OPERATION MANAGEMENT

FORECASTING.

NEED AND IMPORTANCE OF FORECASTING.• Every one interested in future, for curiosity, or for

planning.• Plan for contegencies likely to happen in future if known

before hand. • Contigencies may occur or may not occur, but if they

occur the magnitude can be enormous, the total saving may not be sufficient.

• Same problem faced by operation manager in the field of operation management.

• Today if the demand is more than production total production of all producers taken together.

• Can one setup a plant to increase the production to meet the demand??

What is forecasting.• Every manager would LIKE to know exact nature of

future events to accordingly PLAN when sufficient time is there to implement

• The effectiveness of his plan depends on level of accuracy with which future events are known to him.

• Try to forecast future to the best of his ability, judgement, and experience.

• Process of estimating a future event by casting forward past data. The past data are systematcially combined in a predetermined way to obtained estimate of the future.

• Prediction is the process of estimating a future based on subjective considerations other than just past data, need not be predetermined way.

• Estimate of future values of certain specified indicators relating to decisional/ planning situation.

• Some situation single indicator is sufficient. • The no.of indicators and the degree of

forecast depends on the intended use of forecast.

• How much far in future ?? Should be sufficiently in advance so as to enough time for decision plan & put that plan operational.

• Forecast >or= time taken for preparation of plan + time taken to implement the plan.

Need for Forecasting1. Purpose.• Any action plan is devised in the present, to take care of future

contigency in future, occuring out of set of conditions or situation.• There is some purpose of achieving something for devising the plan. • Example to set up additional plant is to increase the capacity. The

magnitute of production and size of the plant depends on future demand supply gap.

• To achieve this target, a plan is prepare and put into action. 2. Time• To prepare plan, organise resources for its implementation and

complete, need time as a resource. There if forecast is done in advance, enough time will be left for planning and implementing in time.

• In same example, set up additional plant takes t1 time, technology negotiation t2, land purchase t3,permissions and clearances t4, provisions to be made for finance t5, errection, construction, testing etc.,

Steps in forecasting process.

1. Identify the general need.• There may be unfulfilled demand. Op.mgr. may feel, why not

expand production? Wise ?When to expand? How much to expand?

2. Select the period/ time horizon of forecast.• if erection is three years, forecast should be for min. 5 years.3. Select indicators relevant to the need.• Like industry sales, competitors present, project capacity,

population projection ( if product targets population.4. Select forecast model.- what type of data is required. 5. Data collection. Should include past data also.6. Prepare forecast using the data and calculate value of

forecast.7. Evaluate the logical feasibility, don’t blindly follow the result

of model, which has upper, lower limit, probability.

Forecast in POM• Importance of forcast lies in its ability to help manager to

take better actions regarding future. Advantages with forecase as follows.

1. Manager is better informed to set up objectives more clearly.

2. Thinking, generation, choice of alternatives more focussed.

3. Sufficient time is available, possible to organsie and implement his action in better way.

FORECAST ERROR• Value forecast – value actually happening.• Sophosticated models reduce error. Again trade off

between choice of model and cost.

Application of forecasting in POM

APPLICATION INDICATORS TIME SPAN

NEW PLANT FOR EXPANSION

Long term demand, production, capacity of all producers etc.,

5 or more years

Seasonal production planning

Demand cycles, preferable from one peak to another.

6 months to 2 years.

Capacity planning Long term money market, interest rate trends.

One or more year.

Intermediate operations planning

Intermediate demand shift in preferences.

Upto about 2 years.

Short run production adjustement

Short term demand, short term material/ input protections.

About 6 weeks.

Scheduling production Order position Usuallly 1 week.

Product development. Long term sales trend decline stage, technological development in related fields.

2 years and more