Operations Management & strategic management

operations management vs strategic management importance of operations management in strategic management. what is role of operations management in strategic management
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9 INTERMEDIATE : pApER - opERATIoNs MANAgEMENT & sTRATEgIc INTERMEDIATE MANAgEMENT sTuDy NoTEs The Institute of cost Accountants of India CMA Bhawan, 12, Sudder Street, Kolkata - 700 016 syllAbus - 2016First Edition : August 2016 published by : Directorate of Studies The Institute of Cost Accountants of India (ICAI) CMA Bhawan, 12, Sudder Street, Kolkata - 700 016 www.icmai.in printed at : Copyright of these Study Notes is reserved by the Institute of Cost Accountants of India and prior permission from the Institute is necessary for reproduction of the whole or any part thereof.syllabus - 2016 pApER 9: opERATIoNs MANAgEMENT & sTRATEgIc MANAgEMENT (oMsM) syllabus structure The syllabus comprises the following topics and study weightage: A Operations Management 70% B Strategic Management 30% b 30% A 70% AssEssMENT sTRATEgy There will be written examination paper of three hours. obJEcTIVE To provide an in depth study of the various business process, analyze operations, production planning and strategic management. learning Aims The syllabus aims to test the student’s ability to:  Understand the business process and analyze the operations  Acquire knowledge of production planning and resource management  Understand the concept of Corporate Vision - Mission and Objectives  Understand the concept of SWOT and Portfolio Analysis  Understand the different stages in strategy formulation process  Understand the concept of Strategic Business Unit and Business Process re-enginnering skill set required Level B: Requiring the skill levels of knowledge, comprehension, application and analysis. section A : operations Management 70% 1. Operations Management – Introduction 2. Operations Planning 3. Designing of Operational Systems and control 4. Production Planning and control 5. Productivity management and quality management 6. Project Management 7. Economics of Maintenance and Spares management section b : Information systems 30% 8. Strategic Management Introduction 9. Strategic Analysis and Strategic Planning 10. Formulation and Implementation of Strategy sEcTIoN A: opERATIoNs MANAgEMENT 70 MARks 1. operation Management Introduction: Scope characteristics of modern operations functions - recent trends in production / operations management. 2. operations planning: Demand forecasting – capacity planning - capacity requirement planning - facility location - facility layout – Resource aggregate planning – Material requirements planning – Manufacturing resource planning – Economic Batch quantity. 3. Designing of operational systems and control: Product Design, Process design - Selection - Product Life Cycle – Process Planning – Process Selection. 4. production planning and control: Introduction – Control Measures – Time study, Work study, Method study, Job Evaluation, Job Allocation (Assignment Technique), Scheduling Queuing Models, Simulation and Line Balancing – Optimum Allocation of resources – Lean Operations – JIT – Transportation Model and Linear Programming Technique (Formulation of equations only). 5. productivity Management and Quality Management: Measurement techniques of productivity index, productivity of employee, productivity of materials, productivity of management resources, productivity of other factors – productivity improving methods – TQM basic tools and certification – ISO standards basics. 6. project Management: Project planning – project life cycle – Gantt charts, PERT and CPM. 7. Economics of Maintenance and spares Management: Break down Maintenance – Preventive Maintenance – Routine Maintenance – Replacement of Machine – Spare Parts Management. section b: strategic Manangement 30 marks 8. strategic Management Introduction Vision- Mission and objective 9. strategic Analysis and strategic planning Situational Analysis –SWOT Analysis – Portfolio Analysis – BCG Matrices – Stages in Strategic Planning – Alternatives in Strategic Planning 10. Formulation and Implementation of strategy: Strategy formulation function wise (Production Strategy, Marketing Strategy, Man Power Strategy) – Structuring of Organisation for implementation of strategy – Strategic Business Unit – Business Process re-engineering.contents study Note 1 : operation Management – Introduction 1.1 Operations Management - Introduction 1 1.2 Production Management vs. Operation Management 3 1.3 Characteristic of Modern Operation Function 4 1.4 Recent Trends in Production / Operations Management 4 study Note 2 : operations planning 2.1 Demand Forecasting 7 2.2 Capacity Planning 15 2.3 Capacity Requirement 17 2.4 Facility Location 21 2.5 Facility Layout 24 2.6 Resource Aggregate Planning 33 2.7 Material Requirements Planning 36 2.8 Manufacturing Resource Planning 37 2.9 Enterprise Resource Planning 38 2.10 Economic Batch Quantity 38 study Note 3 : Designing of operational system and control 3.1 Production Design 45 3.2 Process Design & Selection 48 3.3 Process Planning 48 3.4 Product Life Cycle 50 3.5 Process Selection 51 study Note 4 : production planning and control 4.1 Production Planning and Control Introduction 53 4.2 Time Study, Work Study, Method Study & Job Evaluation 56 4.3 Job Allocation – Assignment Technique 59 4.4 Scheduling 68 4.5 Queuing Models 734.6 Simulation 83 4.7 Line Balancing 92 4.8 Lean Operations 97 4.9 Just-In-Time (JIT) 97 4.10 Transportation Model 98 4.11 Linear Programming Technique 111 study Note 5 : productivity Management and Quality Management 5.1 Measurement Techniques of Productivity Index 133 5.2 TQM Basic Tools and Certification 141 5.3 ISO Standard Basics 143 study Note 6 : project Management 6.1 Project Planning 147 6.2 Gantt Charts 151 6.3 PERT and CPM 156 study Note 7 : Economics of Maintenance and spares Management 7.1 Break Down Maintenance 167 7.2 Preventive Maintenance 167 7.3 Routine Maintenance 168 7.4 Replacement of Machine 170 7.5 Spare Parts Management 173 study Note 8 : strategic Management Introduction 8.1 Vission, Mission and Objective 197study Note 9 : strategic Analysis and strategic planning 9.1 Situational Analysis 211 9.2 SWOT Analysis 212 9.3 Portfolio Analysis 215 9.4 BCG Matrices 216 9.5 Stages in Strategic Planning 223 9.6 Alternative in Strategic Planning 226 study Note 10 : Formulation and Implementation of strategy 10.1 Strategy Formulation Function-wise (Production Strategy, Marketing Strategy, 229 Manpower Strategy 10.2 Structuring of Organisation for Implementation of Strategy 243 10.3 Strategic Business Unit 246 10.4 Business Process Re-engineering 248Study Note - 1 OPeRaTIONS MaNageMeNT – INTROduCTION This Study Note includes 1.1 Operations Management - Introduction 1.2 Production Management vs. Operation Management 1.3 Characteristic of Modern Operation Function 1.4 Recent Trends in Production/Operations Management 1.1 OPeRaTIONS MaNageMeNT - INTROduCTION operations management is the management of that part of an organization that is responsible for producing goods and/or services. there are examples of these goods and services all around you. every book you read, every video you watch, every e-mail you send, every telephone conversation you have, and every medical treatment you receive involves the operations function of one or more organizations. so does everything you wear, eat, travel in, sit on, and access the internet with. However, in order to have a clear idea of operations management, one must have an idea of ‘operating systems’. an Operating System is defined as a configuration of resources combined for the provision of goods or services. retail organizations, hospitals, bus and taxi services, tailors, hotels and dentists are all examples of operating systems. any operating system converts inputs, using physical resources, to create outputs, the function of which is to satisfy customers wants. the creation of goods or services involves transforming or converting inputs into outputs. Various inputs such as capital, labour, and information are used to create goods or services using one or more transformation processes (e.g., storing, transporting, and cutting). to ensure that the desired output are obtained, an organization takes measurements at various points in the transformation process (feedback) and then compares with them with previously established standards to determine whether corrective action is needed (control). it is important to note that goods and services often occur jointly. For example, having the oil changed in your car is a service, but the oil that is delivered is a good. similarly, house painting is a service, but the paint is a good. the goods-service combination is a continuum. it can range from primarily goods, with little service, to primarily service, with few goods. Because there are relatively few pure goods or pure services, companies usually sell product packages, which are a combination of goods and services. there are elements of both goods production and service delivery in these product packages. this makes managing operations more interesting, and also more challenging. ObjeCTIveS OF OPeRaTIONS MaNageMeNT objectives of operations management can be categorised into (i) customer service and (ii) resource utilisation. (i) Customer service The first objective is the customer service for the satisfaction of customer wants. Customer service is therefore a key objective of operations management. The Operations Management must provide something to a specification which can satisfy the customer in terms cost and timing. Thus, primary objective can be satisfied by providing the ‘right thing at the right price at the right time’. These three aspects of customer service - specification, cost and timing - are described in a little more detail for the four functions in Table 1. they are the principal sources of customer satisfaction and must, therefore, be the principal dimension of the customer service objective for operation managers. operations managment & strategic management 1Operations Management – Introduction Table 1: aspects of Customer Service Principal customer wants Principal function Primary consideration Other consideration manufacture goods of a given, requested or cost i.e. purchase price or cost of obtaining acceptable specification goods timing, i.e. delivery delay from order or request to receipt of goods transport movement of a given, requested or cost, i.e. cost of movement, timing ,i.e. acceptable specification (i) duration or time to move (ii) wait, or delay from requesting to its commencement supply goods of a given, requested or cost, that is purchase price or cost obtaining acceptable specification goods timing, i.e. delivery delay from order or request to supply, to receipt of goods service treatment of a given, requested or cost, i.e. cost of treatment acceptable specification timing, i.e. (i) Duration or timing required for treatment (ii) wait, or delay from requesting to its commencement generally an organization will aim reliably and consistently to achieve certain standards, or levels, on these dimensions, and operations managers will be influential in attempting to achieve these standards. Hence, this objective will influence the operations manager’s decisions to achieve the required customer service. (ii) Resource utilization another major objective is to utilize resources for the satisfaction of customer wants effectively, i.e., customer service must be provided with the achievement of effective operations through efficient use of resources. Inefficient use of resources or inadequate customer service leads to commercial failure of an operating system. operations management is concerned essentially with the utilization of resources, i.e., obtaining maximum effect from resources or minimizing their loss, under utilization or waste. the extent of the utilization of the resources’ potential might be expressed in terms of the proportion of available time used or occupied, space utilization, levels of activity, etc. each measure indicates the extent to which the potential or capacity of such resources is utilized. this is referred as the objective of resource utilization. operations management is also concerned with the achievement of both satisfactory customer service and resource utilization. an improvement in one will often give rise to deterioration in the other. often both cannot be maximized, and hence a satisfactory performance must be achieved on both objectives. all the activities of operations management must be tackled with these two objectives in mind, and many of the problems will be faced by operations managers because of this conflict. Hence, operations managers must attempt to balance these basic objectives. Below Table 2 summarizes the twin objectives of operations management. the type of balance established both between and within these basic objectives will be influenced by market considerations, competitions, the strengths and weaknesses of the organization, etc. Hence, the operations managers should make a contribution when these objectives are set. Table 2 : The twin objectives of operations management The customer service objective. The resource utilization objective. to provide agreed/adequate levels of customer service to achieve adequate levels of resource utilization (and hence customer satisfaction) by providing goods (or productivity) e.g., to achieve agreed levels of or services with the right specification, at the right cost utilization of materials, machines and labour. and at the right time. 2 operations managment & strategic managementSCOPe OF OPeRaTION MaNageMeNT operations management concern with the conversion of inputs into outputs, using physical resources, so as to provide the desired utilities to the customer while meeting the other organizational objectives of effectiveness, efficiency and adoptability. It distinguishes itself from other functions such as personnel, marketing, finance, etc. by its primary concern for ‘conversion by using physical resources’. Following are the activities, which are listed under production and operations management functions: 1. Location of facilities. 2. plant layouts and material Handling. 3. product Design. 4. process Design. 5. production and planning control. 6. Quality control. 7. materials management. 8. maintenance management. Location of Facilities Plant Layout Maintenance & Management Material Handling Production Materials Product Operations management design Management Process Quality design Control Production Planning and Control Fig. 1 : Scope of production and operations management 1.2 PROduCTIONS MaNageMeNT vs OPeRaTIONS MaNageMeT there are two points of distinction between production management and operations management. First, the term production management is more used for a system where tangible goods are produced. Whereas, operations management is more frequently used where various inputs are transformed into intangible services. Viewed from this perspective, operations management will cover such service organisations as banks, airlines, utilities, pollution control agencies, super bazaars, educational institutions, libraries, consultancy firms and police departments, in addition, of course, to manufacturing enterprises. the second distinction relates to the evolution of the subject. operations management is the term that is used nowadays. production management precedes operations management in the historical growth of the subject. operations managment & strategic management 3Operations Management – Introduction 1.3 CHaRaCTeRISTIC OF MOdeRN OPeRaTIONS FuNCTION the production management of today presents certain characteristics which make it look totally different from what it was during the past. Specifically, today’s production system is characterised by at least four features. 1. Manufacturing as Competitive advantage in the past production was considered to be like any other function in the organisation. Wheft demand was high and production capacities were inadequate, the concern was to somehow muster all inputs and use them to produce goods which would be grabbed by -narket. But today’s scenario is contrasting. plants have excess capacities, competition is mounting and firms look and gain competitive advantage to survive and succeed. Interestingly, aroduction system offers vast scope to gain competitive edge and firms intend to exploit the potential. total Quality management (tQm), time-Based competition, Business process re-engineering (Bpre), Just-in-time (Jit), Focused Factory, Flexible manufacturing systems (Fms), computer integrated manufacturing (cim), and the Virtual corporation are but only some techniques which the companies are employing to gain competitive advantage. 2. Services Orientation as was stated earlier, service sector is gaining greater relevance these days. the production system, therefore, needs to be organised keeping in mind the peculiar requirements of the service component. the entire manufacturing needs to be geared to serve (i) intangible and perishable nature of the services, (ii) constant interaction with clients or customers, (iii) small volumes of production to serve local markets, and (iv) need to locate facilities to serve local markets. there is increased presence of professionals on the production, instead of technicians and engineers. 3. disappearance of Smokestacks protective labour legislation, environmental movement and gradual emergence of knowledge based organisations have brought total transformation in the production system. today’s factories are aesthetically designed and built, environment friendly - in fact, they are homes away from homes. going to factory everyday is no more excruciating experience, it is like holidaying at a scenic spot. a visit to aBB, L & t or smith Kline and Beecham should convince the reader about the transformation that has taken place in the wealth creation system. 4. Small has become beautiful it was e.F. schumacher who, in his famous book Small is Beautiful, opposed giant organisations and increased specialisation. He advocated, instead, intermediate technology based on smaller working units, community ownership, and regional workplaces utilising local labour and resources. For him, small was beautiful. Businessmen, all over the world, did not believe in schumacher’s philosophy. inspired by economies of scale, industrialists went in for huge organisations and mass production systems. 1.4 ReCeNT TReNdS IN PROduCTION/OPeRaTIONS MaNageMeNT recent trends in production/operations management relate to global competition and the impact it has on manufacturing firms. Some of the recent trends are : 1. global Market Place : Globalisation of business has compelled many manufacturing firms to have operations in many countries where they have certain economic advantage. this has resulted in a steep increase in the level of competition among manufacturing firms throughout the world. 2. Production/Operations Strategy : More and more firms are recognising the importance of production/ operations strategy for the overall success of their business and the necessity for relating it to their overall business strategy. 3. Total Quality Management (TQM) : TQM approach has been adopted by many firms to achieve customer satisfaction by a never-ending quest for improving the quality of goods and services. 4. Flexibility : the ability to adapt quickly to changes in volume of demand, in the product mix demanded, and in product design or in delivery schedules, has become a major competitive strategy and a competitive advantage to the firms. This is sometimes called as agile manufacturing. 4 operations managment & strategic management5. Time Reduction : reduction of manufacturing cycle time and speed to market for a new product provide competitive edge to a firm over other firms. When companies can provide products at the same price and quality, quicker delivery (short lead times) provide one firm competitive edge over the other. 6. Technology : advances in technology have led to a vast array of new products, new processes and new materials and components. automation, computerisation, information and communication technologies have revolutionised the way companies operate. technological changes in products and processes can have great impact on competitiveness and quality, if the advanced technology is carefully integrated into the existing system. 7. Worker Involvement : the recent trend is to assign responsibility for decision making and problem solving to the lower levels in the organisation. this is known as employee involvement and empowerment. examples of worker involvement are quality circles and use of work teams or quality improvement teams. 8. Re-engineering : this involves drastic measures or break-through improvements to improve the performance of a firm. It involves the concept of clean-slate approach or starting from scratch in redesigning the business processes. 9. environmental Issues : today’s production managers are concerned more and more with pollution control and waste disposal which are key issues in protection of environment and social responsibility. there is increasing emphasis on reducing waste, recycling waste, using less-toxic chemicals and using biodegradable materials for packaging. 10. Corporate downsizing (or Right Sizing) : Downsizing or right sizing has been forced on firms to shed their obesity. This has become necessary due to competition, lowering productivity, need for improved profit and for higher dividend payment to shareholders. 11. Supply-Chain Management : Management of supply-chain, from suppliers to final customers reduces the cost of transportation, warehousing and distribution throughout the supply chain. 12. Lean Production : production systems have become lean production systems which use minimal amounts of resources to produce a high volume of high quality goods with some variety. These systems use flexible manufacturing systems and multi-skilled workforce to have advantages of both mass production and job production (or craft production). operations managment & strategic management 5Operations Management – Introduction 6 operations managment & strategic managementStudy Note - 2 OPERATiONS PLANNiNg This Study Note includes 2.1 Demand Forecasting 2.2 Capacity Planning 2.3 Capacity Reqirement 2.4 Facility Location 2.5 Facility Layout 2.6 Resource Aggregate Planning 2.7 Material Requirements Planning 2.8 Manufacturing Resource Planning 2.9 Enterprise Resource Planning 2.10 Economic Batch Quantity 2.1 DEMAND FORECASTiNg Forecasting Forecasting means peeping into the future. as future is unknown and is anybody’s guess but the business leaders in the past have evolved certain systematic and scientific methods to know the future by scientific analysis based on facts and possible consequences. thus, this systematic method of probing the future is called forecasting. in this way forecasting of sales refers to an act of making prediction about future sales followed by a detailed analysis of facts related to future situations and forces which may affect the business as a whole. Foresight is not the whole of management, but at least it is an essential part of management and accordingly, to foresee in this context means both to assess the future and make provisions for it, that is forecasting is itself action already. Forecasting as a kind of future picture wherein proximate events are outlined with some distinctness, while remote events appear progressively less distinct and it entails the running of the business as foresee and provide means to run the business over a definite period. as far as the marketing manager is concerned the sales forecast is an estimate of the amount of unit sales for a specified future period under the proposed marketing plan or program. It may also be defined as an estimate of sales in rupees of physical units for a specified future period under a proposed marketing plan or program and under an assumed set of economic and other force outside the organisation for which the forecast is made. When we consider the function of production and operations management, no doubt production and operation departments will produce goods as per the sales program given by the sales department, but it has to prepare forecast regarding machine capacity required, materials required and time required for production and so on. this needs the knowledge of what exactly happened in the production shop in previous periods. making of a proper forecast requires the assessment of both controllable and uncontrollable factors (both economic and non economic) inside and outside the organisation. all business and industrial activities revolve around the sale and its future planning. to know what a business will do we must know its future sales. so, sales forecasting is the most important activity in the business because all other activities depend upon the sales of the concern. Sales forecasting as a guiding factor for a firm because it enables the firm to concentrate its efforts to produce the required quantities, at the right time at reasonable price and of the right quality. sales forecasting is the basis of planning the various activities i.e.; production activities, pricing policies, programme policies and strategies, personnel policies as to recruitment, transfer, promotion, training, wages etc. operations managment & strategic management 7Operations Planning the period of forecasting, that is the time range selected for forecasting depends on the purpose for which the forecast is made. the period may vary from one week to some years. Depending upon the period, the forecast can be termed as ‘short range forecasting’, medium range forecasting’ and ‘Long range forecasting’. ‘short range forecasting period may be one week, two weeks or a couple of months. medium range forecasting period may vary from 3 to 6 months. Long range forecasting period may vary from one year to any period. the objective of above said forecast is naturally different. in general, short term forecasting will be of more useful in production planning. the manager who does short range forecast must see that they are very nearer to the accuracy. in long range forecast, the normal period used is generally 5 years. in some cases it may extends to 10 to 15 years also. the purpose of long range forecast is: (i) to work out expected capital expenditure for future developments or to acquire new facilities, (ii) To determine expected cash flow from sales, (iii) to plan for future manpower requirements, (iv) to plan for material requirement, (v) to plan for research and Development. Here much importance is given to long range growth factor. in case of medium range forecasting the period may extend over to one or two years. the purpose of this type of forecasting is: (i) to determine budgetary control over expenses, (ii) to determine dividend policy, (iii) To find and control maintenance expenses, (iv) to determine schedule of operations, (v) to plan for capacity adjustments. in case of short-term forecast, which extends from few weeks to three or six months and the following purposes are generally served: (i) to estimate the inventory requirement, (ii) To provide transport facilities for finished goods, (iii) to decide work loads for men and machines, (iv) To find the working capital needed, (v) to set-up of production run for the products, (vi) To fix sales quota, (vii) To find the required overtime to meet the delivery promises. everyone who use the forecast for one purpose or the other expects that they need that forecast should be accurate. But it is practically impossible to forecast accurately. But decisions are made everyday to run the business by using the best information available with them. management scientists have developed various methods for forecasting. one has to decide which method has to be used to suit the information available with him and to suit his needs. The manager, who is concerned with forecasting, must have knowledge of factors influencing forecast. Various factors that influence the forecast are: (i) environmental changes, (ii) changes in the preference of the user, (iii) number of competitive products, (iv) Disposable income of the consumer. 8 operations managment & strategic managementin forecasting the production important factors to be considered are: (i) Demand from the marketing department, (ii) rate of labours absenteeism, (iii) availability of materials, (iv) available capacity of machines, (v) maintenance schedules, (vi) Delivery date schedules. Steps in forecasting Whatever may be the method used for forecasting, the following steps are followed in forecasting. (a) Determine the objective of forecast: What for you are making forecast? is it for predicting the demand? is it to know the consumer’s preferences? is it to study the trend? You have to spell out clearly the use of forecast. (b) Select the period over which the forecast will be made? is it long-term forecast or medium-term forecast or short-term forecast? What are your information needs over that period? (c) Select the method you want to use for making the forecast. this method depends on the period selected for the forecast and the information or data available on hand. it also depends on what you expect from the information you get from the forecast. select appropriate method for making forecast. (d) gather information to be used in the forecast. the data you use for making forecasting to produce the result, which is of great use to you. the data may be collected by: (i) Primary source: This data we will get from the records of the firm itself. (ii) Secondary source: this is available from outside means, such as published data, magazines, educational institutions etc. (e) Make the forecast: Using the data collected in the selected method of forecasting, the forecast is made. Forecasting Methods: Methods or techniques of sales forecasting: Different authorities on marketing and production have devised several methods or techniques of sales or demand forecasting. the sales forecasts may be result of what market people or buyers say about the product or they may be the result of statistical and quantitative techniques. the most common methods of sales forecasting are: 1. Survey of buyer’s inventions or the user’s expectation method: Under this system of sales forecasting actual users of the product of the concern are contacted directly and they are asked about their intention to buy the company’s products in an expected given future usually a year. total sales forecasts of the product then estimated on the basis of advice and willingness of various customers. this is most direct method of sales forecasting. the chief advantages of this method are: (i) sales forecast under this method is based on information received or collected from the actual users whose buying actions will really decide the future demand. so, the estimates are correct. (ii) it provides a subjective feel of the market and of the thinking behind the buying intention of the actual uses. it may help the development of a new product in the market. (iii) this method is more appropriate where users of the product are numbered and a new product is to be introduced for which no previous records can be made available. (iv) it is most suitable for short-run forecasting. 2. Collective opinion or sales force composite method: Under this method, views of salesmen, branch manager, area manager and sales manager are secured for the different segments of the market. salesmen, being close to actual users are required to estimate expected sales in their respective territories and sections. the estimates of individual salesmen are then consolidated to find out the total estimated sales for the coming session. these estimates are then further examined by the successive executive levels in the light of various factors like proposed changes in product design, advertising and selling prices, competition etc. before they are finally emerged for forecasting. operations managment & strategic management 9Operations Planning 3. Group executive judgement or executive judgement method: this is a process of combining, averaging or evaluating, in some other way, the opinions and views of top executives. opinions are sought from the executives of different fields i.e., marketing; finance; production etc. and forecasts are made. 4. Experts’ opinions: Under this method, the organisation collects opinions from specialists in the field outside the organisation. opinions of experts given in the newspapers and journals for the trade, wholesalers and distributors for company’s products, agencies or professional experts are taken. By analysing these opinions and views of experts, deductions are made for the company’s sales, and sales forecasts are done. 5. Market test method: Under this method seller sells his product in a part of the market for sometimes and makes the assessment of sales for the full market on the bases of results of test sales. this method is quite appropriate when the product is quite new in the market or good estimators are not available or where buyers do not prepare their purchase plan. 6. Trend projection method: Under this method, a trend of company’s or industry’s sales is fixed with the help of historical data relating to sales which are collected, observed or recorded at successive intervals of time. such data is generally referred to as time series. the change in values of sales is found out. the study may show that the sales sometimes are increasing and sometimes decreasing, but a general trend in the long run will be either upward or downward. it cannot be both ways. this trend is called secular trend. the sales forecasts with the help of this method are made on the assumption that the same trend will continue in the future. the method which is generally used in fitting the trend is the method of least squares or straight line trend method. With this method a straight line trend is obtained. This line is called ‘line of best fit’. By using the formula of regression equation of Y on X, the future sales are projected. Calculation of trend. the trend can be calculated by the least square method as follows: (i) Find time deviations (X) of each period from a certain period and then find the sum of time deviation (∑X). 2 2 (ii) square the time deviation of each period (X ) and then find the sum of squares of each period (∑X ). (iii) multiply time deviations with the sales of each period individually (XY) and add the product of the column to find (∑XY). (iv) To find the trend (Y) this is equal to a + bX. The value of a and b may be determined by either of the following two ways: (a) Direct method. This method is applicable only when ∑X = 0. To make ∑X = 0, it is necessary that the time deviations should be calculated exactly from the mid point of the series. then, the values of a and b will be calculated as follows: Y XY ∑ ∑ a (average) = and b (rate of growth)= 2 n X this method is simple and direct. (b) indirect method. This method is somewhat difficult. This method can be applied in both the cases where ∑X has any positive or negative values or ∑X is not equal to zero. The values of a and b are calculated by solving the following two equations: ∑Y = na + b∑X 2 ∑XY = a∑X + b∑X By calculating the values of a and b in the above manner, the sales can be forecasted for any future period by applying the formula Y = a + bX. 7. Moving average method: this is another statistical method to calculate the trend through moving averages. it can be calculated as follows: an appropriate period is to be determined for which the moving average is calculated. While determining the period for moving averages, the normal cycle time of changes in the values of series should be considered so that short-term fluctuations are eliminated. As far as possible, the period for moving averages should be in odd numbers such as period of 3, 5 or 7 years. the period in even numbers will create a problem in centralising the values of averages. the calculated values of moving averages present the basis for determining the expected amount of sale. 10 operations managment & strategic management8. Criteria of a good forecasting method: it cannot be said which method of sales forecasting is the best because everyone has merits and demerits of its own. the suitability of a method depends on various factors such as nature of theproduct, available time and past records, wealth and energy, degree of accuracy and the forecaster etc. of an enterprise. However, in general, a good forecasting method must possess the following qualifications. (i) Accuracy: Accuracy of the forecasting figures is the life blood of the business because many important plans and programmes, policies andstrategies are prepared and followed on the basis of such estimates. if sales forecasts are wrong, the businessman suffer a big loss. Hence, the method of forecasting to be applied must amount to maximum accuracy. (ii) Simplicity: The method for forecasting should be very simple. If the method is difficult or technical, then there is every possibility of mistake. some information are collected from outside and that will remain unanswered or inaccurate replies will be received, if the method is difficult. Management must also be able to understand and have confidence in the method. (iii) Economy: the method to be used should be economical taking into account the importance of the accuracy of forecast. costs must be (iv) Availability: the method should be such for which the relevant information may be available immediately with reasonable accuracy. moreover, the technique must give quick results and useful information to the management. (v) Stability: the data of forecasting should be such wherein the future changes are expected to be minimum and are reliable for future planning for sometime. (vi) Utility: the forecasting technique must be easily understandable and suitable to the management. illustration 1. From the following time series data of sale project the sales for the next three years. Year 2001 2002 2003 2004 2005 2006 2007 sales (`000 units) 80 90 92 83 94 99 92 Solution: Computation of Trend Values Years Time Deviation Sales in Squares of Product of time from 2004 (`000 units) time dev. deviations and sales X Y X² XY 2001 –3 80 9 –240 2002 –2 90 4 –180 2003 –1 92 1 –92 2004 0 83 0 0 2005 +1 94 1 +94 2006 +2 99 4 +198 2007 +3 92 9 +276 n = 7 ∑X = 0 ∑Y = 630 ∑X² = 28 ∑XY = + 56 regression equation of Y on X Y = a + bX To find the values of a and b Y ∑ 630 a = = = 90 n 7 XY 56 ∑ b = = = 2 2 28 X ∑ operations managment & strategic management 11Operations Planning Hence regression equation comes to Y = 90 + 2X. With the help of this equation we can project the trend values for the next three years, i.e. 2008, 2009 and 2010. Y = 90 + 2(4) = 90 + 8 = 98 (000) units. 2008 Y = 90 + 2(5) = 90 + 10 = 100 (000) units. 2009 Y = 90 + 2(6) = 90 + 12 = 102 (000) units. 2010 illustration 2. With the help of following data project the trend of sales for the next five years: Years 2002 2003 2004 2005 2006 2007 Sales (in lakhs) 100 110 115 120 135 140 Solution: Computation of trend values of sales Year Time deviations from Sales (in lakh `) Squares of time Product of time the middle of 2004 and deviation deviation and sales 2005 assuring 5 years = 1 2 X Y X XY 2002 -5 100 25 -500 2003 -3 110 9 -330 2004 -1 115 1 -115 2005 +1 120 1 +120 2006 +3 135 9 +405 2007 + 5 140 25 +700 n = 6 ΣX = 0 ΣY = 720 ΣX² = 70 ΣXY = 280 regression equation of Y on X: Y = a + bX To find the values of a and b Y ∑ 720 a = = = 120 n 6 XY ∑ 280 b = = = 4 2 70 X ∑ sales forecast for the next years, i.e., 2008 to 2012 Y = 120 + 4 (+7) = 120 + 28 = ` 148 lakhs 2008 Y = 120 + 4 (+9) = 120 + 36 = ` 156 lakhs 2009 Y = 120 + 4 (+11) = 120 + 44 = ` 164 lakhs. 2010 Y = 120 + 4 (+13) = 120 + 52 = ` 172 lakhs. 2011 Y = 120 + 4 (+15) = 120 + 60 = ` 180 lakhs. 2012 12 operations managment & strategic management

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