUPPLIER’S
SUPPLIER
. . .
CUSTOMER’S
CUSTOMER
FIRM
. . .
Yarn
suppliers in
Korea
Sewing shops in
Hong Kong Tommy Hilfiger
in Hong Kong
Lord & Taylor
in New York
May Department
Stores
in St. Louis

Supply Chain OverviewSupply Chain Overview
Warehousing
Warehousing
Transportation
Transportation
Vendors/plants/ports
Transportation
Factory
Transportation Customers
Information
flows

Supply Chain SchematicSupply Chain Schematic

Logistics Management in a Firm ValueLogistics Management in a Firm Value
ChainChain

Supply
Sources:
plants
vendors
ports
Regional
Warehouses:
stocking
points
Field
Warehouses:
stocking
points
Customers,
demand
centers
sinks
Production/
purchase
costs
Inventory &
warehousing
costs
Transportation
costs
Inventory &
warehousing
costs
Transportation
costs

Reality of SCM ScopeReality of SCM Scope

Supply Chain Management ApproachSupply Chain Management Approach
• Three items that flow through the supplyThree items that flow through the supply
chain:chain:
– InformationInformation
– MoneyMoney
– MaterialsMaterials
• Three areas of decision-making:Three areas of decision-making:
– MaterialsMaterials
– ProcessesProcesses
– LogisticsLogistics
• Two types of tools:Two types of tools:
– Information TechnologyInformation Technology
– Operational AnalysisOperational Analysis

Logistical ComponentsLogistical Components
of the Supply Chainof the Supply Chain
SupplySupply
ChainChain
TeamTeam
Sourcing & ProcurementSourcing & Procurement
Production SchedulingProduction Scheduling
Order ProcessingOrder Processing
Inventory ControlInventory Control
Warehouse & Materials HandlingWarehouse & Materials Handling
TransportationTransportation
LogisticsInformationSystemLogisticsInformationSystem

Sourcing and ProcurementSourcing and Procurement
 Plan purchasing strategiesPlan purchasing strategies
 Develop specificationsDevelop specifications
 Select suppliersSelect suppliers
 Negotiate price and service levelsNegotiate price and service levels
 Reduce costsReduce costs
The Role of Purchasing:The Role of Purchasing:
©iStockphoto.com/MariaToutoudaki

Production SchedulingProduction Scheduling
Push / Pull
Strategy
Traditional Focus
Push
Start of
Production
Manufacturing
Inventory-
Based
Mass Production
Customer Focus
Pull
Customer-Order
Based
Mass Customization

Just-in-Time ManufacturingJust-in-Time Manufacturing
A process that redefines and
simplifies manufacturing by
reducing inventory levels
and delivering raw materials
at the precise time they are
needed on the production
line.
JITJIT

Benefits of JITBenefits of JIT
 For manufacturers: reduces rawFor manufacturers: reduces raw
material inventories; immediatematerial inventories; immediate
shipping of productsshipping of products
 For suppliers: daily or hourlyFor suppliers: daily or hourly
deliveries rather than weeklydeliveries rather than weekly
 For customers: lower costs; shorterFor customers: lower costs; shorter
lead times; products tailored tolead times; products tailored to
customer needscustomer needs

Order Processing
Order processing is becoming more
automated through the use of computer
technology known as ELECTRONIC DATA
INTERCHANGE (EDI).
a system whereby orders are
entered into the supply
chain and filled.
An Order Processing
System is…

Inventory Control
Inventory
Control
System
Inventory
Control
System
A method of developing
and maintaining an
adequate assortment of
materials or products to
meet a manufacturer’s or
a customer’s demand

Inventory Control
Tools for managing inventory include:
 materials requirement planning (MRP) or
materials management – supplier to
manufacturer
 distribution resource planning (DRP) –
manufacturer to end user
 automatic replenishment programs –
minimal forecasting

Warehousing andWarehousing and
Materials HandlingMaterials Handling
Most manufacturers today have moved to
AUTOMATED materials-handling systems to
minimize the amount of handling.
a method of moving inventory into,
within, and out of the warehouse.
A Materials-Handling
System is…

TransportationTransportation
Airways
Water
Pipelines
Motor Carriers
Railroads

Transportation ModeTransportation Mode
ChoiceChoice
 Cost
 Transit time
 Reliability
 Capability
 Accessibility
 Traceability

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