Operations Strategy

Operations Strategy


If different departments of a company work toward different Goals, individual efforts are wasted. Top Managers are responsible for setting Overall Goals for everyone in the company. The Corporate Strategy of a company states how will the company achieve its Overall Goals and objectives.

Operations Strategy
Through strategic planning, managers establish the direction for Company.

Operations Strategy
At the same time the corporate strategy is formulated, each functional area develops its own functional strategy.

Operations Strategy


Each function in a business has a functional strategy. A functional strategy details how a functional area will contribute to the achievement of the firm s corporate goals and objectives.

Operations Strategy


The operations strategy is a statement of how operations function will contribute to the achievement of corporate goals. Operations function is responsible for producing goods. Therefore, it has a major role in carrying out much of the business strategy.

Operations Strategy
Operations function has an important influence on the COST QUALITY AVAILABILITY


of the company s products.

Operations Strategy

Therefore, Operation s strengths and weaknesses have a great impact on success of company s overall strategy.

Develop an Operations Strategy



-What products can be produced in which facility and how much? -Which products are going to be produced internally, and which ones will be purchased? -How many facilities are needed?

Develop an Operations Strategy



-Where will the facilities be located, with how much capacity? -What type of processes will be utilized to produce products? -How much flexibility is required from each process and each product?

Develop an Operations Strategy



-What level of technology (automation, etc.) will be used? -Are the resources going to be owned or bought? -How will the products be distributed to the end customers?

Develop an Operations Strategy



 

-Which suppliers will provide materials, and how much? -What kind of human skills are needed? -And so on.

Develop an Operations Strategy



Operations decisions given regarding these issues must be consistent with the firm s corporate strategy. These decisions made by operations managers are going to be viewed in detail throughout this course.

DEMAND MANAGEMENT


The first step in operations management is to know what customers want, and how much do they want. A part of a firm s strategic planning involves identifying current and potential demands of its customers.

DEMAND MANAGEMENT
What should be produced? How much should be produced? Where and When should be produced? ARE the questions of Demand Management.

DEMAND MANAGEMENT


Demand management is 1) To recognize the sources of demand for a firm s products, 2) To forecast demand, 3) To determine how the firm will satisfy that demand.

DEMAND MANAGEMENT


A Company s Marketing function provides market-related information and demand forecast TO THE OPERATIONS FUNCTION. AND THEN, Operations function makes sure that the demanded products are provided when they are needed.

DEMAND MANAGEMENT


Although this exchange of Demand Information between Marketing and Operations seems straightforward, It is often complicated by inconsistent OR inaccurate data flowing in both directions.

DEMAND MANAGEMENT
 

 

This confusion results from: - Large number of parts and finished products, - Multiple sources of demand, AND - Differences in the timing of demand by Marketing and Operations.

DEMAND MANAGEMENT


In addition, there are usually additional demands for end-products, resources, and materials. For example, unplanned shortages OR after sales service parts CAN BE reasons for additional demand. (ex: car spare parts) For these reasons, It is generally difficult to predict future demands.

FORECASTING DEMAND


 

A forecast is an Inference of what is likely to happen in future. Forecast can be wrong. Businesses may use Forecasts in several subjects.

FORECASTING DEMAND


Some of the major forecasting areas are (1) Economic Forecasting, (2) Technological Forecasting, and (3) Demand Forecasting. Economic Forecast is a prediction of what general business conditions will be in the future.

FORECASTING DEMAND


Some examples of economic forecasting are: Inflation rates, Gross National Product, Personal Income, Tax revenues, Level of employment, and so on. Economic forecast is usually made by Government Agencies, Banks, and Econometric Forecasting Services.

FORECASTING DEMAND


Another application of forecasting is Technological Forecasting. Technological forecast predicts the probability and significance of possible future developments in technology.

FORECASTING DEMAND


What technology will the firm s competitors incorporate into their products and processes? Are there any technological advances with which the firm can create a competitive advantage?

FORECASTING DEMAND


For example, development of electric cars in U.S. seems like a challenging shift for car manufacturers. But what time and how will they be in the market is a concern of technological forecasting. Technological forecast can help answering these questions.

FORECASTING DEMAND


The result of Economic Forecast and Technological Forecast Are combined with Previous Demand Data to develop Demand Forecast. Demand Forecast predicts the quantity and timing of demand for a firm s products.

Factors Affecting Demand

Factors Affecting Demand



Status of the General Economy is about the business life that may go through some phases of Inflation, Recession, or Depression. These specific conditions affect all the companies in a country in general.

Factors Affecting Demand



The concept of Product Life Cycle, on the other hand, addresses the pattern of changes in Sales, Product Standardization, and Competitive Pressures exhibited by most of the products in the marketplace.

Factors Affecting Demand

It includes four major stages: Introduction Growth Maturity, AND Decline

Factors Affecting Demand



The changes in sales of products usually follow a similar shape for many products: This shape is called Product Life Cycle Curve.

Factors Affecting Demand

Factors Affecting Demand

There are several other factors that affect demand and the company may have Control:

Forecast Horizon
Forecast Horizon is the number of future periods that the forecasting makes predictions.

Forecast Horizon


Based on the length of the horizon, there are three types of forecasting: 1) Long Range Forecasting (which concerns predictions for over 5 years in future) 2) Intermediate Forecasting (which is usually for predictions of up to 2 years), and 3) Short Range Forecasting (which predicts between 1 day and 1 year horizons).

Forecast Horizon

Forecast Horizon


An Aggregate Production Plan is a general schedule that specifies the quantity of each product family (or product group) that will be produced in each period. The Aggregate Plan is converted to Detailed Job Scheduling and Material Purchasing Requirements in the short range planning.

Forecast Horizon


It is generally true that SHORT RANGE forecast results are More Accurate than long-range forecast results. In other words, A forecast for next month should be more accurate than a forecast for the same month Next Year. All firms want to have the most accurate forecast.

Forecast Horizon
The more accurate the forecast, the more efficient and effective a firm can use its resources to satisfy demand.

Forecasting Methods
A forecast can be developed through either a Subjective approach, OR an Objective approach.

Forecasting Methods


Subjective approaches are qualitative in nature AND they are usually based on the opinions of people (that is why they are subjective). Objective approaches involve Quantitative methods and Mathematical formulations. (They cab also be referred as Statistical forecasting)

Subjective (Qualitative) Forecasting Methods

There are four major qualitative forecasting techniques:

1) Executive Committee Consensus



Here, a forecast is developed by asking a group of Knowledgeable Executives To discuss their opinions Regarding the future values of the items Being forecasted. This method provides forecast in a relatively short time.

1) Executive Committee Consensus



But, Presence of a Powerful member in the group May prevent the committee from achieving a consensus. In addition, it requires the valuable time of highly paid executives.

1) Executive Committee Consensus



This method is mostly used for long and medium range forecasting purposes.

2) Delphi Method


The Delphi Method also involves a Group of Experts who eventually develop a consensus. They usually make long range forecasting for future technologies OR future sales of a new product.

2) Delphi Method


The difference here is that, In this method, the panel members are located in different places AND do not know each other. This reduces the influence of powerful executives.

2) Delphi Method


There is one coordinator who knows all the participants, And all participants only contact with the coordinator. First, Each member completes a questionnaire and returns it to the coordinator.

2) Delphi Method


The results are summarized by the coordinator and a new questionnaire is developed based on these results. This summary report is sent back to the participants.

2) Delphi Method


The participants review this report AND they either defend OR modify their original views. The process is repeated until a consensus is reached. The quality of the consensus and final decision is largely dependent on the coordinator.

3) Sales Force Composite

Since Sales people in a company directly deal with customers, They are a good source of information regarding customers future intentions to buy a product.

3) Sales Force Composite



They can help a firm obtain a forecast quickly and inexpensively. In this technique, each sales representative is asked to estimate sales in his/her territory.

3) Sales Force Composite



These individual estimates are then combined together by Upper Managers to develop Regional Sales forecast. This method is more suitable for forecasting sales volume of a new product. But still it is subject to opinion based terms.

4) Customer Surveys


By using a customer survey, a Firm can base its demand forecast on the customers purchasing plans. This information can be directly obtained from the customers themselves.

4) Customer Surveys


This can be done through personal, telephone Or mail surveys. Customer survey method is also an excellent opportunity for understanding the thinking behind customers when they are purchasing and selecting a product.

4) Customer Surveys


However, asking questions may annoy some customers. And, this method requires considerable time and large staff for surveys.

Quantitative Forecasting Methods



Quantitative forecasting methods employ mathematical models and historical data to predict demand. The first step in developing a quantitative forecast model is to Collect sufficient data on Past levels of demand.

Quantitative Forecasting Methods



For example, data obtained for at least 2 to 3 years of past ARE desirable. In addition, the effects of unusual or irregular events That caused a change in demand Should be removed from the data (such as natural disasters, or Olympics).

Quantitative Forecasting Methods



There are two major types of quantitative forecast models:

1) Time Series Models, AND 2) Causal Models

Quantitative Forecasting Methods



The main difference between the two models is that: In time series modeling technique, The only independent variable is the time.

Quantitative Forecasting Methods

In contrast, Causal Models may employ some factors other than Time, When predicting forecast values.

Time Series Modeling



Time Series modeling involves plotting demand data on a time scale. A time series is a sequence of chronologically arranged observations taken at regular intervals for a particular variable.

Time Series Modeling



Daily, weekly, monthly sales data are examples for time series. Time series are frequently analyzed to identify any 1) Trends, or 2) Seasonal Factors, or 3) Cyclical Factors that influence the demand data.

Time Series Modeling



Trend, is a gradual upward or downward movement of data over time. Trends reflect changes in population levels, technology, and living standards. Seasonality, is variation that repeats itself at fixed intervals. It can be as long as a Year, OR as short as a few hours.

Time Series Modeling



Seasonal variations can correspond to the Seasons of the Year, Holidays, OR other special periods. For example, They can be caused by weather conditions (e.g., sales of air conditions).

Time Series Modeling



Cyclical variation has a duration of at least one year; The duration varies from cycle to cycle. Therefore, Cyclical variation requires many years of data to determine its repetitiveness.

Time Series Modeling



For example, The ups and downs of general business economy Represent a form of cyclical variation. Finally, Random variations are variations in demand that cannot be explained by Trends, Seasonality, or Cyclicality.

Time Series Modeling

An unpredictable event such as a war, a strike, or an earthquake CAN cause large Random variations.

Types of Time Series Modeling



There are two major types of time series models:

1- Smoothing Models 2- Time Series Decomposition Models

1- Smoothing Models
- Moving Average (Simple & Weighted) - Single Exponential Smoothing - Double Exponential Smoothing

2- Time Series Decomposition Models

- Additive Models - Multiplicative Models

Smoothing Models


When many short-term demand forecasts are required, developing a Complex Forecasting model for each item may be Too Expensive and timeconsuming. (for example, a large number of lowcost inventory items)

Smoothing Models


In such cases, Simple Smoothing models such as Moving Averages and Exponential Smoothing often provide quick and inexpensive forecasting.

Simple Moving Average



A simple moving average calculates the average demand for the last n periods. The calculated average value is the forecast for the next time period.

Simple Moving Average



Since all values in the time series are combined in an average, individual Highs and Lows offset each other. And, This reduces the likelihood of random variations.

EXAMPLE

EXAMPLE


Actual monthly demands of a product are given above. A Two-month (n=2) and Five-month (n=5) moving average were used to predict monthly demand for this product.

EXAMPLE


For example, for n=2, The forecast value for March in Year 5 is calculated as:

FMar = (920 + 940) / 2 = 930

EXAMPLE


Similarly, for n=5, The forecast value for March in Year 5 is calculated as:

FMar = (920 + 940 + 1020 + 1030 + 1040) / 5 = 990

EXAMPLE


At the end of March, we can forecast demand for April (with the new actual data).What value should be used for n? In general, the higher the level of n, the less responsive the average is to the recent changes in demand.

EXAMPLE


Therefore, it appears that: If the pattern of data is changing too much, it is best to use a small value for n. However, if n is too small, the average could be too responsive to variations in demand that are random, but not true.

EXAMPLE


Then, If the pattern is relatively stable OR If there is substantial random variation, we should increase the value of n.