Operations Management PDF

Operations Management: Sustainability and Supply Chain Management Thirteenth Edition, Global Edition Chapter 1 Operations and Productivity Copyright © 2020 Pearson Education Ltd. All Rights Reserved.  Outline (1 of 2)...

Operations Management: Sustainability and Supply Chain Management Thirteenth Edition, Global Edition Chapter 1 Operations and Productivity Copyright © 2020 Pearson Education Ltd. All Rights Reserved.  Outline (1 of 2) Global Company Profile: Hard Rock Cafe What Is Operations Management? Organizing to Produce Goods and Services The Supply Chain Why Study OM? What Operations Managers Do Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Outline (2 of 2) The Heritage of Operations Management Operations for Goods and Services The Productivity Challenge Current Challenges in Operations Management Ethics, Social Responsibility, and Sustainability Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Operations Management at Hard Rock Cafe First opened in 1971 – Now - 23 hotels and 168 restaurants in over 68 countries Rock music memorabilia Creates value in the form of good food and entertainment 3,500+ custom meals per day in Orlando How does an item get on the menu? Role of the Operations Manager Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Learning Objectives (1 of 2) When you complete this chapter you should be able to: 1.1 Define operations management 1.2 Identify the 10 strategic decisions of operations management 1.3 Identify career opportunities in operations management 1.4 Explain the distinction between goods and services Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Learning Objectives (2 of 2) When you complete this chapter you should be able to: 1.5 Explain the difference between production and productivity 1.6 Compute single-factor productivity 1.7 Compute multifactor productivity 1.8 Identify the critical variables in enhancing productivity Copyright © 2020 Pearson Education Ltd. All Rights Reserved. What Is Operations Management? Production is the creation of goods and services Operations management (OM) is the set of activities that creates value in the form of goods and services by transforming inputs into outputs Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Organizing to Produce Goods and Services Essential functions: 1. Marketing – generates demand 2. Production/operations – creates the product 3. Finance/accounting – tracks how well the organization is doing, pays bills, collects the money Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Organization Charts (1 of 3) Figure 1.1 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Organization Charts (2 of 3) Figure 1.1 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Organization Charts (3 of 3) Figure 1.1 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. The Supply Chain A global network of organizations and activities that supplies a firm with goods and services Members of the supply chain collaborate to achieve high levels of customer satisfaction, efficiency, and competitive advantage Figure 1.2 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Why Study OM? 1. OM is one of three major functions of any organization; we want to study how people organize themselves for productive enterprise 2. We want (and need) to know how goods and services are produced 3. We want to understand what operations managers do 4. OM is such a costly part of an organization Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Options for Increasing Contribution Table 1.1 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. What Operations Managers Do Basic Management Functions Planning Organizing Staffing Leading Controlling Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Ten Strategic Decisions Table 1.2 DECISION CHAPTER(S) 1. Design of goods and services 5, Supplement 5 2. Managing quality 6, Supplement 6 3. Process and capacity strategy 7, Supplement 7 4. Location strategy 8 5. Layout strategy 9 6. Human resources and job design 10 7. Supply-chain management 11, Supplement 11 8. Inventory management 12, 14, 16 9. Scheduling 13, 15 10. Maintenance 17 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. The Strategic Decisions (1 of 5) 1. Design of goods and services – Defines what is required of operations – Product design determines cost, quality, sustainability and human resources 2. Managing quality – Determine the customer’s quality expectations – Establish policies and procedures to identify and achieve that quality Copyright © 2020 Pearson Education Ltd. All Rights Reserved. The Strategic Decisions (2 of 5) 3. Process and capacity design – How is a good or service produced? – Commits management to specific technology, quality, human resources, and investments 4. Location strategy – Nearness to customers, suppliers, and talent – Considering costs, infrastructure, logistics, and government Copyright © 2020 Pearson Education Ltd. All Rights Reserved. The Strategic Decisions (3 of 5) 5. Layout strategy – Integrate capacity needs, personnel levels, technology, and inventory – Determine the efficient flow of materials, people, and information 6. Human resources and job design – Recruit, motivate, and retain personnel with the required talent and skills – Integral and expensive part of the total system design Copyright © 2020 Pearson Education Ltd. All Rights Reserved. The Strategic Decisions (4 of 5) 7. Supply chain management – Integrate supply chain into the firm’s strategy – Determine what is to be purchased, from whom, and under what conditions 8. Inventory management – Inventory ordering and holding decisions – Optimize considering customer satisfaction, supplier capability, and production schedules Copyright © 2020 Pearson Education Ltd. All Rights Reserved.  The Strategic Decisions (5 of 5) 9. Scheduling – Determine and implement intermediate- and short- term schedules – Utilize personnel and facilities while meeting customer demands 10. Maintenance – Consider facility capacity, production demands, and personnel – Maintain a reliable and stable process Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Where are the OM Jobs? Introducing new technologies and methods Improving facility location and space utilization Defining and implementing operations strategy Improving response time Developing people and teams Improving customer service Managing quality Managing and controlling inventory Enhancing productivity Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Opportunities Figure 1.3 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Certifications APICS, the Association for Operations Management American Society for Quality (ASQ) Institute for Supply Management (ISM) Project Management Institute (PMI) Council of Supply Chain Management Professionals Chartered Institute of Procurement and Supply (CIPS) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Significant Events in OM Figure 1.4 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Eli Whitney Born 1765; died 1825 In 1798, received government contract to make 10,000 muskets Showed that machine tools could make standardized parts to exact specifications – Musket parts could be used in any musket Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Frederick W. Taylor Born 1856; died 1915 Known as ‘father of scientific management’ In 1881, as chief engineer for Midvale Steel, studied how tasks were done – Began first motion and time studies Created efficiency principles Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Taylor’s Principles Management Should Take More Responsibility for: 1. Matching employees to right job 2. Providing the proper training 3. Providing proper work methods and tools 4. Establishing legitimate incentives for work to be accomplished Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Frank and Lillian Gilbreth Frank (1868-1924); Lillian (1878-1972) Husband and wife engineering team Further developed work measurement methods Applied efficiency methods to their home and 12 children! Book and Movie: “Cheaper by the Dozen,” “Bells on Their Toes” Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Henry Ford Born 1863; died 1947 In 1903, created Ford Motor Company In 1913, first used moving assembly line to make Model T – Unfinished product moved by conveyor past work station Paid workers very well for 1911 ($5/day!) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. W. Edwards Deming Born 1900; died 1993 Engineer and physicist Credited with teaching Japan quality control methods in post-WW2 Used statistics to analyze process His methods involve workers in decisions Copyright © 2020 Pearson Education Ltd. All Rights Reserved. OM Relies on Contributions From Industrial engineering Statistics Management Analytics Economics Physical sciences Information technology Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Operations for Goods and Services (1 of 2) Services – Economic activities that typically produce an intangible product (such as education, entertainment, lodging, government, financial, and health services) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Operations for Goods and Services (2 of 2) Manufacturers produce tangible product, services often intangible Operations activities are performed in both manufacturing and services Distinction not always clear Few pure services Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Differences Between Goods and Services Table 1.3 CHARACTERISTICS OF SERVICES CHARACTERISTICS OF GOODS Intangible: Ride in an airline seat Tangible: The seat itself Produced and consumed simultaneously: Beauty salon Product can usually be kept in inventory produces a haircut that is consumed as it is produced (beauty care products) Unique: Your investments and medical care are unique Similar products produced (iPods) High customer interaction: Often what the customer is Limited customer involvement in production paying for (consulting, education) Inconsistent product definition: Auto Insurance Product standardized (iPhone) changes with age and type of car Often knowledge based: Legal, education, and medical Standard tangible product tends to make services are hard to automate automation feasible Services dispersed: Service may occur at retail store, Product typically produced at a fixed facility local office, house call, or via Internet Quality may be hard to evaluate: Consulting, education, Many aspects of quality for tangible products and medical services are easy to evaluate (strength of a bolt) Reselling is unusual: Musical concert or medical care Product often has some residual value Copyright © 2020 Pearson Education Ltd. All Rights Reserved. U.S. Agriculture, Manufacturing, and Service Employment Figure 1.5 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Organizations in Each Sector Table 1.4 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Service Pay Perception that services are low-paying 42% of service workers receive above average wages 14 of 33 service industries pay below average Retail trade pays only 61% of national average Overall average wage is 96% of the average Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Productivity Challenge Productivity is the ratio of outputs (goods and services) divided by the inputs (resources such as labor and capital) The objective is to improve productivity! Important Note! Production is a measure of output only and not a measure of efficiency Copyright © 2020 Pearson Education Ltd. All Rights Reserved. The Economic System Figure 1.6 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Improving Productivity at Starbucks (1 of 2) A team of 10 analysts continually look for ways to shave time. Some improvements: Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Improving Productivity at Starbucks (2 of 2) A team of 10 analysts continually look for ways to shave time. Some improvements: Operations improvements have helped Starbucks increase yearly revenue per outlet by $250,000 to $1,000,000. Productivity has improved by 27%, or about 4.5% per year. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Productivity Measure of process improvement Represents output relative to input Only through productivity increases can our standard of living improve Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Productivity Calculations Labor Productivity One resource input ⇨ single-factor productivity Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Multi-Factor Productivity Also known as total factor productivity Output and inputs are often expressed in dollars Multiple resource inputs ⇨ multi-factor productivity Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Collins Title Productivity (1 of 4) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Collins Title Productivity (2 of 4) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Collins Title Productivity (3 of 4) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Collins Title Productivity (4 of 4) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Measurement Problems Quality may change while the quantity of inputs and outputs remains constant External elements may cause an increase or decrease in productivity Precise units of measure may be lacking Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Productivity Variables 1. Labor - contributes about 10% of the annual increase 2. Capital - contributes about 38% of the annual increase 3. Management - contributes about 52% of the annual increase Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Key Variables for Improved Labor Productivity 1. Basic education appropriate for the labor force 2. Diet of the labor force 3. Social overhead that makes labor available – Challenge is in maintaining and enhancing skills in the midst of rapidly changing technology and knowledge Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Labor Skills About half of the 17-year-olds in the U.S. cannot correctly answer questions of this type Figure 1.7 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Capital Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Management Ensures labor and capital are effectively used to increase productivity – Use of knowledge – Application of technologies Knowledge societies – Labor has migrated from manual work to technical and information-processing tasks More effective use of technology, knowledge, and capital Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Productivity in the Service Sector Productivity improvement in services is difficult because: 1. Typically labor intensive 2. Frequently focused on unique individual attributes or desires 3. Often an intellectual task performed by professionals 4. Often difficult to mechanize and automate 5. Often difficult to evaluate for quality Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Productivity at Taco Bell (1 of 2) Improvements: Revised the menu Designed meals for easy preparation Shifted some preparation to suppliers Efficient layout and automation Training and employee empowerment New water and energy saving grills Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Productivity at Taco Bell (2 of 2) Results: Preparation time cut to 8 seconds Management span of control increased from 5 to 30 In-store labor cut by 15 hours/day Floor space reduced by more than 50% Stores average 164 seconds/customer from drive-up to pull-out Water- and energy-savings grills conserve 300 million gallons of water and 200 million Kw H of electricity each year Green-inspired cooking method saves 5,800 restaurants $17 million per year Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Current Challenges in OM Globalization Supply-chain partnering Sustainability Rapid product development Mass customization Lean operations Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Ethics, Social Responsibility, and Sustainability (1 of 2) Challenges facing operations managers: Develop and produce safe, high-quality green products Train, retrain, and motivate employees in a safe workplace Honor stakeholder commitments Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Ethics, Social Responsibility, and Sustainability (2 of 2) Stakeholders Those with a vested interest in an organization, including customers, distributors, suppliers, owners, lenders, employees, and community members. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Copyright This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Operations Management: Sustainability and Supply Chain Management Thirteenth Edition, Global Edition Chapter 2 Operations Strategy in a Global Environment Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Outline (1 of 2) Global Company Profile: Boeing A Global View of Operations and Supply Chains Developing Missions and Strategies Achieving Competitive Advantage Through Operations Issues in Operations Strategy Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Outline (2 of 2) Strategy Development and Implementation Strategic Planning, Core Competencies, and Outsourcing Global Operations Strategy Options Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Boeing’s Global Supply-Chain Strategy (1 of 3) Some of the International Suppliers of Boeing 787 Components HEADQUARTERS SUPPLIER COMPONENT COUNTRY Latecoere France Passenger doors Labinel France Wiring Dassault France Design and PLM software Messier-Bugatti France Electric brakes Electrical power conversion Thales France system Messier-Dowty France Landing gear structure Diehl Germany Interior lighting Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Boeing’s Global Supply-Chain Strategy (2 of 3) Some of the International Suppliers of Boeing 787 Components HEADQUARTERS SUPPLIER COMPONENT COUNTRY Cobham UK Fuel pumps and valves Rolls-Royce UK Engines Smiths Aerospace UK Central computer system BAE Systems UK Electronics Alenia Aeronautica Italy Upper center fuselage Carbon fiber for wing and Toray Industries Japan tail units Fuji Heavy Industries Japan Center wing box Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Boeing’s Global Supply-Chain Strategy (3 of 3) Some of the International Suppliers of Boeing 787 Components HEADQUARTERS SUPPLIER COMPONENT COUNTRY Kawasaki Heavy Forward fuselage, fixed Japan Industries sections of wing Teijin Seiki Japan Hydraulic actuators Mitsubishi Heavy Japan Wing box Industries Chengdu Aircraft China Rudder Hafei Aviation China Parts Korean Airlines South Korea Wingtips Saab Sweden Cargo and access doors Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Learning Objectives (1 of 2) When you complete this chapter you should be able to: 2.1 Define mission and strategy 2.2 Identify and explain three strategic approaches to competitive advantage 2.3 Understand the significant key success factors and core competencies Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Learning Objectives (2 of 2) When you complete this chapter you should be able to: 2.4 Use factor rating to evaluate both country and provider outsources 2.5 Identify and explain four global operations strategy options Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Global Strategies (1 of 2) Boeing – sales and supply chain are worldwide Benetton – moves inventory to stores around the world faster than its competition by building flexibility into design, production, and distribution Sony – purchases components from suppliers in Thailand, Malaysia, and around the world Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Global Strategies (2 of 2) Volvo – considered a Swedish company, purchased by a Chinese company, Geely. The current Volvo S40 is assembled in Belgium and Malaysia on a platform shared with the Mazda 3 (built in Japan) and the Ford Focus (built in six countries including the U.S.). Haier – A Chinese company, produces compact refrigerators (it has one-third of the U.S. market) and wine cabinets (it has half of the U.S. market) in South Carolina and other appliances in Kentucky. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Growth of World Trade Figure 2.1 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Reasons to Globalize 1. Improve the supply chain 2. Reduce costs and exchange rate risks 3. Improve operations 4. Understand markets 5. Improve products 6. Attract and retain global talent Copyright © 2020 Pearson Education Ltd. All Rights Reserved.  Improve the Supply Chain Locating facilities closer to unique resources – Auto design to California – Perfume manufacturing in France Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Reduce Costs Risks associated with currency exchange rates Reduce direct and indirect costs Trade agreements can lower tariffs – Maquiladoras – World Trade Organization (WTO) – North American Free Trade Agreement (NAFTA) – APEC, SEATO, MERCOSUR, CAFTA – European Union (EU) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Improve Operations Understand differences between how business is handled in other countries – Japanese – inventory management – Germans – robots – Scandinavians – ergonomics International operations can improve response time and customer service Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Understand Markets Interacting with foreign customers, suppliers, competition can lead to new opportunities – Cell phone design moved from Europe to Japan and India – Extend the product life cycle Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Improve Products Remain open to free flow of ideas Toyota and BMW manage joint research and development – Reduced risk, state-of-the-art design, lower costs Samsung and Bosch jointly produce batteries Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Attract and Retain Global Talent Offer better employment opportunities – Better growth opportunities and insulation against unemployment – Relocate unneeded personnel to more prosperous locations Copyright © 2020 Pearson Education Ltd. All Rights Reserved.  Cultural and Ethical Issues Social and cultural behavior differs International laws, agreements, codes of conduct for ethical behaviors Despite cultural and ethical differences, we observe extraordinary mobility of capital, information, goods, and people Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Companies Want To Consider National literacy rate Work ethic Rate of innovation Tax rates Rate of technology Inflation change Availability of raw materials Number of skilled workers Interest rates Political stability Population Product liability laws Transportation infrastructure Export restrictions Communication system Variations in language Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Match Product and Parent Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Match Product and Country Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Developing Missions and Strategies Mission statements tell an organization where it is going The Strategy tells the organization how to get there Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Mission (1 of 4) Mission - where is the organization going? – Organization’s purpose for being – Answers “What do we contribute to society?” – Provides boundaries and focus Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Mission (2 of 4) Figure 2.2 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Mission (3 of 4) Figure 2.2 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Mission (4 of 4) Figure 2.2 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Factors Affecting Mission Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Strategic Process Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Sample Missions Figure 2.3 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Strategy Strategies require managers to Develop action plan to achieve mission Ensure functional areas have supporting strategies Exploit opportunities and strengths, neutralize threats, and avoid weaknesses Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Strategies for Competitive Advantage 1. Differentiation – better, or at least different 2. Cost leadership – cheaper 3. Response – more responsive Copyright © 2020 Pearson Education Ltd. All Rights Reserved.  Competing on Differentiation Uniqueness can go beyond both the physical characteristics and service attributes to encompass everything that impacts customer's perception of value Safeskin gloves – leading edge products Walt Disney Magic Kingdom – experience differentiation Hard Rock Cafe – dining experience Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Experience Differentiation Engaging a customer with a product through imaginative use of the five senses, so the customer “experiences” the product Theme parks use sight, sound, smell, and participation Movie theatres use sight, sound, moving seats, smells, and mists of rain Restaurants use music, smell, and open kitchens Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Competing on Cost Provide the maximum value as perceived by customer. Does not imply low quality. Southwest Airlines – secondary airports, no frills service, efficient utilization of equipment Walmart – small overhead, shrinkage, and distribution costs Franz Colruyt – no bags, no bright lights, no music Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Competing on Response Flexibility is matching market changes in design innovation and volumes – A way of life at Hewlett- Packard Reliability is meeting schedules – German machine industry Quickness in design, production, and delivery – Johnson Electric, Pizza Hut Copyright © 2020 Pearson Education Ltd. All Rights Reserved. OM’s Contribution to Strategy Figure 2.4 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Issues In Operations Strategy Resources view Value-chain analysis Porter’s Five Forces model Operating in a system with many external factors Constant change Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Product Life Cycle Figure 2.5 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. SWOT Analysis Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Strategy Development Process Figure 2.6 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Strategy Development and Implementation Identify key success factors Integrate OM with other activities Build and staff the organization The operations manager’s job is to implement an OM strategy, provide competitive advantage, and increase productivity Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Key Success Factors Figure 2.7 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Activity Mapping at Southwest Airlines (1 of 7) An activity map is a dynamic visual representation of the L4-L7 protocol activity between devices in your network. You can see a 2D or 3D layout of device connections in real-time to learn about the traffic flow and relationships between devices. An activity system map can help understand the flow of your business and the operations, from Figure 2.8 supply to buyer. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Activity Mapping at Southwest Airlines (2 of 7) Figure 2.8 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Activity Mapping at Southwest Airlines (3 of 7) Figure 2.8 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Activity Mapping at Southwest Airlines (4 of 7) Figure 2.8 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Activity Mapping at Southwest Airlines (5 of 7) Figure 2.8 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Activity Mapping at Southwest Airlines (6 of 7) Figure 2.8 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Activity Mapping at Southwest Airlines (7 of 7) Figure 2.8 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Implementing Strategic Decisions (1 of 2) Table 2.1 Operations Strategies of Two Drug Companies Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Implementing Strategic Decisions (2 of 2) Table 2.1 Operations Strategies of Two Drug Companies Copyright © 2020 Pearson Education Ltd. All Rights Reserved.  Strategic Planning, Core Competencies, and Outsourcing (1 of 2) Outsourcing – transferring activities that have traditionally been internal to external suppliers Accelerating due to 1) Increased technological expertise 2) More reliable and cheaper transportation 3) Rapid development and deployment of advancements in telecommunications and computers Outsourcing is when a company hires an external third party to do work that it otherwise would have done in-house. Companies typically do this to save money, by finding a third party that can do the same work for less than the company would have spent employing its own staff Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Strategic Planning, Core Competencies, and Outsourcing (2 of 2) Subcontracting - contract manufacturing Outsourced activities – Legal services – IT services – Travel services – Payroll – Production – Surgery Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Theory of Comparative Advantage If an external provider can perform activities more productively than the purchasing firm, then the external provider should do the work Purchasing firm focuses on core competencies Drives outsourcing Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Risks of Outsourcing Table 2.2 Potential Advantages and Disadvantages of Outsourcing ADVANTAGES DISADVANTAGES Cost savings Increased logistics and inventory costs Gaining outside expertise that Loss of control (quality, delivery, etc. comes with specialization ) Improving operations and Potential creation of future service competition Maintaining a focus on core Negative impact on employees competencies Accessing outside technology Risks may not manifest themselves for years Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Rating Outsourcing Providers Insufficient analysis most common reason for failure Factor-rating method Points are assigned for each factor for each provider Weights are assigned to each factor Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Rating Provider Selection Criteria Table 2.3 Factor Ratings Applied to National Architects' Potential IT Outsourcing Providers Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Global Operations Strategy Options Figure 2.9 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Ranking Corruption corruption is "the abuse of entrusted power for private gain". This can mean not only financial gain but also non-financial advantages. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Operations Management: Sustainability and Supply Chain Management Thirteenth Edition, Global Edition Chapter 3 Project Management Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Outline (1 of 3) Global Company Profile: Bechtel Group The Importance of Project Management Project Planning Project Scheduling Project Controlling Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Outline (2 of 3) Project Management Techniques: P E R T and CP M Determining the Project Schedule Variability in Activity Times Cost-Time Trade-offs and Project Crashing Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Outline (3 of 3) A Critique of PERT and CPM Using Microsoft Project to Manage Projects Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Bechtel Projects (1 of 2) Oil pipelines in Venezuela, from Saudi Arabia to Syria through Jordan, and Canada Trans Mountain Oil Pipeline Managing the Channel Tunnel project Constructing the Hoover Dam, the highest dam in the Western Hemisphere Nuclear power plants and nuclear cleanup projects including Three Mile Island Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Bechtel Projects (2 of 2) Construction of Jubail, a complete city in Saudi Arabia Project management for the 1984 Summer Olympics in Los Angeles San Francisco's Bay Area Rapid Transit system (BART) Emergency response efforts following Hurricane Katrina and extinguishing oil well fires in Kuwait Boston's Central Artery/Tunnel Project and Washington D. C.'s Silver Line metro Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Learning Objectives (1 of 2) When you complete this chapter you should be able to: 3.1 Use a Gantt chart for scheduling 3.2 Draw AOA and AON networks 3.3 Complete forward and backward passes for a project 3.4 Determine a critical path Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Learning Objectives (2 of 2) When you complete this chapter you should be able to: 3.5 Calculate the variance of activity times 3.6 Crash a project Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Importance of Project Management Bechtel Project Management – International workforce, construction professionals, cooks, medical personnel, security – Strategic value of time-based competition – Quality mandate for continual improvement Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Project Characteristics Single unit Many related activities Difficult production planning and inventory control General purpose equipment High labor skills Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Examples of Projects Building Construction Research Project Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Management of Projects 1. Planning - goal setting, defining the project, team organization 2. Scheduling - relate people, money, and supplies to specific activities and activities to each other 3. Controlling - monitor resources, costs, quality, and budgets; revise plans and shift resources to meet time and cost demands Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Project Management Activities Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Project Planning, Scheduling, and Controlling (1 of 2) Figure 3.1 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Project Planning, Scheduling, and Controlling (2 of 2) Figure 3.1 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Project Planning Establishing objectives Defining project Creating work breakdown structure Determining resources Forming organization Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Project Organization Often temporary structure Uses specialists from entire company Headed by project manager – Coordinates activities – Monitors schedule and costs Permanent structure called ‘matrix organization’ Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Project Organization Most Helpful When: 1. Work can be defined with a specific goal and deadline 2. The job is unique or somewhat unfamiliar to the existing organization 3. The work contains complex interrelated tasks requiring specialized skills 4. The project is temporary but critical to the organization 5. The project cuts across organizational lines Copyright © 2020 Pearson Education Ltd. All Rights Reserved. A Sample Project Organization Figure 3.2 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Matrix Organization Copyright © 2020 Pearson Education Ltd. All Rights Reserved. The Role of the Project Manager (1 of 2) Highly visible, Responsible for making sure that: 1. All necessary activities are finished in order and on time 2. The project comes in within budget 3. The project meets quality goals 4. The people assigned to the project receive motivation, direction, and information Copyright © 2020 Pearson Education Ltd. All Rights Reserved. The Role of the Project Manager (2 of 2) Highly visible, Responsible for making sure that: 1. All necessary activities are finished in order and on time 2. The project comes in within budget 3. The project meets quality goals 4. The people assigned to the project receive motivation, direction, and information Project managers should be: Good coaches Good communicators Able to organize activities from a variety of disciplines Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Ethical Issues Project managers face many ethical decisions on a daily basis The Project Management Institute has established an ethical code to deal with problems such as: 1. Offers of gifts from contractors 2. Pressure to alter status reports to mask delays 3. False reports for charges of time and expenses 4. Pressure to compromise quality to meet schedules Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Work Breakdown Structure (1 of 2) Level 1. Project 2. Major tasks in the project 3. Subtasks in the major tasks 4. Activities (or “work packages”) to be completed Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Work Breakdown Structure (2 of 2) Figure 3.3 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Project Scheduling Techniques (1 of 2) Ensure that all activities are planned for Their order of performance is accounted for The activity time estimates are recorded The overall project time is developed Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Purposes of Project Scheduling 1. Shows the relationship of each activity to others and to the whole project 2. Identifies the precedence relationships among activities 3. Encourages the setting of realistic time and cost estimates for each activity 4. Helps make better use of people, money, and material resources by identifying critical bottlenecks in the project Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Project Scheduling Techniques (2 of 2) 1. Gantt chart 2. Critical Path Method (CPM) 3. Program Evaluation and Review Technique (PERT) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. A Simple Gantt Chart Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Service For a Delta Jet Figure 3.4 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Project Controlling Close monitoring of resources, costs, quality, budgets Feedback enables revising the project plan and shift resources Computerized tools produce extensive reports Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Project Management Software There are several popular packages for managing projects – Oracle Primavera – Mind View – HP Project – Fast Track – Microsoft Project Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Project Control Reports 1. Detailed cost breakdowns for each task 2. Labor requirements 3. Cost and hour summaries 4. Raw material and expenditure forecasts 5. Variance reports 6. Time analysis reports 7. Work status reports Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Project Control (1 of 2) Well-defined – Waterfall Projects – Extensive planning – Known constraints – Well-defined specifications Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Project Control (2 of 2) Ill-defined – Agile Projects – Many unknowns – Evolving technology and specifications – Project developed iteratively and incrementally Copyright © 2020 Pearson Education Ltd. All Rights Reserved. PERT and CPM Network techniques Developed in 1950s – CPM by DuPont for chemical plants (1957) – PERT by Booz, Allen & Hamilton with the U.S. Navy, for Polaris missile (1958) Consider precedence relationships and interdependencies Each uses a different estimate of activity times Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Six Steps PERT and CPM (1 of 2) 1. Define the project and prepare the work breakdown structure 2. Develop relationships among the activities – decide which activities must precede and which must follow others 3. Draw the network connecting all of the activities Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Six Steps PERT and CPM (2 of 2) 4. Assign time and/or cost estimates to each activity 5. Compute the longest time path through the network – this is called the critical path 6. Use the network to help plan, schedule, monitor, and control the project Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Questions PERT and CPM Can Answer (1 of 2) 1. When will the entire project be completed? 2. What are the critical activities or tasks in the project? 3. Which are the noncritical activities? 4. What is the probability the project will be completed by a specific date? Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Questions PERT and CPM Can Answer (2 of 2) 5. Is the project on schedule, behind schedule, or ahead of schedule? 6. Is the money spent equal to, less than, or greater than the budget? 7. Are there enough resources available to finish the project on time? 8. If the project must be finished in a shorter time, what is the way to accomplish this at least cost? Copyright © 2020 Pearson Education Ltd. All Rights Reserved. A Comparison of AON and AOA Network Conventions (1 of 3) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. A Comparison of AON and AOA Network Conventions (2 of 3) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. A Comparison of AON and AOA Network Conventions (3 of 3) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. AON Example Table 3.1 Milwaukee Paper Manufacturing’s Activities and Predecessors IMMEDIATE ACTIVITY DESCRIPTION PREDECESSORS A Build internal components Blank B Modify roof and floor Blank C Construct collection stack A D Pour concrete and install frame A, B E Build high-temperature burner C F Install pollution control system C G Install air pollution device D, E H Inspect and test F, G Copyright © 2020 Pearson Education Ltd. All Rights Reserved. AON Network for Milwaukee Paper (1 of 3) Figure 3.5 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. AON Network for Milwaukee Paper (2 of 3) Figure 3.6 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. AON Network for Milwaukee Paper (3 of 3) Figure 3.7 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. AOA Network for Milwaukee Paper Figure 3.8 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Determining the Project Schedule (1 of 4) Perform a Critical Path Analysis The critical path is the longest path through the network The critical path is the shortest time in which the project can be completed Any delay in critical path activities delays the project Critical path activities have no slack time Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Determining the Project Schedule (2 of 4) Table 3.2 Time Estimates for Milwaukee Paper Manufacturing ACTIVITY DESCRIPTION TIME (WEEKS) A Build internal components 2 B Modify roof and floor 3 C Construct collection stack 2 D Pour concrete and install frame 4 E Build high-temperature burner 4 F Install pollution control system 3 G Install air pollution device 5 H Inspect and test 2 Blank Total time (weeks) 25 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Determining the Project Schedule (3 of 4) Perform a Critical Path Analysis Earliest start (ES) = earliest time at which an activity can start, assuming all predecessors have been completed Earliest finish (EF) = earliest time at which an activity can be finished Latest start (LS) = latest time at which an activity can start so as to not delay the completion time of the entire project Latest finish (LF) = latest time by which an activity has to be finished so as to not delay the completion time of the entire project Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Determining the Project Schedule (4 of 4) Figure 3.9 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Forward Pass (1 of 2) Begin at starting event and work forward Earliest Start Time Rule: If an activity has only a single immediate predecessor, its ES equals the EF of the predecessor If an activity has multiple immediate predecessors, its ES is the maximum of all the EF values of its predecessors ES = Max {EF of all immediate predecessors} Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Forward Pass (2 of 2) Begin at starting event and work forward Earliest Finish Time Rule: The earliest finish time (EF) of an activity is the sum of its earliest start time (ES) and its activity time EF = ES + Activity time Copyright © 2020 Pearson Education Ltd. All Rights Reserved. ES/EF Network for Milwaukee Paper (1 of 7) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. ES/EF Network for Milwaukee Paper (2 of 7) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. ES/EF Network for Milwaukee Paper (3 of 7) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. ES/EF Network for Milwaukee Paper (4 of 7) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. ES/EF Network for Milwaukee Paper (5 of 7) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. ES/EF Network for Milwaukee Paper (6 of 7) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. ES/EF Network for Milwaukee Paper (7 of 7) Figure 3.10 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Backward Pass (1 of 2) Begin with the last event and work backwards Latest Finish Time Rule: If an activity is an immediate predecessor for just a single activity, its LF equals the LS of the activity that immediately follows it If an activity is an immediate predecessor to more than one activity, its LF is the minimum of all LS values of all activities that immediately follow it LF = Min {LS of all immediate following activities} Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Backward Pass (2 of 2) Begin with the last event and work backwards Latest Start Time Rule: The latest start time (LS) of an activity is the difference of its latest finish time (LF) and its activity time LS = LF − Activity time Copyright © 2020 Pearson Education Ltd. All Rights Reserved. LS/LF Times for Milwaukee Paper (1 of 4) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. LS/LF Times for Milwaukee Paper (2 of 4) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. LS/LF Times for Milwaukee Paper (3 of 4) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. LS/LF Times for Milwaukee Paper (4 of 4) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Computing Slack Time (1 of 3) After computing the ES, EF, LS, and LF times for all activities, compute the slack or free time for each activity Slack is the length of time an activity can be delayed without delaying the entire project Slack = LS − ES or Slack = LF − EF Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Computing Slack Time (2 of 3) Table 3.3 Milwaukee Paper’s Schedule and Slack Times EARLIEST EARLIEST LATEST LATEST ON START FINISH START FINISH SLACK CRITICAL ACTIVITY ES EF LS LF LS − ES PATH A 0 2 0 2 0 Yes B 0 3 1 4 1 No C 2 4 2 4 0 Yes D 3 7 4 8 1 No E 4 8 4 8 0 Yes F 4 7 10 13 6 No G 8 13 8 13 0 Yes H 13 15 13 15 0 Yes Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Computing Slack Time (3 of 3) Table 3.3 Milwaukee Paper’s Schedule and Slack Times Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Critical Path for Milwaukee Paper Copyright © 2020 Pearson Education Ltd. All Rights Reserved. ES − EF Gantt Chart for Milwaukee Paper Copyright © 2020 Pearson Education Ltd. All Rights Reserved. LS − LF Gantt Chart for Milwaukee Paper Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Variability in Activity Times (1 of 4) CPM assumes we know a fixed time estimate for each activity and there is no variability in activity times PERT uses a probability distribution for activity times to allow for variability Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Variability in Activity Times (2 of 4) Three time estimates are required – Optimistic time (a) – if everything goes according to plan – Pessimistic time (b) – assuming very unfavorable conditions – Most likely time (m) – most realistic estimate Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Variability in Activity Times (3 of 4) Estimate follows beta distribution Expected activity time: Variance of activity completion times: Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Variability in Activity Times (4 of 4) Figure 3.11 Estimate follows beta distribution Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Computing Variance Table 3.4 Time Estimates (in weeks) for Milwaukee Paper's Project MOST OPTIMISTIC LIKELY PESSIMISTIC EXPECTED TIME VARIANCE ACTIVITY a m b t = (a + 4m + b)/6 [(b − a)/6] 2 A 1 2 3 2.11 B 2 3 4 3.11 C 1 2 3 2.11 D 2 4 6 4.44 E 1 4 7 4 1.00 F 1 2 9 3 1.78 G 3 4 11 5 1.78 H 1 2 3 2.11 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Probability of Project Completion (1 of 7) Project variance is computed by summing the variances of critical activities Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Probability of Project Completion (2 of 7) Project variance is computed by summing the variances of critical activities Project variance Project standard deviation Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Probability of Project Completion (3 of 7) PERT makes two more assumptions: Total project completion times follow a normal probability distribution Activity times are statistically independent Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Probability of Project Completion (4 of 7) Figure 3.12 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Probability of Project Completion (5 of 7) What is the probability this project can be completed on or before the 16-week deadline? Where Z is the number of standard deviations the due date or target date lies from the mean or expected date Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Probability of Project Completion (6 of 7) What is the probability this project can be completed on or before the 16-week deadline? Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Probability of Project Completion (7 of 7) Figure 3.13 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Determining Project Completion Time Figure 3.14 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Variability of Completion Time for Noncritical Paths Variability of times for activities on noncritical paths must be considered when finding the probability of finishing in a specified time Variation in noncritical activity may cause change in critical path Copyright © 2020 Pearson Education Ltd. All Rights Reserved. What Project Management Has Provided So Far 1. The project’s expected completion time is 15 weeks 2. There is a 71.57% chance the equipment will be in place by the 16-week deadline 3. Five activities (A, C, E, G, and H) are on the critical path 4. Three activities (B, D, F) are not on the critical path and have slack time 5. A detailed schedule is available Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Cost–Time Trade-Offs and Project Crashing It is not uncommon to face the following situations: The project is behind schedule The completion time has been moved forward Shortening the duration of the project is called project crashing Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Factors to Consider When Crashing a Project The amount by which an activity is crashed is, in fact, permissible Taken together, the shortened activity durations will enable us to finish the project by the due date The total cost of crashing is as small as possible Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Steps in Project Crashing (1 of 3) Step 1: Compute the crash cost per time period. If crash costs are linear over time: Step 2: Using current activity times, find the critical path(s) and identify the critical activities Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Steps in Project Crashing (2 of 3) Step 3: If there is only one critical path, then select the activity on this critical path that (a) can still be crashed, and (b) has the smallest crash cost per period. If there is more than one critical path, then select one activity from each critical path such that (a) each selected activity can still be crashed, and (b) the total crash cost of all selected activities is the smallest. Crash each selected activity by one period. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Steps in Project Crashing (3 of 3) Step 4: Update all activity times. If the desired due date has been reached, stop. If not, return to Step 2. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Crashing the Project Table 3.5 Normal and Crash Data for Milwaukee Paper Manufacturing Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Crash and Normal Times and Costs for Activity B Figure 3.15 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Critical Path and Slack Times for Milwaukee Paper Figure 3.16 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Crashing Activity A One Week (1 of 2) Figure 3.16 (revised) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Crashing Activity A One Week (2 of 2) Figure 3.16 (revised) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Crashing Activity G One Week (1 of 2) Figure 3.16 (revised) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Crashing Activity G One Week (2 of 2) Figure 3.16 (revised) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Advantages of PERT/CPM (1 of 2) 1. Especially useful when scheduling and controlling large projects 2. Straightforward concept and not mathematically complex 3. Graphical networks help highlight relationships among project activities 4. Critical path and slack time analyses help pinpoint activities that need to be closely watched Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Advantages of PERT/CPM (2 of 2) 5. Project documentation and graphics point out who is responsible for various activities 6. Applicable to a wide variety of projects 7. Useful in monitoring not only schedules but costs as well Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Limitations of PERT/CPM 1. Project activities have to be clearly defined, independent, and stable in their relationships 2. Precedence relationships must be specified and networked together 3. Time estimates tend to be subjective and are subject to fudging by managers 4. There is an inherent danger of too much emphasis being placed on the longest, or critical, path Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Using Microsoft Project (1 of 3) Program 3.1 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Using Microsoft Project (2 of 3) Program 3.2 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Using Microsoft Project (3 of 3) Program 3.3 Pollution Project Percentage Completed on April 9 ACTIVITY COMPLETED ACTIVITY COMPLETED A 100 E 20 B 100 F 20 C 100 G 0 D 10 H 0 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Copyright This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Operations Management: Sustainability and Supply Chain Management Thirteenth Edition, Global Edition Chapter 4 Forecasting Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Outline (1 of 2) Global Company Profile: Walt Disney Parks & Resorts What Is Forecasting? The Strategic Importance of Forecasting Seven Steps in the Forecasting System Forecasting Approaches Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Outline (2 of 2) Time-Series Forecasting Associative Forecasting Methods: Regression and Correlation Analysis Monitoring and Controlling Forecasts Forecasting in the Service Sector Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Forecasting Provides a Competitive Advantage for Disney (1 of 4) Global portfolio includes parks in Shanghai, Hong Kong, Paris, Tokyo, Orlando, and Anaheim Revenues are derived from people - how many visitors and how they spend their money Daily management report contains only the forecast and actual attendance at each park Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Forecasting Provides a Competitive Advantage for Disney (2 of 4) Disney generates daily, weekly, monthly, annual, and 5- year forecasts Forecast used by labor management, maintenance, operations, finance, and park scheduling Forecast used to adjust opening times, rides, shows, staffing levels, and guests admitted Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Forecasting Provides a Competitive Advantage for Disney (3 of 4) 20% of customers come from outside the USA Economic model includes gross domestic product, cross- exchange rates, arrivals into the USA A staff of 35 analysts and 70 field people survey 1 million park guests, employees, and travel professionals each year Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Forecasting Provides a Competitive Advantage for Disney (4 of 4) Inputs to the forecasting model include airline specials, Federal Reserve policies, Wall Street trends, vacation/ holiday schedules for 3,000 school districts around the world Average forecast error for the 5-year forecast is 5% Average forecast error for annual forecasts is between 0% and 3% Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Learning Objectives (1 of 2) When you complete this chapter you should be able to: 4.1 Understand the three time horizons and which models apply for each 4.2 Explain when to use each of the four qualitative models 4.3 Apply the naive, moving-average, exponential smoothing, and trend methods Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Learning Objectives (2 of 2) When you complete this chapter you should be able to: 4.4 Compute three measures of forecast accuracy 4.5 Develop seasonal indices 4.6 Conduct a regression and correlation analysis 4.7 Use a tracking signal Copyright © 2020 Pearson Education Ltd. All Rights Reserved. What is Forecasting? Process of predicting a future event Underlying basis of all business decisions – Production – Inventory – Personnel – Facilities Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Forecasting Time Horizons 1. Short-range forecast – Up to 1 year, generally less than 3 months – Purchasing, job scheduling, workforce levels, job assignments, production levels 2. Medium-range forecast – 3 months to 3 years – Sales and production planning, budgeting 3. Long-range forecast – 3+ years – New product planning, facility location, capital expenditures, research and development Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Distinguishing Differences 1. Medium/long range forecasts deal with more comprehensive issues and support management decisions regarding planning and products, plants and processes 2. Short-term forecasting usually employs different methodologies than longer-term forecasting 3. Short-term forecasts tend to be more accurate than longer- term forecasts Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Influence of Product Life Cycle Introduction – Growth – Maturity – Decline Introduction and growth require longer forecasts than maturity and decline As product passes through life cycle, forecasts are useful in projecting – Staffing levels – Inventory levels – Factory capacity Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Product Life Cycle (1 of 2) Figure 2.5 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Product Life Cycle (2 of 2) Figure 2.5 Copyright © 2020 Pearson Education Ltd. All Rights Reserved.  Types of Forecasts 1. Economic forecasts – Address business cycle – inflation rate, money supply, housing starts, etc. 2. Technological forecasts – Predict rate of technological progress – Impacts development of new products 3. Demand forecasts – Predict sales of existing products and services Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Strategic Importance of Forecasting Supply Chain Management – Good supplier relations, advantages in product innovation, cost and speed to market Human Resources – Hiring, training, laying off workers Capacity – Capacity shortages can result in undependable delivery, loss of customers, loss of market share Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Seven Steps in Forecasting 1. Determine the use of the forecast 2. Select the items to be forecasted 3. Determine the time horizon of the forecast 4. Select the forecasting model(s) 5. Gather the data needed to make the forecast 6. Make the forecast 7. Validate and implement the results Copyright © 2020 Pearson Education Ltd. All Rights Reserved. The Realities! Forecasts are seldom perfect; unpredictable outside factors may impact the forecast Most techniques assume an underlying stability in the system Product family and aggregated forecasts are more accurate than individual product forecasts Vorhersagen sind selten perfekt; unvorhersehbare äußere Faktoren können die Vorhersage beeinflussen - Die meisten Techniken gehen von einer zugrunde liegenden Stabilität des Systems aus. - Produktfamilien und aggregierte Prognosen sind genauer als Prognosen für einzelne Produkte Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Forecasting Approaches (1 of 2) Qualitative Methods Used when situation is vague and little data exist – New products – New technology Involves intuition, experience – e.g., forecasting sales on Internet Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Forecasting Approaches (2 of 2) Quantitative Methods Used when situation is ‘stable’ and historical data exist – Existing products – Current technology Involves mathematical techniques – e.g., forecasting sales of color televisions Copyright © 2020 Pearson Education Ltd. All Rights Reserved.  Overview of Qualitative Methods (1 of 2) 1. Jury of executive opinion – Pool opinions of high-level experts, sometimes augmented by statistical models 2. Delphi method – Panel of experts, queried iteratively Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Overview of Qualitative Methods (2 of 2) 3. Sales force composite – Estimates from individual salespersons are reviewed for reasonableness, then aggregated 4. Market Survey – Ask the customer Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Jury of Executive Opinion Involves small group of high-level experts and managers Group estimates demand by working together Combines managerial experience with statistical models Relatively quick ‘Group-think’ disadvantage Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Delphi Method Iterative group process, continues until consensus is reached Three types of participants – Decision makers – Staff – Respondents Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Sales Force Composite Each salesperson projects his or her sales Combined at district and national levels Sales reps know customers’ wants May be overly optimistic Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Market Survey Ask customers about purchasing plans Useful for demand and product design and planning What consumers say and what they actually do may be different May be overly optimistic Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Overview of Quantitative Approaches Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Time-Series Forecasting Set of evenly spaced numerical data – Obtained by observing response variable at regular time periods Forecast based only on past values, no other variables important – Assumes that factors influencing past and present will continue influence in future Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Time-Series Components Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Components of Demand Figure 4.1 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Trend Component Persistent, overall upward or downward pattern Changes due to population, technology, age, culture, etc. Typically several years duration Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Seasonal Component Regular pattern of up and down fluctuations Due to weather, customs, etc. Occurs within a single year PERIOD LENGTH “SEASON” LENGTH NUMBER OF “SEASON” IN PATTERN Week Day 7 Month Week 4 – 4.5 Month Day 28 – 31 Year Quarter 4 Year Month 12 Year Week 52 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Cyclical Component Repeating up and down movements Affected by business cycle, political, and economic factors Multiple years duration Often causal or associative relationships Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Random Component Erratic, unsystematic, ‘residual’ fluctuations Due to random variation or unforeseen events Short duration and nonrepeating Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Naive Approach Assumes demand in next period is the same as demand in most recent period – e.g., If January sales were 68, then February sales will be 68 Sometimes cost effective and efficient Can be good starting point Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Moving Averages MA is a series of arithmetic means Used if little or no trend Used often for smoothing – Provides overall impression of data over time Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Moving Average Example Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Weighted Moving Average (1 of 3) Used when some trend might be present – Older data usually less important Weights based on experience and intuition Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Weighted Moving Average (2 of 3) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Weighted Moving Average (3 of 3) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Potential Problems With Moving Average (1 of 2) 1. Increasing n smooths the forecast but makes it less sensitive to changes 2. Does not forecast trends well 3. Requires extensive historical data Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Graph of Moving Averages Figure 4.2 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Potential Problems With Moving Average (2 of 2) Form of weighted moving average – Weights decline exponentially – Most recent data weighted most Requires smoothing constant (α) – Ranges from 0 to 1 – Subjectively chosen Involves little record keeping of past data Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Exponential Smoothing New forecast = Last period’s forecast + α (Last period’s actual demand − Last period’s forecast) where Ft = new forecast Ft – 1 = previous period’s forecast α = smoothing (or weighting) constant (0 ≤ α ≤ 1) At – 1 = previous period’s actual demand Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Exponential Smoothing Example (1 of 3) Predicted demand = 142 Ford Mustangs Actual demand = 153 Smoothing constant α =.20 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Exponential Smoothing Example (2 of 3) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Exponential Smoothing Example (3 of 3) Predicted demand = 142 Ford Mustangs Actual demand = 153 Smoothing constant α =.20 New forecast = 142 +.2(153 − 142) = 142 + 2.2 = 144.2 ≈ 144 cars Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Effect of Smoothing Constants Smoothing constant generally.05 ≤ α ≤.50 As α increases, older values become less significant Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Impact of Different α (1 of 2) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Impact of Different α (2 of 2) Choose high values of α when underlying average is likely to change Choose low values of α when underlying average is stable Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Selecting the Smoothing Constant The objective is to obtain the most accurate forecast no matter the technique We generally do this by selecting the model that gives us the lowest forecast error according to one of three preferred measures: Mean Absolute Deviation (MAD) Mean Squared Error (MSE) Mean Absolute Percent Error (MAPE) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Common Measures of Error (1 of 3) Mean Absolute Deviation (MAD) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Determining the MAD (1 of 2) ACTUAL FORECAST TONNAGE WITH QUARTER UNLOADED FORECAST WITH α =.10 α =.50 1 180 175 175 2 168 175.50 = 175.00 +.10(180 − 175) 177.50 3 159 174.75 = 175.50 +.10(168 − 175.50) 172.75 4 175 173.18 = 174.75 +.10(159 − 174.75) 165.88 5 190 173.36 = 173.18 +.10(175 − 173.18) 170.44 6 205 175.02 = 173.36 +.10(190 − 173.36) 180.22 7 180 178.02 = 175.02 +.10(205 − 175.02) 192.61 8 182 178.22 = 178.02 +.10(180 − 178.02) 186.30 9 ? 178.59 = 178.22 +.10(182 − 178.22) 184.15 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Determining the MAD (2 of 2) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Common Measures of Error (2 of 3) Mean Squared Error (MSE) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Determining the MSE Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Common Measures of Error (3 of 3) Mean Absolute Percent Error (MAPE) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Determining the MAPE Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Comparison of Measures Table 4.1 Comparison of Measures of Forecast Error APPLICATION TO CHAPTER MEASURE MEANING EXAMPLE Mean absolute How much the forecast For α =.10 in Example 4, the deviation (MAD) missed the target forecast for grain unloaded was off by an average of 10.31 tons. Mean squared error The square of how For α =.10 in Example 5, the (MSE) much the forecast square of the forecast error was missed the target 190.8. This number does not have a physical meaning, but is useful when compared to the MSE of another forecast. Mean absolute The average percent For α =.10 in Example 6, the percent error (MAPE) error forecast is off by 5.59% on average. As in Examples 4 and 5, some forecasts were too high, and some were low. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Comparison of Forecast Error (1 of 5) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Comparison of Forecast Error (2 of 5) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Comparison of Forecast Error (3 of 5) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Comparison of Forecast Error (4 of 5) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Comparison of Forecast Error (5 of 5) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Exponential Smoothing with Trend Adjustment (1 of 3) When a trend is present, exponential smoothing must be modified MONTH ACTUAL DEMAND FORECAST (Ft ) FOR MONTHS 1 – 5 1 100 F1 = 100 (given) 2 200 F2 = F1 + α(A1 − F1 ) = 100 +.4(100 − 100) = 100 3 300 F3 = F2 + α(A2 − F2 ) = 100 +.4(200 − 100) = 140 4 400 F4 = F3 + α(A3 − F3 ) = 140 +.4(300 − 140) = 204 5 500 F5 = F4 + α(A4 − F4 ) = 204 +.4(400 − 204) = 282 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Exponential Smoothing with Trend Adjustment (2 of 3) where Ft = exponentially smoothed forecast average Tt = exponentially smoothed trend A t = actual demand α = smoothing constant for average (0 ≤ α ≤ 1) β = smoothing constant for trend (0 ≤ β ≤ 1) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Exponential Smoothing with Trend Adjustment (3 of 3) Step 1: Compute Ft Step 2: Compute Tt Step 3: Calculate the forecast FITt = Ft + Tt Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Exponential Smoothing with Trend Adjustment Example MONTH ACTUAL MONTH (t) ACTUAL DEMAND (At ) (t) DEMAND (At ) 1 12 6 21 2 17 7 31 3 20 8 28 4 19 9 36 5 24 10 ? α =.2 β =.4 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Exponential Smoothing with Trend Adjustment Example (1 of 5) Table 4.2 Forecast with α =.2 and β =.4 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Exponential Smoothing with Trend Adjustment Example (2 of 5) Table 4.2 Forecast with α =.2 and β =.4 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Exponential Smoothing with Trend Adjustment Example (3 of 5) Table 4.2 Forecast with α =.2 and β =.4 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Exponential Smoothing with Trend Adjustment Example (4 of 5) Table 4.2 Forecast with α =.2 and β =.4 SMOOTHED ACTUAL SMOOTHED FORECAST INCLUDING MONTH FORECAST DEMAND TREND, Tt TREND, FITt AVERAGE, Ft 1 12 11 2 13.00 2 17 12.80 1.92 14.72 3 20 15.18 2.10 17.28 4 19 17.82 2.32 20.14 5 24 19.91 2.23 22.14 6 21 22.51 2.38 24.89 7 31 24.11 2.07 26.18 8 28 27.14 2.45 29.59 9 36 29.28 2.32 31.60 10 blank 32.48 2.68 35.16 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Exponential Smoothing with Trend Adjustment Example (5 of 5) Figure 4.3 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Trend Projections (1 of 2) Fitting a trend line to historical data points to project into the medium to long-range Linear trends can be found using the least-squares technique a = y-axis intercept b = slope of the regression line x = the independent variable Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Least Squares Method (1 of 2) Figure 4.4 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Least Squares Method (2 of 2) Equations to calculate the regression variables Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Least Squares Example (1 of 4) ELECTRICAL ELECTRICAL YEAR YEAR POWER DEMAND POWER DEMAND 1 74 5 105 2 79 6 142 3 80 7 122 4 90 blank blank Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Least Squares Example (2 of 4) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Least Squares Example (3 of 4) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Least Squares Example (4 of 4) Figure 4.5 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Least Squares Requirements 1. We always plot the data to insure a linear relationship 2. We do not predict time periods far beyond the database 3. Deviations around the least squares line are assumed to be random Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Seasonal Variations In Data (1 of 2) The multiplicative seasonal model can adjust trend data for seasonal variations in demand Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Seasonal Variations In Data (2 of 2) Steps in the process for monthly seasons: 1. Find average historical demand for each month 2. Compute the average demand over all months 3. Compute a seasonal index for each month 4. Estimate next year’s total demand 5. Divide this estimate of total demand by the number of months, then multiply it by the seasonal index for that month Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Seasonal Index Example (1 of 6) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Seasonal Index Example (2 of 6) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Seasonal Index Example (3 of 6) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Seasonal Index Example (4 of 6) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Seasonal Index Example (5 of 6) Seasonal forecast for Year 4 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Seasonal Index Example (6 of 6) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. San Diego Hospital (1 of 5) Figure 4.6 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. San Diego Hospital (2 of 5) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. San Diego Hospital (3 of 5) Figure 4.7 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. San Diego Hospital (4 of 5) Period 67 68 69 70 71 72 Month Jan Feb Mar Apr May June Forecast with Trend & 9,911 9,265 9,764 9,691 9,520 9,542 Seasonality Period 73 74 75 76 77 78 Month July Aug Sept Oct Nov Dec Forecast with Trend & 9,949 10,068 9,411 9,724 9,355 9,572 Seasonality Copyright © 2020 Pearson Education Ltd. All Rights Reserved. San Diego Hospital (5 of 5) Figure 4.8 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Adjusting Trend Data Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Cyclical Variations Cycles – patterns in the data that occur every several years – Forecasting is difficult – Wide variety of factors Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Associative Forecasting Used when changes in one or more independent variables can be used to predict the changes in the dependent variable Most common technique is linear-regression analysis We apply this technique just as we did in the time- series example Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Trend Projections (2 of 2) Forecasting an outcome based on predictor variables using the least squares technique a = y-axis intercept b = slope of the regression line x = the independent variable Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Associative Forecasting Example (1 of 6) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Associative Forecasting Example (2 of 6) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Associative Forecasting Example (3 of 6) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Associative Forecasting Example (4 of 6) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Associative Forecasting Example (5 of 6) If payroll next year is estimated to be $6 billion, then: Sales (in $ millions) = 1.75 +.25(6) = 1.75 + 1.5 = 3.25 Sales = $3,250,000 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Associative Forecasting Example (6 of 6) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Standard Error of the Estimate (1 of 4) A forecast is just a point estimate of a future value This point is actually the mean or expected value of a probability distribution Figure 4.9 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Standard Error of the Estimate (2 of 4) where y = y-value of each data point yc = computed