Module 8 Part 1

• Risk


  State of uncertainty or exposure to the consequences of uncertainty from nature, economic system, & human nature where some of the possibilities involve a loss, catastrophe, or other undesirable outcome
• Uncertainty


  Existence of more than one possibility
• All production of new or existing products face various risks hence, careful planning is very necessary
• The 1st step in planning the operation of a production system is determining an accurate forecast of the demand for items to be produced
• This forecast is then used as a basis to specify the control policies for the inventory system, to load the machines, to determine the machinery and materials handling requirements, and to determine the work-force level during the production period
• There is no guarantee of success
• General Risks


  • Risks associated with product failure
• Specific Risks


  • Physical property – hazards on property
  • Administration – preventive action
  • Labor force – health, morale, and safety
  • Materials – price, supply, deterioration
  • Technology – machines, methods, materials
  • Market – sales, demand
• Forecasting


  Process of predicting future trends, events, or conditions from known facts
• Forecasting is very important in planning and preparing for expected changes in business
• Underlying basis of all business decisions

  • Accounting
  • Finance
  • Human Resources
  • Marketing
  • MIS
  • Operations
  • Product/ Service Design
• Types of Forecasting (by time horizon)

  • Short-Range Forecast (up to 1 year, usually less than 3 months)
  • Medium-Range Forecast (3 months to 3 years)
  • Long-Range Forecast (3+ years)
• Short-Range Forecast


  Usually employs different methodologies than longer-term forecasting, tend to be more accurate than longer-term forecasts
• Medium-Range Forecast


  Deals with more comprehensive issues and support management decisions regarding planning and products, plants and processes
• Long-Range Forecast


  Deals with more comprehensive issues and support management decisions regarding planning and products, plants and processes
• Types of Forecasting (by use, function, or application)

  • Economical Forecasts
  • Resource Forecasts
  • D/S/R Forecasts
  • Technological Forecasts
• Economical Forecasts


  Projection of the level of economic activity for a particular time period, address business cycle (e.g., inflation rate, money supply, Interest rates, CPI, etc.)
• Resource Forecasts


  Forecasting of important resources that go into the business such as personnel, raw materials, piece parts, etc.
• D/S/R Forecasts


  Predict sales of existing product, basis of the company's all other forecasts, very important since firm's existence depends on a continued, healthy demand for its product or service
• Technological Forecasts


  Predict rate of technological progress, predict acceptance of new product, uses Delphi method and brainstorming
• 7 Steps in Forecasting

  • Determine the use of the forecast
  • Select the items to be forecasted
  • Determine the time horizon of the forecast
  • Select the forecasting model(s)
  • Gather the data
  • Make the forecast
  • Validate and implement results
• There is a very nil chance of achieving a set of perfect forecasts (Statistically, at a very high level of confidence, forecasts are "never perfect")
• Assumption is that there is some underlying stability in the system
• Both product family and aggregated product forecasts are more accurate than individual product forecasts
• Forecasting Truisms

  • Forecasts are always wrong
  • Aggregated Forecasts are more accurate
  • Shorter horizon forecasts are more accurate
• Qualitative Forecasting Methods


  Used when situation is vague & little data exist (i.e. new products, or new technologies), subjective and judgmental; it involves intuition, experience, estimates, and opinions
• Quantitative Forecasting Methods


  Used when situation is 'stable' & historical data exist (i.e. existing products, current technology), involves mathematical techniques that rely on historical data (time series) and/or causal variables (causal/associative)
• Qualitative Forecasting Methods

  • Historical Analogy
  • Market Research
  • Panel Consensus
  • Jury of executive opinion
  • Delphi method
  • Sales force composite (Grass roots)
• Historical Analogy


  Specific to new products; ties what is being forecast to a similar items
• Sales force composite (Grass roots)


  Estimates from individual salespersons are reviewed for reasonableness, then aggregated, combination of predictions or opinions are drawn from experienced sales personnel and used to forecast sales for a designated time period
• Market Research


  Seeks input from customers or potential customers through use of surveys, interviews, and etc. regarding the purchasing plan and compare to the hypothesis about the market
• Panel Consensus


  Assumes that discussion by a group produces better forecasts than any one individual, participants (executives, salespeople, customers) in free open exchange at meetings
• Jury of executive opinion


  Involves small group of high-level managers, group estimates demand by working together, combines managerial experience with statistical models
• Delphi method


  A technique for developing a consensus of expert opinion, appropriate for broad, long-range issues like future technological breakthroughs, economic conditions, etc.
• Simulation

  Dynamic model usually computer-based, that allow the forecaster to make assumptions about the internal variables & external environment.
• Focus Forecasting

  Uses several rules that seem logical and easy to understand to

  project past data into the future.
• Two Components of Focus Forecasting

  • Several simple forecasting rules
  • Computer simulation of these past data.
• Web-based Forecasting

  Applicable to any industry but are more used on food, apparel, and general merchandise industries
• Collaborative Planning, Forecasting, and Replenishment (CPFR)

  • used to coordinate demand forecasting, production and purchase planning, and inventory replenishment between supply chain trading partners.