CHAPTER 1
Tactical decisions
Operations management (OM)
The business function responsible for
planning, coordinating, and controlling
the resources needed to produce a
companys goods and services.
Three major business functions;
Marketing; (2) Operations; (3)
Finance
Role of operations management
To transform organizational inputs into
outputs
Efficiency
Performing activities at the lowest
possible cost.
Manufacturing organizations
Organizations that primarily produce a
tangible product and typically have
low customer contact.
Service organizations
Organizations that primarily produce an
intangible product, such as ideas,
assistance, or information, and typically
have high customer contact.
Strategic decisions
Decisions that set the direction for the
entire company; they are broad in
scope and long-term in nature.
Decisions that are specific and short-
term in nature and are bound by
strategic decisions.
Total quality management (TQM)
Industrial Revolution
An industry movement that changed
production by substituting machine
power for labor power.
Scientific management
An approach to management that
focused on improving output by
redesigning jobs and determining
acceptable levels of worker output.
Hawthorne studies
The studies responsible for creating
the human relations movement, which
focused on giving more consideration
to workers needs.
Human relations movement
A philosophy based on the recognition
that factors other than money can
contribute to worker productivity.
Management science
A field of study that focuses on the
development of quantitative
techniques to solve operations
problems.
Just-in-time (JIT)
A philosophy designed to achieve
high-volume production through
elimination of waste and continuous
improvement.
Philosophy that seeks to improve
quality by eliminating causes of
product defects and by making quality
the responsibility of everyone in the
organization.
Reengineering
Redesigning a companys processes
to make them more efficient.
Flexibility
An organizational strategy in which the
company attempts to offer a greater
variety of product choices to its
customers.
Time-based competition
An organizational strategy focusing on
efforts to develop new products and
deliver them to customers faster than
competitors.
Supply chain management (SCM)
Management of the flow of materials
from suppliers to customers in order to
reduce overall cost and increase
responsiveness to customers.
Global marketplace
A trend in business focusing on
customers, suppliers, and competitors
from a global perspective.

Sustainability
A trend in business to consciously
reduce waste, recycle, and reuse
products and parts.
Lean systems
A concept that takes a total system
approach to creating efficient
operations.
Enterprise resource planning (ERP)
Large, sophisticated software systems
used for identifying and planning the
enterprise-wide resources needed to
coordinate all activities involved in
producing and delivering products.
Customer relationship management
(CRM)
Software solutions that enable the firm
to collect customer-specific data.
Cross-functional decision making
The coordinated interaction and
decision making that occur among the
different functions of the organization.
Trade-off
The need to focus more on one
competitive priority than on others.
CHAPTER 2
Business strategy
A long-range plan for a business.
Operations strategy
A long-range plan for the operations
function that specifies the design and
use of resources to support the
business strategy.
Mission
A statement defining what business an
organization is in, who its customers
are, and how its core beliefs shape its
business.
Environmental scanning
Monitoring the external environment
for changes and trends to determine
business opportunities and threats.
Core competencies
The unique strengths of a business
Organizational Core Competencies.
(1) Workforce; (2) Facilities; (3)
Market Understanding; (4) Financial
Know-how; (5) Technology
Competitive priorities
Order qualifiers
Competitive priorities that must be met
for a company to qualify as a
competitor in the marketplace.
Capabilities that the operations
function can develop in order to give a
company a competitive advantage in
its market.
Cost a competitive priority focusing
on low cost
Quality a competitive priority
focusing on the quality of goods and
services
High-performance design focus on
aspects of quality
Goods and services consistency
how often goods or services meet the
exact design specification
Time a competitive priority focusing
on speed and on-time delivery
Rapid delivery refers to how quickly
an order is received
On-time delivery refers to how often
deliveries are made on time
Flexibility a competitive priority
focusing on offering a wide variety of
goods or services
Product flexibility - ability to offer a
wide variety of goods or services and
customize them to the unique needs of
clients
Volume flexibility - ability to rapidly
increase or decrease the amount
produced in order to accommodate
changes in the demand
Order winners
Competitive priorities that win orders in
the marketplace.
 Multifactor productivity CHAPTER 3

Operations Strategy

Productivity computed as a ratio of Manufacturability

output to several, but not all, inputs.
Structure operations decisions
related to the design of the production
process such as facilities technology, The ease with which a product can be
and flow of gods and services through made.
the facility

Product design
Infrastructure operations decisions
related to the planning and control
systems of the operation, such as
organization of operations, skills and The process of defining all of the
pay of workers, and quality measures. products characteristics.

Primary types of technologies Service design

Product technology which is any The process of establishing all the

new technology developed by a firm characteristics of the service, including
physical, sensual, and psychological
benefits.

Process technology It is the

technology used to improve the
process of creating goods and Steps in the product design process
services.

Idea development product idea

Information technology which developed; sources can be customers,
enables communication, processing, and etc
storage of information.

Benchmarking
Productivity

The process of studying the practices of

A measure of how efficiently an companies considered best-in-class
organization converts inputs into and comparing your companys
outputs. performance against theirs.

Total productivity Reverse engineering

Productivity computed as a ratio of The process of disassembling a

output to all organizational inputs. product to analyze its design features.

Partial productivity Early supplier involvement (ESI)

Productivity computed as a ratio of Involving suppliers in the early stages

output to only one input (e.g., labor, of product design.
materials, machines).
Product screening product idea
evaluated; need to consider
operations, marketing and financial
requirements
Break-even analysis
A technique used to compute the
amount of goods a company would
need to sell to cover its costs.
Fixed costs
Costs a company incurs regardless of
how much it produces.
Variable costs
Costs that vary directly with the
amount of units produced.
Preliminary design & testing
product prototypes, built, tested, and
refined
Final design final product
specifications completed
Design for manufacture (DFM)
A series of guidelines to follow in order
to produce a product easily and
profitably. DFM guidelines focuses on
two issues
Design simplification means
reducing the number of parts and
features of the product whenever
possible. A simpler product is easier to
Process flowchart
A chart showing the sequence of steps
in producing the product or service.
make, costs less, and gives higher
quality.
2. Design standardization the use
of common and interchangeable parts.
By using interchangeable parts, we
can make a greater variety of products
with less inventory and significantly
lower cost and provide greater
flexibility.
DFM Guidelines
Minimize parts
Design parts for different products
Use modular design
Avoid tools
Simplify operations
Product life cycle
A series of stages that products pass
through in their lifetime, characterized
by changing product demands over
time.
A type of process used to produce a
Concurrent engineering
An approach that brings together
multifunction teams in the early phase
of product design in order to
simultaneously design the product and
the process.
Remanufacturing
The concept of using components of
old products in the production of new
ones.
Bottleneck
Longest task in the process.
TYPES OF PROCESSES
Intermittent operations
Processes used to produce a variety of
products with different processing
requirements in lower volumes.
Project process
A type of process used to make a one-
at-a-time product exactly to customer
specifications.
Batch process
A type of process used to produce a
small quantity of products in groups or
batches based on customer orders or
specifications.
Repetitive operations
Processes used to produce one or a few
standardized products in high volume.
Line process
large volume of a standardized
product.
Continuous process
A type of process that operates
continually to produce a high volume of a
fully standardized product.
Process flow analysis
A technique used for evaluating a
process in terms of the sequence of
steps from inputs to outputs with the
goal of improving its design.
Make-to-stock strategy
Produces standard products and
services for immediate sale or delivery.
Assemble-to-order strategy
Produces standard components that
can be combined to customer
specifications.
Make-to-order strategy
Produces products to customer
specifications after an order has been
received.
Process performance metrics
Measurements of different process
characteristics that tell how a process
is performing.
Throughput time average amount
of time it takes a product to move
through the system.
Process velocity ratio of throughput
time to value-added time
Productivity ratio of outputs over
inputs
Utilization ratio of time a resource is
used to time it is available for use
Efficiency ratio of actual output to
standard output
Information technology (IT)
Technology that enables storage,
processing, and communication of
information within and between firms.
Enterprise resource planning (ERP)
Large software programs used for
planning and coordinating all
resources throughout the entire
enterprise.
Global positioning systems (GPS)
A type of wireless technology that
uses satellite transmission to
communicate exact locations.
Radio frequency identification
(RFID)
A wireless technology that uses
memory chips equipped with radio
antennas attached to objects used to
transmit streams of data.
Automation
Using machinery to perform work
without human operators.
Flexible manufacturing system
(FMS)
A type of automated system that
combines the flexibility of intermittent
operations with the efficiency of
continuous operations.
Numerically controlled (NC) machine
A machine controlled by a computer
that can perform a variety of tasks.
Computer-aided design (CAD)
A system that uses computer graphics
to design new products.
Computer-integrated manufacturing
(CIM)
A term used to describe the integration
of product design, process planning,
and manufacturing using an integrated
computer system.
Service package
A grouping of physical, sensual, and
psychological benefits that are
purchased together as part of the
service.
CHAPTER 4
Supply chain
A network of all the activities involved
in delivering a finished product or
service to the customer.
Supply chain management
Coordinates and manages all the
activities of the supply chain.
Tier one supplier
Supplies materials or services directly
to the processing facility.
Tier two supplier
Directly supplies materials or services
to a tier one supplier in the supply
chain.
Tier three supplier
Directly supplies materials or services
to a tier two supplier in the supply
chain.
Logistics

Activities involved in obtaining,
producing, and distributing materials
and products in the proper place and
in proper quantities.
Traffic management
Responsible for arranging the method
of shipment for both incoming and
outgoing products or materials.
Distribution management
Responsible for movement
of material from the manufacturer to
the customer.
Bullwhip effect
Inaccurate or distorted demand
information created in the supply
chain.
Causes of Bullwhip effect
Demand forecast updating
Order batching instead of placing
replenishment orders right after each
unit is sold, it waits some period of
Business-to-consumer e-commerce
(B2C)
On-line businesses sell to individual
consumers.
Advertising revenue model
time, sums up the number of units
sold, and then places the order
Electronic storefronts
Price fluctuations cause
companies to buy products before On-line catalogs of products made
they need them available to the general public by a
single supplier.
Rationing and gaming result when
demand exceeds supply and products Net marketplaces
are rationed to members of the supply
chain.
Suppliers and buyers conduct trade in a
single Internet-based environment.
Counteracting the Bullwhip Effect
Electronic request for quote
Change the way suppliers forecast (eRFQs)
product demand by making this
information from the final-seller level
available to all levels of the supply
chain. An electronic request for a quote on
goods and services.
Eliminate order batching
Virtual private network (VPN)
Stabilize prices
Eliminate gaming
A private Internet-based
communications environment that is
used by the company, its suppliers,
Automated order entry system and its customers for day-today
activities.
A method using telephone models to
send digital orders to suppliers. Benefits of B2B E-Commerce
Lower procurement admin cost
Electronic data interchange (EDI)
Low-cost access to global suppliers
A form of computer-to-computer Lower inventory investment
communications that enables sharing
business documents. Better product quality
Provides users with information on
services and products and provides an
opportunity for suppliers to advertise. A company receives a fee for
executing a transaction.
Subscription revenue model
Sales revenue model
A Web site that charges a subscription
fee for access to its contents and A means of selling goods, information,
services. or services directly to customers.
Transaction fee model Affiliate revenue model

Companies receive a referral fee for
directing business to an affiliate.
Intranets
Networks that are internal to an
organization.
Extranets
Intranets that are linked to the Internet
so that suppliers and customers can be
included in the system.
Green supply chain management
Focuses on the role of the supply
chain with regard to its impact on the
environment.
Requisition request
Request indicating the need for an
item.
Price and availability
The current price of the item and
whether the quantity is available when
needed.
Purchase order
A legal document committing the
company to buy the goods and providing
details of the purchase.
Incoming inspection
Verifies the quality of incoming goods.
Sourcing strategy
A plan indicating suppliers to be used
when making purchases
Vertical integration
A measure of how much of the supply
chain is actually owned or operated by
the manufacturing company. MKT
Insource
Processes or activities that are
completed in-house.
Outsource
Processes or activities that are
completed by suppliers.
Backward integration
Owning or controlling sources of raw
materials and components.
Forward integration
Owning or controlling the channels of
distribution.
Partnering
A process of developing a long-term
relationship with a supplier based on
mutual trust, shared vision, shared
information, and shared risks.
ISM Principles and Standards of
Ethical Supply Management Conduct
Impropriety.
Conflicts of interest.
Influence.
Responsibilities to your employees
Promote positive supplier and
customer relationships
Sustainability and social responsibility
Confidential and proprietary
information
Reciprocity
Applicable law, regulations, and trade
agreements
 Transportation crossdocking to join the market, usually for long-term
contractual purchasing.
Professional competence

Consolidation of LTL shipments to gain

economies of scale. Value chain management (VCM)

General warehouse
Retail crossdocking Automation of a firms purchasing or
selling processes.

Used for long-term storage.

Sorting product from multiple vendors
onto outbound trucks headed for Exchanges
specific stores.
Distribution warehouse

A marketplace that focuses on spot

Strategies for Leveraging Supply requirements of large firms in a single
Used for short-term storage, Chain Management industry.
consolidation, and product mixing.

Regularly assess supply chain Industry consortia Industry-owned

Postponement network markets that enable buyers to
purchase direct inputs from a limited
set of invited suppliers.

A strategy that shifts production Have a global view of demand

differentiation closer to the consumer
by postponing final configuration. Supply chain velocity

Decide how to get products to your

customers
Crossdocking The speed at which product moves
Improve asset productivity through a pipeline from the
manufacturer to the customer.
Expand visibility
Eliminates the storage and order-picking
functions of a distribution
CHAPTER 5
Know what happens, when it happens

Design to deliver
warehouse.
Total quality management (TQM)

Track performance to allow for

TYPES OF CROSS DOCKING
continuous improvement
An integrated effort designed to
improve quality performance at every
level of the organization.
Manufacturing crossdocking
E-distributors

Customer-defined quality
The receiving and consolidating of
Independently owned net
inbound supplies and materials to
support just-in-time manufacturing.
marketplaces having catalogs
representing thousands of suppliers
The meaning of quality as defined by
and designed for spot purchases.
the customer.

Distributor crossdocking

DEFINITIONS OF QUALITY

The receiving and consolidating of E-purchasing

inbound products from different
vendors into a multi-SKU pallet. Conformance to specifications

Companies that connect on-line MRO

suppliers to businesses that pay fees
How well a product or service meets Fitness for use
the targets and tolerances determined
by its designers.

A definition of quality that evaluates A Japanese term that describes the

how well the product performs for its notion of a company continually
intended use. Appraisal costs

Value for price paid

Costs incurred in the process of

uncovering defects.
Quality defined in terms of product or
service usefulness for the price paid.

Internal failure costs

Support services

Costs associated with discovering

poor product quality before the
Quality defined in terms of the support product reaches the customer.
provided after the product or service is
purchased.

External failure costs

Psychological criteria

Costs associated with quality problems

that occur at the customer site.
A way of defining quality that focuses
on judgmental evaluations of what
constitutes product or service
excellence. Robust design

Most common Quality definition A design that results in a product that

can perform over a wide range of
conditions.

Conformance the degree to which a

product characteristic meets preset
standards Taguchi loss function

Performance
Costs of quality increase as a
quadratic function as conformance
values move away from the target.
Reliability product will function as expected
without failure

CONCEPTS of the TQM PHILOSOPHY

Durability expected operational life of the

product
Customer focus goal is to identify and
meet customer needs

Serviceability how readily a product can be

repaired

Continuous improvement a
philosophy of never-ending
improvement
Prevention costs

Kaizen
Costs incurred in the process of
preventing poor quality from occurring.
striving to be better through learning
and problem solving.
Plandostudyact (PDSA) cycle
A diagram that describes the activities
that need to be performed to
incorporate continuous improvement
into the operation. The specific steps in
the cycle:
(1) Plan (2) Do (3) Study (4) Act
Benchmarking
Studying the business practices of
other companies for purposes of
comparison.
Employee Empowerment seek out,
identify, and correct quality problems
Quality circle
A team of volunteer production
employees and their supervisors who
meet regularly to solve quality
problems.
Use of quality tools ongoing
employee training in the use of quality
of tools
Cause-and-effect diagram
A chart that identifies potential causes
of particular quality problems.
Flowchart
A schematic of the sequence of steps
involved in an operation or process.
Checklist
A list of common defects and the
number of observed occurrences of
these defects.
Process management quality should
Control charts
Charts used to evaluate whether a
process is operating within set
expectations.
Scatter diagrams
Graphs that show how two variables
are related to each other.
Pareto analysis
A technique used to identify quality
problems based on their degree of
importance.
Histogram
A chart that shows the frequency
distribution of observed values of a
variable.
Product design products need to
be designed to meet customer
expectations
Quality function deployment (QFD)
A tool used to translate the
preferences of the customer into
specific technical requirements.
Reliability
The probability that a product, service,
or part will perform as intended.
be built into the process; sources of
quality problems should be identified and
corrected
Quality at the source
The belief that it is best to uncover the
source of quality problems and
eliminate it.
Managing supplier quality quality
concepts must extend to a companys
suppliers
Malcolm Baldrige National Quality
Award
An award given annually to companies
that demonstrate quality excellence
and establish best practice standards
in industry.
Deming Prize
A Japanese award given to companies
to recognize efforts in quality
improvement.
ISO 9000
A set of international quality standards
and a certification demonstrating that
companies have met all the standards
specified. Three new standards-
ISO 9000:2000, Quality Management
Systems Fundamentals and
Standards:
Provides the terminology and
definitions used in the standards.
ISO 9001:2000, Quality Management
Systems Requirements: This is the
standard for the certification of a firms
quality management system.
ISO 9004:2000, Quality Management
Systems Guidelines for
Performance:
Provides guidelines for establishing a
quality management system
CHAPTER 6
Statistical quality control (SQC)
The general category of statistical tools
used to evaluate organizational quality.
Three broad categories:
Descriptive statistics
Statistics used to describe quality
characteristics and relationships.
Statistical process control (SPC)
A statistical tool that involves
inspecting a random sample of the
output from a process and deciding
whether the process is producing
products with characteristics that fall
within a predetermined range.
Acceptance sampling
The process of randomly inspecting a
sample of goods and deciding whether
to accept the entire lot based on the
results.
Common causes of variation
Random causes that cannot be
identified
integration of environmental
responsibility into the overall business
ISO 14000
Operations standards include the
A set of international standards and a measurement of consumption of
natural resources and energy
certification focusing on a companys
environmental responsibility, focus on
three major areas:
Environmental systems standards
measure emissions, effluents, and other
waste systems.
Management systems standards
measure systems development and
Assignable causes of variation Types of Control Charts
Causes that can be identified and Variable a product characteristic that
eliminated. can be measured and has a continuum
of values (e.g., height, weight, or
volume).
Mean (average)
Attribute a product characteristic
that has a discrete value and can be
A statistic that measures the central counted.
tendency of a set of data.
x-bar chart
Range
A control chart used to monitor
The difference between the largest changes in the mean value of a
and smallest observations in a set of process.
data.
Standard deviation
A statistic that measures the amount
of data dispersion around the mean.
Control chart
A graph that shows whether a sample
of data falls within the common or
normal range of variation.
Out of control
The situation in which a plot of data falls
outside preset control limits.
Range (R) chart A broad view of JIT

Acceptable quality level (AQL)

A control chart that monitors changes A philosophy that encompasses the

in the dispersion or variability of a entire organization.
process. The small percentage of defects that
consumers are willing to accept.

P-chart
Lot tolerance percent defective
(LTPD)

A control chart that monitors the

proportion of defects in a sample.
The upper limit of the percentage of
defective items consumers are willing
to tolerate.
C-chart

Consumers risk
A control chart used to monitor the
number of defects per unit.

The chance of accepting a lot that

contains a greater number of defects
Process capability than the LTPD limit.

The ability of a production process to Producers risk

meet or exceed preset specifications.

The chance that a lot containing an

Product specifications acceptable quality level will be rejected

Preset ranges of acceptable quality Average outgoing quality (AOQ)

characteristics.

The expected proportion of defective

Process capability index items that will be passed to the customer
under the sampling plan.

An index used to measure process

capability. CHAPTER 7

Six Sigma quality Just-in-time (JIT) philosophy

A high level of quality associated with Getting the right quantity of goods at
approximately 3.4 defective parts per the right place at the right time.
million.

Waste
Operating characteristic (OC) curve

Anything that does not add value.

A graph that shows the probability or
chance of accepting a lot given various
proportions of defects in the lot.
Defining beliefs of JIT
Broad view of operations, simplicity,
continuous improvement, visibility, and
flexibility.
Types of waste
Material, energy, time, and space.
Broad view of the organization
Tasks and procedures are important
only if they meet the companys overall
goals.
Simplicity
The simpler a solution, the better it is.
Continuous improvement (kaizen)
A philosophy of never-ending
improvement.
Visibility
Production card
A kanban card that authorizes
production of material.
Withdrawal card
A kanban card that authorizes
withdrawal of material.
Small-lot production
Problems must be visible to be
identified and solved.
Respect for people
Flexibility
An element of JIT that considers
human resources as an essential part
of the JIT philosophy.
A company can quickly adapt to the
changing needs of its customers.
Setup cost
JIT system
Cost incurred when setting up equipment
for a production run.
The three elements are just-in-time
manufacturing, total quality
management, and respect for people.
Quality at the source
Three basic elements work together to
complete a JIT system Uncovering the root cause of a quality
problem.
Just-in-time manufacturing
Pull system
The element of JIT that focuses on the
production system to achieve value JIT is based on a pull system rather
added manufacturing. than a push system.
Total quality management (TQM) Kanban card
An integrated effort designed to A card that specifies the exact quantity of
improve quality performance at every product that needs to be produced.
level of the organization.
The ability to produce small quantities Uniform plant loading
of products.
A constant production plan for a facility
Internal setup with a given planning horizon.
Requires the machine to be stopped in Multifunction workers
order to be performed.
Capable of performing more than one
External setup job.
Can be performed while the machine Cell manufacturing
is still running.
Placement of dissimilar machines and
equipment together to produce a
family of products with similar
processing requirements.
Jidoka
Authority given to workers to stop the
production line if a quality problem is
detected.
Poka-yoke
Foolproof devices or mechanisms that
prevent defects from occurring.
Bottom-round management
Consensus management by
committees or teams.
Quality circles
Small teams of employees that volunteer
to solve quality problems.
Role of Production Employees in JIT
Have cross-functional skills
Actively engaged in solving production
and quality problems
Empowered to make production and
quality decisions
Quality is everyones responsibility
Responsible for recording and visually
displaying performance data
Work in teams to solve problems
Decisions made through bottom-round
management
Responsible for preventive Greater flexibility
maintenance
Implementing JIT
Single-source suppliers
Make quality improvements.
Reorganize workplace
Suppliers that supply an entire family
Reduce setup times
of parts for one manufacturer.
Reduce lot sizes and lead times
Implement layout changes
Key Elements of JIT Supplier
Relationship
Switch to pull production
Suppliers viewed as external factory.
Develop relationship with suppliers
Use of single-source suppliers.
Examples of JIT concepts seen in
Long-term supplier relationships
service firms
developed.
Improved quality
Suppliers locate near customer.
Uniform facility loading
Stable delivery schedules.
Use of multifunction workers
Cost and information sharing.
Reductions in cycle time
Benefits of JIT
Minimizing setup times and parallel
Reduction in inventory
processing
Workplace organization
Improved quality
CHAPTER 8
Reduced space requirements
Forecasting
Shorter lead times
Predicting future events.
Lower production costs
Features Common to all Forecasting
Models
Increased productivity
Forecasts are rarely perfect
Increased machine utilization
Forecasts are more accurate for
groups or families of items rather
than for individual items
Forecasts are more accurate for
shorter than longer than horizons
Steps in the Forecasting Process
Decide what to forecast
Evaluate and analyze appropriate data
Select and test the forecasting
model
Generate the forecast
Monitor forecast accuracy
Qualitative forecasting methods
Forecast is made subjectively by the
forecaster.
Quantitative forecasting methods
Forecast is based on mathematical
modeling.
Types of Forecasting Methods
**QUALITATIVE METHODS**
Executive opinion
Forecasting method in which a group
of managers collectively develop a
forecast.
Market research
Approach to forecasting that relies on
surveys and interviews to determine
customer preferences.
Delphi method
Approach to forecasting in which a
forecast is the product of a consensus
among a group of experts.
Qualitative Forecasting method
**QUANTITATIVE METHODS**
Time series models based on the
assumption that a forecast can be
generated from the information
contained in a time series of data.
Time series a series of observations
taken over time.
Causal models based on the
assumption that the variable being
forecast is related to other variables in
the environment.
TIME SERIES MODELS
Types of data patterns:
Level or horizontal data values
fluctuate around a constant mean
Trend data exhibit increasing or
decreasing values over time
Seasonality regularly repeats itself
and is constant in length
Cycles data patterns created by
economic fluctuations
Random variation
Unexplained variation that cannot be
predicted.
Quantitative Forecasting Models

Type
Description

Strength
Weaknesses

Time Series Models

Nave
Uses last periods actual value

Simple and easy to

Only good if data change little

as a forecast
use
from period to period

Simple mean
Uses an average of past data

Good for level pattern

Requires carrying a lot of

as a forecast

data

Simple
A forecasting method in which

Only good for level

Important to select the proper

moving
only n of the most recent

pattern
moving average

average
observations are averaged
Weighted
A forecasting method where n

Good for level pattern;

Selection of weights requires

moving
of the most recent observations

allows placing different

good judgment

average
may have different weights

weights on past

demands
Choice of alpha is critical

Exponential
A weighted average procedure

Provides excellent

smoothing
with weights declining

forecast results for

exponentially as data become

short-to medium-length

older
forecasts.

Trend-adjusted
An exponential smoothing

Provides good results

Should only be used for data

exponential
model with separate equations

for trend data

with trend

smoothing
for forecasting the level and

trend
Linear trend
Technique uses the least-

Easy to use and

Data should display a clear

line
squares method to fit a straight

understand
trend over time

line to past data over time

Seasonal
Computes the percentage

Simple and logical

Make sure seasonality is

indexes
amount by which data for each

procedure for
actually present

season are above or below the

computing seasonality.

mean.

Causal (Associative) Models

Linear
Uses the least-squares

Easy to understand;
Make sure a linear

regression
method to model a linear

provides good forecast

relationship is present

relationship between two

accuracy

variables.
Multiple
Similar to linear regression, but

A powerful tool in
Significantly increases data

regression
models the relationship of

forecasting when
and computational

multiple variables with the

multiple variables are

requirements

variable being forecast.

being considered.

MEASURING FORECAST ACCURACY

Forecast error

Factors that influencing selection of a

4. Is it possible to implement new

Difference between forecast and actual

forecasting model

methods?

value for a given period.

5. Do you require interactive or repetitive

1. Amount and type of available data

forecasting?

Mean absolute deviation (MAD)

2.
Degree of accuracy required
6. Do you have a very large data sets?

Measure of forecast error that computes

3. Length of forecast horizon
7. Is there any local support?

error as the average of the sum of the

4.
Data patterns present
8. Does the package give the right

absolute errors.

Forecasting software packages

answers?
Mean squared error (MSE)

1.
Spreadsheets

Measure of forecast error that computes

2.
Statistical packages

error as the average of the squared error.

3.
Specialty forecasting packages

Forecast bias

Guidelines in selecting forecasting software

A persistent tendency for a forecast to be

1. Does the package have the facilities

over or under the actual value of the data.

you want?
2. What platform is the package

Tracking signal

available for?

Tool used to monitor the quality of a

3. How easy is the package to learn and

forecast.

use?

Collaborative planning, forecasting, Resolve/collaborate on exceptions to sales forecasts

and replenishment (CPFR) nine-step
process

Create order forecast

Establish collaborative relationships

Create a joint business plan Identify exceptions for order forecast

Create a sales forecast Resolve/collaborate on exceptions to order forecast

Generate order

Identify exceptions for sales

forecasts
CHAPTER 9 A condition in which the cost of each additional unit made increases.

Capacity Focused factories

The maximum output rate that can be Facilities that are small, specialized, and focused on a narrow set of objectives.
achieved by a facility.

Three-step procedure for making capacity planning decisions

Capacity planning
Identify capacity requirements

The process of establishing the output

rate that can be achieved by a facility. Capacity cushion additional capacity added to regular capacity requirements to provide
greater flexibility.

Two (2) Measures of Capacity

Design capacity the maximum

output rate that can be achieved by a
facility under ideal conditions.

Effective capacity the maximum

output rate that can be sustained
under normal conditions.

Capacity utilization

Percentage measure of how well

available capacity is being used.

Best operating level

The volume of output that results in

the lowest average unit cost.

Economies of scale

A condition in which the average cost

of a unit produced is reduced as

the amount of output is increased.

Diseconomies of scale
Develop capacity alternatives Community considerations

Site considerations

(1) Do nothing, (2) Expand large now, Quality-of-life issues

and (3) Expand small now, with option
Other considerations
to add later

Globalization
Evaluate capacity alternatives

The process of locating facilities around the world.

Decision tree

Procedures for Evaluating Location Alternatives

Modeling tool used to evaluate
independent decisions that must be
made in sequence. It contains the
following information:
Factor rating

Decision points represented by

A procedure that can be used to evaluate multiple alternative locations based on a
squares, called nodes
number of selected factors.

Decision alternatives represented by

Loaddistance model
branches or arrows leaving a
decision point

A procedure for evaluating location alternatives based on distance.

Chance events events that could affect

the value of a decision

Outcomes Rectilinear distance

Expected value (EV) The shortest distance between two points measured by using only north south and
eastwest movements.

A weighted average of chance events,

where each chance event is given a Break-even analysis
probability of occurrence.

Technique used to compute the amount of goods that must be sold just to cover costs.
Location analysis

Techniques for determining location

decisions.

Factors Affecting Location Decisions

Proximity to sources of supply

Proximity to customers

Proximity to Source of Labor