Module 1

Operations Planning, Control & Forecasting

Notes

MBA Semester 4
Course – Sales and Operations Planning

Topics Covered
1. Operations planning and control
2. Forecasting & Need for forecasting
3. Time horizons of forecasting – Short term, Medium term and Long term
4. Stages of forecasting
5. Forecasting Methods & Sources of data

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 Module – 1
Module Name

1. Operations Planning & Control

Operational planning is about controlling the design and development process. The organization
must ensure that all related activities take place under controlled conditions. Operational planning
and control requirements (ISO 9001:2015) are comparable to the requirements from ISO
9001:2008 Clause 7.1 – Product Realization Planning, but it has been extended to include
implementation and control, as well planning.

Your organization needs to plan in advance for how they will manufacture their product or deliver
their service. The plans need to take into account the product requirements and any quality
objectives that might be appropriate, resources and documents that may be necessary, what type
of monitoring and/or inspection activities should be put in place to ensure the product or service
will meet the requirements, and what types of records should be kept.

There should be a process for developing work instructions that detail standard practice for
performing tasks that comply with all management system requirements, as well as a process for
identifying hazards and controlling tasks for all non-routine tasks and ensuring all safety and
environmental requirements are met.

You should seek and record evidence that your organization has determined the design and the
processes to meet the requirements of your customers and the requirements of your management
system. Evidence that the processes, including all inputs, outputs, resources, controls, criteria, and
process measurement and performance indicators being planned should be sought. Operational
planning includes the following elements:

1. Developing process plans that include clear, concise and detailed work instructions;
2. Defining quality objectives and requirements (tolerances, surface finish, workmanship
standards, etc.) for the product or service;
3. Defining how quality objectives and requirements are documented; e.g. drawings,
specifications, models, etc., and communicated, e.g. instructions, pre-production samples,
operator training, etc.
4. Ensuring that product and service inspection and testing methods and procedures are
defined and documented, along with their respective acceptance criteria;
5. Ensuring that each specified inspection, test and monitoring activity is recorded through
work orders, tags, tickets, forms, electronic data collection systems, etc.;
6. Undertaking risk analysis studies of key manufacturing processes and ensuring mitigations
arising from risk management are incorporated into key product and or process designs;
7. Developing the capabilities, training, qualifications, procedures and work instructions
necessary to execute the requirements to ensure product compliance to contract/customer
requirements;

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 8. Developing training and procedures to ensure general workmanship, safety, equipment
maintenance and qualification, material handling and environmental standards are
maintained in a manner consistent with contract/customer requirements and sound
business practices;
9. Designating and maintaining an adequate number of personnel trained and qualified to
support both new product development and continuous process improvement;
10. Implementing a production and purchasing control systems capable of managing all phases
of manufacturing and service delivery, from scheduling of customer needs, to the delivery of
finished goods. The system employed should account for every part entered into the
manufacturing process and provide for lot/batch tracking, traceability and integrity of
process, including documentation of delays and interruptions;
11. Ensuring suitable production facilities, equipment, inspection and servicing capabilities are
available to achieve contract/customer requirements.
12. Ensuring that environmental factors such as lighting, housekeeping, contamination,
handling equipment, temperature compensation and process licensing are managed in such
a way as to comply with contract/customer and regulatory agency requirements.
13. Controlling conditions such as utilities and supplies including water, compressed air,
electricity and chemical products to the extent they affect product quality.
Department Managers must ensure that work practices and instructions are developed as
necessary to support the execution of process and production plans, while supervisors at every
level must ensure that training is implemented and that qualifications are maintained to support
the requirements of process and production plans.

Operational personnel must carry out the process and production plans as per instructions and in
the sequence presented to them. When required, they must stop work if they identify any
discrepancies in product, planning or instructions to their immediate supervisor, and make input
into process improvement or corrective action.

Process and production plan verification

All other customer defined criteria for control or monitoring of quality must have been established
(e.g. process mapping, statistical process control, third party verification, etc.) and customer
approval must have been obtained as necessary. A new process is deemed qualified for release to
production when the following criteria are met:

1. An approved First Article is produced to the Process Plan to verify that all dimensions,
features, and product attributes meet specified requirements;
2. Key/Critical features are identified for in-process monitoring of machined product through
pre-control or other specified means;
3. All machine set-up, operating instructions and operator qualifications are in place and
operating;
4. Inspection plans are in place for quality control verification at both In-Process and Final
Inspection steps;
5. Special processes have been verified through the approved supplier list or other specified
means;
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 6. Product and/or component purchases have been verified through the approved supplier list
and end item Quality Control or specified functional test.

2. Forecasting & Need for forecasting

Learning Objectives
 What is forecasting and why is it important?
 Understand the differences between qualitative and quantitative forecasting.
 Describe types of demand patterns exhibited in product demand.
 Calculate forecasts using time series analysis and seasonal index.
 Determine forecast accuracy.
Forecasting is the process of making predictions of the future based on past and present data. This
is most commonly by analysis of trends. A commonplace example might be estimation of some
variable of interest at some specified future date. Prediction is a similar, but more general term.
Both might refer to formal statistical methods employing time series, cross-
sectional or longitudinal data, or alternatively to less formal judgmental methods. Usage can differ
between areas of application: for example, in hydrology, the terms “forecast” and “forecasting” are
sometimes reserved for estimates of values at certain specific future times, while the term
“prediction” is used for more general estimates, such as the number of times floods will occur over
a long period.
Risk and uncertainty are central to forecasting and prediction; it is generally considered good
practice to indicate the degree of uncertainty attached to specific forecasts. In any case, the data
must be up to date in order for the forecast to be as accurate as possible. In some cases, the data
used to predict the variable of interest is itself forecasted.
As discussed in the previous chapter, functional strategies need to be aligned and supportive to the
higher level corporate strategy of the organization. One of these functional areas is marketing.
Creating marketing strategy is not a single event, nor is the implementation of marketing strategy
something only the marketing department has to worry about.
When the strategy is implemented, the rest of the company must be poised to deal with the
consequences. An important component in this implementation is the sales forecast, which is the
estimate of how much the company will actually sell. The rest of the company must then be geared
up (or down) to meet that demand. In this module, we explore forecasting in more detail, as there
are many choices that can be made in developing a forecast.
Accuracy is important when it comes to forecasts. If executives overestimate the demand for a
product, the company could end up spending money on manufacturing, distribution, and servicing
activities it won’t need. Data Impact, a software developer, recently overestimated the demand for
one of its new products. Because the sales of the product didn’t meet projections, Data Impact
lacked the cash available to pay its vendors, utility providers, and others. Employees had to be
terminated in many areas of the firm to trim costs.
Underestimating demand can be just as devastating. When a company introduces a new product, it
launches marketing and sales campaigns to create demand for it. But if the company isn’t ready to
deliver the amount of the product the market demands, then other competitors can steal sales the

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firm might otherwise have captured. Sony’s inability to deliver the e-Reader in sufficient numbers
made Amazon’s Kindle more readily accepted in the market; other features then gave the Kindle an
advantage that Sony is finding difficult to overcome.
The firm has to do more than just forecast the company’s sales. The process can be complex,
because how much the company can sell will depend on many factors such as how much the
product will cost, how competitors will react, and so forth. Each of these factors has to be taken
into account in order to determine how much the company is likely to sell. As factors change, the
forecast has to change as well. Thus, a sales forecast is actually a composite of a number of
estimates and has to be dynamic as those other estimates change.
A common first step is to determine market potential, or total industry-wide sales expected in a
particular product category for the time period of interest. (The time period of interest might be
the coming year, quarter, month, or some other time period.) Some marketing research companies,
such as Nielsen, Gartner, and others, estimate the market potential for various products and then
sell that research to companies that produce those products.
Once the firm has an idea of the market potential, the company’s sales potential can be estimated. A
firm’s sales potential is the maximum total revenue it hopes to generate from a product or the
number of units of it the company can hope to sell. The sales potential for the product is typically
represented as a percentage of its market potential and equivalent to the company’s estimated
maximum market share for the time period. In your budget, you’ll want to forecast the revenues
earned from the product against the market potential, as well as against the product’s costs.

3. Time horizons of forecasting

Business forecasts are classified according to period, time and use. There are long term
forecasts as well as short term forecasts. Operation managers need long range forecasts to make
strategic-decisions about products, processes and facilities. They also need short term forecasts to
assist them in making decisions about production issues that span, only few weeks. Forecasting
forms an integral part of planning and decision making, production managers must be clear about
the horizon of forecasts.
The three divisions of forecast are short range forecast, medium range forecast and long range
forecast.
1. Short range forecast: It is typically less than 3 months but has a time span of up-to 1 year.
It is used in planning, purchasing for job schedules, job assignments, work force levels,
product levels.
2. Medium range forecast: It is typically 3 months to 1 year but has a time span from one to
three years. It is used for sales planning, production planning, cash budgeting and so on.
3. Long range forecast: This has a time span of three or more years. It is used for designing
and installing new plants, facility location, capital expenditures, research and development,
etc.
Medium and Long range Forecasts deal with more comprehensive issues and support management
decisions regarding design and the development of new products, plants and processes. Short
range forecasts tend to be more accurate than the long range forecasts.
Application of Short Range forecasts

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Short range forecasts provide operations managers with the information to make important
decisions such as the following:
 How much inventory of a particular product should be carried next month?
 How much of each product should be scheduled for production next week
 How much of each raw material should be ordered for delivery next week?
 How much workers should be scheduled to work on regular time basis and on overtime
basis next week?
 How many maintenance workers should be scheduled to work next week?
Application of Long Range forecasts
Long range forecasts provide, operations managers with information to make important decisions
such as the following:
 Selecting a product design. The final design is dependent on expected sales volume. If the
demand is high, the design should be such that the product can be mass produced ton
ensuring low costs manufacture.
 Selecting a production processing scheme
 Selecting a plan to supply scarce materials
 Selecting a long range production capacity plan
 Selecting a long range Financial Plan for acquiring funds for capital investment
 To build new buildings and to purchase new materials
 To develop new sources of materials and new source of capital funds(finance)

4. Stages of forecasting

A forecasting task usually involves five basic steps.

Step 1: Problem definition.
Often this is the most difficult part of forecasting. Defining the problem carefully requires an
understanding of the way the forecasts will be used, who requires the forecasts, and how the
forecasting function fits within the organisation requiring the forecasts. A forecaster needs to
spend time talking to everyone who will be involved in collecting data, maintaining databases, and
using the forecasts for future planning.
Step 2: Gathering information.
There are always at least two kinds of information required: (a) statistical data, and (b) the
accumulated expertise of the people who collect the data and use the forecasts. Often, it will be
difficult to obtain enough historical data to be able to fit a good statistical model. In that case, the
judgmental forecasting methods mentioned earlier can be used. Occasionally, old data will be less
useful due to structural changes in the system being forecast; then we may choose to use only the
most recent data. However, remember that good statistical models will handle evolutionary
changes in the system; don’t throw away good data unnecessarily.

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Step 3: Preliminary (exploratory) analysis.
Always start by graphing the data. Are there consistent patterns? Is there a significant trend? Is
seasonality important? Is there evidence of the presence of business cycles? Are there any outliers
in the data that need to be explained by those with expert knowledge? How strong are the
relationships among the variables available for analysis? Various tools have been developed to help
with this analysis.
Step 4: Choosing and fitting models.
The best model to use depends on the availability of historical data, the strength of relationships
between the forecast variable and any explanatory variables, and the way in which the forecasts
are to be used. It is common to compare two or three potential models. Each model is itself an
artificial construct that is based on a set of assumptions (explicit and implicit) and usually involves
one or more parameters which must be estimated using the known historical data. We will discuss
regression models (Chapter 5), exponential smoothing methods (Chapter 7), Box-Jenkins ARIMA
models (Chapter 8), Dynamic regression models (Chapter 9), Hierarchical forecasting (Chapter 10),
and several advanced methods including neural networks and vector auto regression in
Chapter 11.
Step 5: Using and evaluating a forecasting model.
Once a model has been selected and its parameters estimated, the model is used to make forecasts.
The performance of the model can only be properly evaluated after the data for the forecast period
have become available. A number of methods have been developed to help in assessing the
accuracy of forecasts. There are also organisational issues in using and acting on the forecasts. A
brief discussion of some of these issues is given in Chapter 3. When using a forecasting model in
practice, numerous practical issues arise such as how to handle missing values and outliers, or how
to deal with short time series. These are discussed in Chapter 12.

5. Forecasting Methods & Sources of data

1. Primary sources

Information from primary sources takes time to gather because it is first-hand

information, also considered the most reliable and trustworthy sort of information. The
forecaster himself does the collection, and may do so through things such as interviews,
questionnaires, and focus groups.

2. Secondary sources

Secondary sources supply information that has been collected and published by other
entities. An example of this type of information might be industry reports. As this
information has already been compiled and analyzed, it makes the process quicker.

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