UNIT II FORECASTING

CAPACITY AND FACILITY

DESIGN
UNIT II FORECASTING CAPACITY AND
FACILITY DESIGN
Demand Forecasting Need, Types,
Objectives and Steps. Overview of
Qualitative and Quantitative
methods. Capacity Planning Long
range, Types, Developing capacity
alternatives. Overview of sales and
operations planning. Overview of
MRP, MRP II and ERP. Facility Location
Theories, Steps in Selection,
Location Models. Facility Layout
 Demand Forecasting
Forecasting is a proactive process of
determining what products are needed
where, when, and in what quantities.
Consequently, demand forecasting is a
customerfocused activity.

It supports other planning activities such as

capacity planning, inventory planning, and
even overall business planning
 Demand Forecasting
5 main characters of demand are-
Average
Demand tends to cluster around a specific level.
Trend
Demand consistently increases or decreases over time.
Seasonality
Demand shows peaks and valleys at consistent intervals.
These intervals can be hours, days, weeks, months, years, or
seasons.
Cyclicity
Demand gradually increases and decreases over an extended
period of time, such as years. Business cycles
(recession/expansion)product life cycles influence this
component of demand.
Elasticity
Degree of responsiveness of demand to a corresponding
 Objectives of Demand
forecasting
Helping continuous production
Regular supply of commodities
Formulation of price policy
To formulate effective sales of
performance
Arrangement of finance
To determine productive capacity
Labour requirements
 Types of Demand
Forecasting
Passive forecasts
Where the factors being forecasted are
assumed to be constant over a period of
time and changes are ignored.

Active forecasts
Where factors being forecasted are taken
as flexible and are subject to changes.
 Necessity of Demand
Forecasting
Reduces future uncertainties, helps study markets that are
dynamic, volatile and competitive

Allows operating levels to be set to respond to demand

variations

Allows managers to plan personnel, operations of

purchasing & finance for better control over wastes
efficiency and conflicts.
 Necessity of Demand
Forecasting
Inventory Control-reduces reserves of slack resources to
meet uncertain demand

Effective forecasting builds stability in operations.

Setting Sales Targets, Pricing policies, establishing controls

and incentives
 How to make Demand
Forecast
Determine purpose of forecast
Establish a time horizon
Select a forecasting technique
Gather and analyze data
Prepare the forecast
Monitor the forecast
 Levels of forecasting
At firms level
At industry level
At total market level
 Key factors for selecting the right
method
Short term
3-6 months, operating decisions, e.g.,
production planning
Medium term
6 months 2 years, tactical decision,
e.g., employment changes
Long term
Above 2 years, strategic decision, e.g.,
research development
 Data Requirements
Techniques differ by virtue of how
much data is required to successfully
employ the technique.

Judgmental techniques require little or

no data whereas methods such as
Time series analysis or Regression
models require a large amount of past
or historical data
 Methods of Demand
forecasting
Two methods of demand forecasting are
MICROECONOMIC METHODS (QUANTITATIVE)
MACROECONOMIC METHODS (QUALITATIVE)
 Methods of Demand
forecasting
MICROECONOMIC METHODS (QUANTITATIVE)
involves the prediction of activity of particular
firms, branded products, commodities,
markets, and industries.
are much more reliable than macroeconomic
methods because the dimensionality of factors
is lower and often can easily be incorporated
into a model.

Some methods of quantitatve are

Survey of buyers intensions
Experts opinion method
Delphi method
Market experimentation method
 Methods of Demand
forecasting
MACROECONOMIC METHODS (QUALITATIVE)
involves the prediction of economic aggregates
such as inflation, unemployment, GDP growth,
short-term interest rates, and trade flows.
is very difficult because of the complex
interdependencies in the overall economic factors

Some methods of qualitative are

Time series model
Trend analysis
Moving average methods
Exponential smoothing
Casual methods
 Buyers Intention Survey
Features of buyers intention survey
Employs sample survey techniques for
gathering data
Data is collected from end users of goods
consumer, producer, and mixed
Data portrays biases and preferences of
customers
Ideal for short and medium term demand
forecasting, cost effective and reliable
 Advantages of Buyers Intention
Survey
Helps in approximating future
requirements even without past data
Accurate method as buyers needs
and wants are clearly identified and
catered to
Most effective way of assessing
demand for new firms
 Limitations of Buyers Intention
Survey
People may not know what they are
going to purchase
They may report what they want to
buy, but not what they are capable of
buying
Customers may not want to disclose
real information
Effects of derived demand may make
forecasting difficult
 Experts Opinion Method
Features of experts opinion method
Panel of Experts in same field with
experience and working knowledge
Combines input from key information
sources
Exchange of ideas and claims
Final decision is based on majority or
consensus, reached from experts
forecasts
 Advantages of Experts Opinion
Method
Can be undertaken easily without the
use of elaborate statistical tools
Incorporates a variety of extensive
opinions from expert in the field
 Limitations of Experts Opinion
Method
Judgemental biases
People expect information obtained
from a small sample to be typical of
the larger population
 Delphi Method
Panel of experts is selected
One coordinator is chosen by members of the jury
Anonymous forecasts are made by experts based
on a common questionnaire
Coordinator renders an average of all forecasts
made to each of the members
2 to 3 cycles are undertaken
Convergence and diversion is acceptable
Forecasts are revised until a consensus is reached
by all
 Advantages of Delphi
method
Eliminates need for group meetings
Eliminates biases in group meetings
Participants can change their
opinions anonymously
 Limitations of Delphi
method
Time consuming
Reaching a consensus take a lot of
time
Participants may drop out
 Market Experimentation
Involves actual experiments and simulations
Coupons are issued to few selected customers
Selected customers purchase the products
Proximity with consumers makes information
collected reliable
Information from interactions between sales
personnel and customers is used for
forecasting
Best used if sales personnel are highly
specialized and well trained
 Advantages of Market
Experimentation
Uses knowledge of those closest to
the market
Helps estimating actual potential for
future sales
Provides feedback for improving
customizing and offering made to
customers
 Collective Opinion Method
Opinions from marketing and sales
specialists are compiled
2 types of targets estimated
Ambitious targets
Conservative targets
Combines expertise of higher level
management and sales executives
 Limitations of Collective Opinion
Method
Power struggles may occur between
specialists
Consensus may not be reached in
good time
Differences and prejudices in opinion
may also exists
Quantitative Methods Time Series
Models
Past data is used to make future
predictions
Known or independent variables are
used for predicting unknown or
dependent variables used the trend
equation
Based on trend equation, we find
Line of Best Fit and then it is
projected into a scatter diagram
dividing points equally on both sides
 Trend Series Model
Trend Equation
Y = a + bX + E
a = constant or intercept
b = slope of trend line
X = independent variable
E = Error term
Trend Series Model
 Moving Average Method
Data from a number of consecutive
past periods is combined to provide
forecast for coming periods
Higher is the amount of previous
data, better is the forecast
Since the averages are calculated on
moving basis, the seasonal and
cyclical variations are smoothened
out
 Exponential Smoothing
Used in cases where the variable
under forecast doesnt follow a trend
2 Types Simple and Weighted
Simple smoothing simple average of
specific observation called order
Weighted smoothing weights assigned
in decreasing order as one moves from
current period observations to previous
observations
 Exponential Smoothing
The equation for exponential smoothing
follows a geometric progression
a, a(1-a), a(1-a)^2,
a value assigned to the observation
a(1-a) weight assigned to 1 period
pervious observation
a(1-a)^2 weight assigned to 2 periods
previous observation
Sum of all weights always unity
 Casual Models
It is a statistical technique for quantifying
the relationship between variables
In simple regression analysis, there is one
dependent variable (e.g. sales) to be
forecast and one independent variable
The values of the independent variable
are typically those assumed to "cause" or
determine the values of the dependent
variable
 Casual Model
For example Assuming that the amount of
advertising dollars spent on a product
determines the amount of its sales
we could use regression analysis to
quantify the precise nature of the
relationship between advertising and sales
For forecasting purposes, knowing the
quantified relationship between the
variables allows us to provide forecasting
estimates
Steps in Regression Analysis
Identification of variables influencing
demand for product under estimation
Collection of historical data on variables
Choosing an appropriate form of function
Estimation of the function

y x
Y= value being forecasted, = constant value,
= coefficients of regression, x = independent
variable
 Benefits of Demand
Forecasting
Higher revenues
Sales maximization
Reduced investments for safety
stocks
Improved production planning
Early recognition of market trends
Better market positioning
Improved customer service levels