Production Operation[1]

8/3/2019 Production Operation[1]

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PRODUCTION & OPERATION

MANAGEMENT

Author

NEELAM YADAV



Production Operation Management

POM concerns itself with the conversion of inputs into outputs, usingphysical resourses, so as to provide the desired utility/ utilities ± of

form, place, possession or state or a combination thereof ± to the

customer while meeting the other organisational objectives of

effectiveness, efficiency and adaptability.

Production and Operations Management ± Some Cases

Case Input Physical

Resource/s used

Output Type of Input/

Output

Type of utility

provided to

the customers

1. Inorganic

chemicalsproduction

Ores Chemical plant &

equipment, otherchemicals, use of

labour, etc.

Inorganic

chemical

Physical input

and physicaloutput

Form

2. Outpatient

ward of a

general

hospital

Unhealth

y

Patients

Doctors, nurses,

other staff,

equipment, other

facilities

Healthier

patients

Physical input

and physical

output

State



3. Educational

institution

µRaw¶ minds Teachers,

books, teaching

aids, etc.

µEnlightened¶

minds

Physical input

and physical

output

State

4. Sales office Data from

market

Personnel,

office

equipment and

facilities, etc.

Processed

µinformation¶

Non-physical

input and Non-

physical output

State

5. Petrol

pump

Petrol (in

possession of

the petrolpump owner)

Operators and

boys,

equipment, etc.

Petrol (in

possession of

the carowner)

Physical input

and physical

output

Possession

6. Taxi Service Customer (at

railway

station)

Driver taxi

itself, petrol

Customer (at

his residence)

Physical input

and physical

output

Place

7.Maintenance

workshop

Equipmentgone µbad¶

Mechanics,Engineers,

repairs

equipment, etc.

µGood¶Equipment

Physical inputand physical

output

State andForm

8. Income Tax

office

µInformation

¶

Officers and

other staff,

office facility

Raid Non-physical

input and

physical output

State

(possession?)



Production and operations management (POM) is defined as thedesign, operation, and improvement of the transformation process,

which converts the various inputs into the desired outputs of

products and services.

It is now replaced by simply operations management. Operations

management is a broad term which includes manufacturing as well

as service organizations. Operations management also highlights the

increasing importance of service industry in the overall business

environment.



Today's Factors Affecting OM

Global Competition

Quality, Customer Service, and Cost

Challenges

Rapid Expansion of Advanced

Technologies

Continued Growth of the Service Sector

Scarcity of Operations Resources

Social-Responsibility Issues



Studying Operations Management

Operations as a System

Decision Making in OM



Operations as a System

ProductionProduction SystemSystem

InputsInputsConversionConversion

SubsystemSubsystem OutputsOutputs

ControlControl

SubsystemSubsystem



Inputs of an Operations System External

± Legal, Economic, Social, Technological

Market

± Competition, Customer Desires, Product Info.

Primary Resources

± Materials, Personnel, Capital, Utilities



Conversion Subsystem

Physical (Manufacturing)

Locational Services (Transportation)

Exchange Services (Retailing)

Storage Services (Warehousing)

Other Private Services (Insurance)

Government Services (Federal)



Transformation ProcessTransformation process for a hybrid service and manufacturing

organization ( a restaurant)

Inputs

Customers Waiters

Chef

Manager

Furniture

Building

Food

Transformation

Pr ocess

OutputsCustomer satisfied with

Good preparationsof the food

Pleasant behaviour

and personality

of the waiters

Appropriate prices

charged

Random Disturbances

High turnover of chefs,

waiters, etc.

Inflation

Govt.¶s taxation policy

Feedback mechanisms

Rising revenues

Repeat customers

Appreciation of customers

Quality of

inputs

monitored

Quality of outputs

monitored



Decision Making in OM Strategic Decisions

Operating Decisions

Control Decisions



Strategic Decisions

These decisions are of strategic importanceand have long-term significance for the

organization.

Examples include deciding: ± the design for a new product¶s production

process

± where to locate a new factory

± whether to launch a new-product development

plan



Operating Decisions

These decisions are necessary if theongoing production of goods and services is

to satisfy market demands and provide

profits. Examples include deciding:

± how much finished-goods inventory to carry

± the amount of overtime to use next week

± the details for purchasing raw material next

month



Control Decisions

These decisions concern the day-to-day

activities of workers, quality of products

and services, production and overheadcosts, and machine maintenance.

Examples include deciding:

± labor cost standards for a new product

± frequency of preventive maintenance

± new quality control acceptance criteria



Production

Production is the process of making products.

In this process, different inputs like materials,

human, capital and other resources aretransformed into higher valued goods and

services.

³Production is a process by which goods andservice are created.´



Objectives of production management

1. Primary objectives

Quality

Quantity

Cost/ price

Time



2. Secondary objectives

Men

Materials

Machines

Services

Techniques



Functions of production management

Production design

Development of product

Purchasing

Plan implementation

Inventory control



Production vs. Operations vs.

Material Management

These are interrelated but there is a line of

difference between three.

Production is the transformation of rawmaterials and other inputs into higher valued

outputs.

Management of materials as input is known

as material management.

Management of processes or operations is

operations management.



Product Life Cycle

Time

ProductDevelop-

ment

Introduction

Profits

Sales

Growth Maturity Decline

Losses/Investments ($)

Sales andProfits ($)

Sales and Pr ofits Over the Pr oduct¶s Life Fr om

Intr oduction to Decline



Introduction Stage of the PLC

Summary of Characteristics, Objectives, & Strategies

SalesSales

CostsCosts

Pr ofitsPr ofits

Mar keting ObjectivesMar keting Objectives

Pr oductPr oduct

Pr icePr ice

Low salesLow sales

High cost per customer High cost per customer

Negative or lowNegative or low

Cr eate pr oduct awar eness and tr ialCr eate pr oduct awar eness and tr ial

Offer a basic pr oductOffer a basic pr oduct

Usually is high; use cost-plus formulaUsually is high; use cost-plus formula

Distr ibutionDistr ibution High distr ibution expensesHigh distr ibution expenses

Adver tisingAdver tising Build pr oduct awar eness among early adopter s and dealer s

Build pr oduct awar eness among early adopter s and dealer s



G rowth Stage of the PLC G rowth Stage of the PLC


SalesSales

CostsCosts

Pr ofitsPr ofits


Pr oductPr oduct

Pr icePr ice

Rapidly r ising salesRapidly r ising sales

Average cost per customer Average cost per customer

Rising pr ofitsRising pr ofits

Maximize mar ket shar eMaximize mar ket shar e

Offer new pr oduct featur es, extensions,ser vice, and warranty

Offer new pr oduct featur es, extensions,ser vice, and warranty

Pr ice to penetrate mar ketPr ice to penetrate mar ket

Distr ibutionDistr ibution Incr ease number of distr ibution outletsIncr ease number of distr ibution outlets

Adver tisingAdver tising Build awar eness and inter est in the massmar ket

Build awar eness and inter est in the massmar ket



M aturity Stage of the PLC M aturity Stage of the PLC Summary of Characteristics, Objectives, & Strategies

SalesSales

CostsCosts

Pr ofitsPr ofits


Pr oductPr oduct

Pr icePr ice

Peak salesPeak sales

Low cost per customer Low cost per customer

High pr ofits, then lower pr ofitsHigh pr ofits, then lower pr ofits

Maximize pr ofits while defending mar ketshar e

Maximize pr ofits while defending mar ketshar e

Diver sif y brand and modelsDiver sif y brand and models

Pr ice to match or best competitor sPr ice to match or best competitor s

Distr ibutionDistr ibution Build mor e intensive distr ibutionBuild mor e intensive distr ibution

Adver tisingAdver tising Str ess brand differ ences and benefitsStr ess brand differ ences and benefits



Decline Stage of the PLC Decline Stage of the PLC


SalesSales

CostsCosts

Pr ofitsPr ofits


Pr oductPr oduct

Pr icePr ice

Declining salesDeclining sales

Low cost per customer Low cost per customer

Declining pr ofitsDeclining pr ofits

Reduce expenditur e and maintain, r eposition,har vest or dr op the pr oduct

Reduce expenditur e and maintain, r eposition,har vest or dr op the pr oduct

Phase out weak itemsPhase out weak items

Cut pr iceCut pr ice

Distr ibutionDistr ibution Go selective: phase out unpr ofitable outletsGo selective: phase out unpr ofitable outlets

Adver tisingAdver tising Reduce to level needed to r etainhar d-cor e loyal customer s

Reduce to level needed to r etainhar d-cor e loyal customer s



Classification of Operations

The production and operations management function can be broadlydivided into the following four areas:

1. Technology selection and management

2. Capacity management

3. Scheduling/Timing/Time allocation

4. System maintenance

Technology selection and management

This is primarily an aspect pertaining to the long-term decision. It is not

immediate connected with the day-to-day short term decisions handled in

the plant, it is an important problem to be addressed in an age of

spectacular technological advances, so that an appropriate choice is made by a particular organization to suit its objectives, organizational

preparedness and its micro-economic perspectives.



It is a decision that will have a significant bearing on the management of

manpower, machinery, and materials capacity of the operations system. A

technology decision is closely linked with the capacity and system

maintenance areas.

Capacity Management

The capacity management aspect once framed in a long-term perspective,

revolves around matching of available capacity to demand or makingcertain capacity available to meet the demand variation. This is done on

both the intermediate and short time horizons. Capacity management is

very important for achieving the organisational objectives of efficiency,

customer service and overall effectiveness. While lower than needed

capacity results in non-fulfillment of some of the customer services and

other objectives of the production/operations system a higher than



necessary capacity results in lowered utilisation of the resourses or, in

other words, lower efficiency of the conversion operations.

Scheduling

Scheduling is another decision area of operations management which

deals with the timing of various activities ± time phasing of the filling of

the demands or rather, the time phasing of the capacities to meet the

demand as it keeps fluctuating. In job-shop (i.e. tailor-made physical

output or service) type operations systems, the scheduling decisions arevery important which determine the system effectiveness (e.g. customer

delivery) as well as the system efficiency (i.e. the productive use of the

machinery and labour). Similarly, we can also say that the need for system

effectiveness coupled with system efficiencies determine the system

structure and the importance of scheduling.



System Maintenance

The fourth area of operations management is regarding safeguards ± that

only desired outputs will be produced in the µnormal¶ condition of the physical resources, and that the condition will be maintained normal.

Technology selection and management has much to contribute towards

this problem. A proper selection and management procedure would give

rise to few problems. Further, the checks (e.g. quality checks on

physical/non-physical output) on the system performance and the

corrective action (e.g. repair of an equipment) would enhance the chances

of having the desired outputs undiluted by other pollutants.



Responsibilities of Operations Manager

To act as internal

quality auditors incertification

programmes suchas ISO 9000

To take part instrategic decisionmaking of the

organization.

To implement TotalProductiveMaintenance (TPM)programme

To take part in theimplementation anduse of ERP software

in the organization.

To automateprocessesaccording to therequirements of theorganization

To enhance the R & Defforts of the organizationfor becoming self-reliant

in developing newtechnologies.

To take care of issuesrelating to serviceoperationsmanagement

Increased attention totimely implementation of projects (such ascommissioning of facilities, launching of new products/services,etc.) in view of the

increased competition.

To implement theenvironment andpollution normsestablished by thegovernment from timeto time.

To take decisionsregarding outsourcing/off-shoing of businessprocesses

To act as amember of theconcurrent

engineeringteam in newproductdesign.

To act as supply chainmanagers in in forging long-term strategic relationships

with suppliers.

Increased attention totechnology managementin view of joint ventures

of MNCs with domesticcompanies.



New-Product Development

Process

IdeaGeneration

IdeaScr eening

ConceptDevelopment

and Testing

Mar ketingStrategy

BusinessAnalysis

Pr oductDevelopment

TestMar keting

Commer cialization



Customer s Competitor s Distr ibutor s Supplier s

N ew Product Development ProcessStep 1. Idea G eneration

N ew Product Development ProcessStep 1. Idea G eneration

Idea Generation is the Systematic Sear ch for New Pr oduct Ideas Obtained Inter nally Fr om

Employees and Also Fr om:



Process to spot good ideas and drop poor ones assoon as possible.

Many companies have systems for rating andscreening ideas which estimate:

± Market Size

± Product Price

± Development Time & Costs

± Manufacturing Costs

± Rate of Return Then, the idea is evaluated against a set of general

company criteria.

N ew Product Development ProcessStep 2. Idea Screening

N ew Product Development ProcessStep 2. Idea Screening



1. Develop New Pr oduct Ideasinto Alter native Detailed

Pr oduct Concepts

2. Concept Testing - Test theNew Pr oduct Concepts withGr oups of Tar get Customer s

3. Choose the One That Has theStr ongest Appeal to Tar get

Customer s

N ew Product Development ProcessStep 3. Concept Development & Testing

N ew Product Development ProcessStep 3. Concept Development & Testing



Par t Two Descr ibes Shor t-Term:Pr oduct¶s Planned Pr ice

Distr ibution

Mar keting Budget

Par t Two Descr ibes Shor t-Term:Pr oduct¶s Planned Pr ice

Distr ibution

Mar keting Budget

Par t Thr ee Descr ibes Long-Term:Sales & Pr ofit Goals

Mar keting Mix Strategy

Par t Thr ee Descr ibes Long-Term:Sales & Pr ofit Goals

Mar keting Mix Strategy

Mar keting Strategy Statement Formulation

Par t One Descr ibes Overall:Tar get Mar ket

Planned Pr oduct Positioning

Sales & Pr ofit GoalsMar ket Shar e

Par t One Descr ibes Overall:Tar get Mar ket

Planned Pr oduct Positioning

Sales & Pr ofit GoalsMar ket Shar e

N ew Product Development ProcessStep 4. M arketing Strategy Development

N ew Product Development ProcessStep 4. M arketing Strategy Development



N ew Product Development ProcessStep 5. Business Analysis

Step 6. Product Development

N ew Product Development ProcessStep 5. Business Analysis

Step 6. Product Development

Business Analysis

Review of Pr oduct Sales, Costs,

and Pr ofits Pr o jections to See if

They Meet Company Objectives

If Yes, Move to

Pr oduct Development

If No, Eliminate

Pr oduct Concept



N ew Product Development ProcessStep 7. Test M arketing

N ew Product Development ProcessStep 7. Test M arketing

Adver tising

Packaging

Pr oductBudget Levels

Positioning

Strategy

Distr ibutionPr icing

Branding

Elements thatMay be Test

Mar keted by a

Company

Test Mar keting is the Stage Wher e the Pr oduct andMar keting Pr ogram ar e Intr oduced into Mor e RealisticMar ket Settings.



When? Wher e?

Commer cialization is the Intr oduction of theNew Pr oduct into the Mar ketplace.

N ew Product Development ProcessStep 8. Commercialization

N ew Product Development ProcessStep 8. Commercialization



Facility Location Planning

A factory or a plant is the manufacturing facility of a company. A

warehouse is the storage facility of a manufacturing or a distribution

company. The offices of a service sector company such as a courier

company, a bank, or an insurance company are its facilities. The

facility location decision is very important for big business houses aswell as new entrepreneurs. Wrong location of the facility may lead to

a failure of the complete project.



Factors affecting Facility Location Planning

FacilityLocation

planning

Residential

Complexes,

Schools,

Hospitals,

Clubs, etc. Availability

Of cheap and

Skillful labour

Proximity

to raw

material

Good

transportationfacilities

Proximity to

subcontractors

Easy

Availability

Of cheap

land

Government

policies

Basic

amenities

Environment And

community

ProximityTo markets

Low

Construction

costs

Availability

Of power

supply



Availability of power supply ± Uninterrupted power supply is a basic

requirement of most industries. some factories have to set up their own

captive power plant if located in areas with power problems. For eg: the

factories of HINDALCO (Aditya Birla Group) have their own captive power plant.

Basic amenities ± The area for location of plant should have water supply

lines managed by the local municipal corporation. Roads up to the factory

premises are always desireable. These basic amenities are very useful

even during the construction period of the plant. Other amenities desired

are sanitation facilities such as sewer lines, drainage system, etc.

Government Policies ± The governments of state such as Maharashtra,

Gujarat, and Karnataka have been very successful in inducing big business

houses to set up their plants in these states. Local taxation policies and

various promotional efforts help in increasing the industrial activity in the

region. Pondicherry and Daman and Diu are examples of µno sales tax

regions¶.



Environmental and community considerations- Many state

governments have strict environmental policies in place, which have to be

followed by the industries operating there. The people residing in the area

should not be against the idea of having a plant in their region as the

effluents from a factory spoil the natural environment of the region.

Proximity to subcontractors- The presence of small ancillary units

manufacturing small components/sub-assemblies is important for any new

factory. If a new auto plant is set up in Gurgaon, where the Maruti Suzuki

plant is already located, it will get the advantage of the subcontractors

existing there. These subcontractors can immediately start supplying the

components required by the new plant for starting its production process.

Easy availability of cheap land- Land is the basic necessity for the

construction of a new plant. Regions such as UP, Bihar, and Orissa may

be suitable because of this. Still, because of many other factors, companies

prefer costly land near Mumbai, Pune, Ahmedabad, etc.



Less Construction costs- Construction costs of a plant may be low at a

particular place due to cheap labour available there. The construction

material may also be cheaper at another place. Such places are obviously

preffered for locating a plant.

Availability of cheap, skillful and efficient labour- India and other

developing nations appear to have cheap labour. However, the reality is

that labour turns to be expensive here because it is not efficient when

compared to the labour in developed countries. Multinational companies prefer China over India to set up their global sourcing bases because the

labour in china has become more skillful and efficient as a result of

increased industrial activity in the past few decades.

Residential complexes, schools, hospitals, clubs, etc. ± Usually new

factories are given land in remote villages by the state governments.

Proper facilities such as residential complexes, schools, hospitals, clubs,

etc. are not available for the managers of these plants and their families at

such places. Under such situations, companies have to create these

facilities on their own.



Proximity to customers (markets)- When the customers/markets are

located near the plant, products can be easily supplied to them. This

reduces the cost of the product as the transportation cost is not added to it.

Proximity to raw material- Most textile units are located in Gujarat and

Maharashtra because these are the largest cotton-growing areas in the

country. Iron and steel plants are located in Bihar and Orissa because of

the large presence of iron ore mines in these regions.

Good transportation facilities- Regions near metro cities have the

advantage of good transportation facilities, as they have good rail, air,

water and road transportation networks.



INTRODUCTION The production cycle is a recurring set of

business activities and related data processing

operations associated with the manufacture of

products.



INTRODUCTION Questions to be addressed in this topic include:

± What are the basic business activities and data processingoperations that are performed in the production cycle?

± What decisions need to be made in the production cycle,and what information is needed to make these decisions?

± How can the company¶s cost accounting system help inachieving the entity¶s objectives?

± What are the major threats in the production cycle and the

controls that can mitigate those threats?



INTRODUCTION Information also flows fr om the production cycle:

± The revenue cycle receives information from the

production cycle about finished goods available for sale.

± The expenditure cycle receives information about rawmaterials needs.

± The human resources/payroll cycle receives information

about labor needs.

± The general ledger and reporting system receivesinformation about cost of goods manufactured.



INTRODUCTION Decisions that must be made in the production

cycle include:

± What mix of products should be produced?

± How should products be priced? ± How should resources be allocated?

± How should costs be managed and performanceevaluated?

These decisions require cost data well beyondthat required for external financial statements.



PRODUCTION CYCLE

ACTIVITIES The four basic activities in the production cycle are:

± Product design

± Planning and scheduling

± Production operations ± Cost accounting

Accountants are primarily involved in the fourthactivity (cost accounting) but must understand theother processes well enough to design an AIS that provides needed information and supports theseactivities.



PRODUCT DESIGN

The objective of product design is to design a

product that strikes the optimal balance of:

± Meeting customer requirements for quality,

durability, and functionality; and

± Minimizing production costs.



PRODUCT DESIGN

Key documents and forms in product design:

± Bill o f Mater ials: Lists the components that are

required to build each product, including part

numbers, descriptions,and quantity.

± Oper at i on s List : Lists the sequence of steps

required to produce each product, including the

equipment needed and the amount of time

required.



PRODUCT DESIGN

Role of the accountant in product design:

± Participate in the design, because 65í80% of

product cost is determined at this stage.

± Add value by:

Designing an AIS that measures and collects the needed

data.

Information about current component usage. Information about machine set-up and materials-handling

costs.

Data on repair and warranty costs to aid in future

modification and design.



PLANNING AND

SCHEDULING

The objective of the planning and scheduling

activity is to develop a production plan that isefficient enough to meet existing orders and

anticipated shorter-term demand while

minimizing inventories of both raw materials

and finished goods.



PLANNING AND

SCHEDULING Key documents and forms:

± Master production schedule Specifies how much of each product is to be produced during the period and

when. Uses information about customer orders, sales forecasts, and finished goods

inventory levels to determine production levels.

Although plans can be modified, production plans must be frozen a few weeks

in advance to provide time to procure needed materials and labor.

Scheduling becomes significantly more complex as the number of factories

increases.

Raw materials needs are determined by exploding the bill of materials to

determine amount needed for current production. These amounts are

compared to available levels to determine amounts to be purchased.



PLANNING AND


± Master production schedule

± Production order

Authorizes production of a specified quantity of a

product. It lists:

± Operations to be performed

± Quantity to be produced

± Location for delivery Also collects data about these activities,

PLANNING AND



PLANNING AND

SCHEDULING

Key documents and forms:


± Production order

± Materials requisition

Authorizes movement of the needed materials from the

storeroom to the factory floor.

This document indicates:

± Production order number

± Date of issue

± Part numbers and quantities of raw materials needed

(based on data in bill of materials)



PLANNING AND



± Production order

± Materials requisition

± Move ticket

Documents the transfer of parts and materials

throughout the factory.



COST ACCOUNTING

The objectives of cost accounting are:

± To provide information for planning, controlling,

and evaluating the performance of production

operations;

± To provide accurate cost data about products for

use in pricing and product mix decisions; and

± To collect and process information used tocalculate inventory and COGS values for the

financial statements.



COST ACCOUNTING

Types of cost accounting systems:

± Job order costing Assigns costs to a specific production batch or job.

Used when the product or service consists of discretely

identifiable items.



CONTROL & THREATS

In the production cycle (or any cycle), a well-designed AIS

should provide adequate controls to ensure that the following

objectives are met:

± All transactions are properly authorized.

± All recorded transactions are valid.

± All valid and authorized transactions are recorded.

± All transactions are recorded accurately.

± Assets are safeguarded from loss or theft.

± Business activities are performed efficiently and effectively. ± The company is in compliance with all applicable laws and

regulations.

± All disclosures are full and fair.



There are several actions a company can take withrespect to any cycle to reduce threats of errors or irregularities. These include:

± Using simple, easy-to-complete documents with clear instructions (enhances accuracy and reliability).

± Providing space on forms to record who completed andwho reviewed the form (encourages proper authorizations and accountability).



± Pre-numbering documents (encourages recording

of valid and only valid transactions).

± Restricting access to blank documents (reduces

risk of unauthorized transaction).

In the following sections, we¶ll discuss the

threats that may arise in the four major stepsof the production cycle, as well as general

threats



THREATS IN PRODUCT

DESIGN THREAT NO. 1²Poor product design

± Why is this a problem?

Higher materials purchasing and carrying costs.

Costs for inefficient production.

Higher repair and warranty costs.

± Controls:

Accurate data about the relationship between

components and finished goods.

Analysis of warranty and repair costs to identify primary causes of product failure to be used in re-designing product.



THREATS IN PLANNING AND

SCHEDULING

THREAT NO. 2²Over- or under-production

± Why is this a problem? Over-production may result in:

± Excess goods for short-run demand and potential cash flow

problems.

± Obsolete inventory.

Under-production may result in:

± Lost sales.

± Customer dissatisfaction.




SCHEDULING ± Controls:

More accurate production planning, including accurate andcurrent:

± Sales forecasts ± Inventory data

Investments in production planning.

Regular collection of data on production performance toadjust production schedule.

Proper authorization of production orders.

Restriction of access to production scheduling program.




SCHEDULING THREAT NO. 3 ²Suboptimal investment in

fixed assets

± Why is this a problem? Over-investment causes excess costs.

Under-investment impairs productivity.

± Controls:

Proper authorization of fixed asset transactions:



THREATS IN PRODUCTION

OPERATIONS

Managers should be held accountable for assets under

their control.

Fixed assets should be physically secured. Disposal of assets should be authorized and

documented.

Periodic reports of fixed asset transactions should be

reviewed by the controller.



THREATS IN PRODUCTION

OPERATIONS

THREAT NO. 5²Disruption of operations

± Why is this a problem?

Disasters can disrupt functioning and destroy assets

± Controls:

Backup power sources, such as generators and

uninterruptible power supplies.

Investigate disaster preparedness of key suppliers andidentify alternative sources for critical components.



THREATS IN COST

ACCOUNTING THREAT 6²Inaccurate recording and

processing of production activity data

± Why is this a problem? Diminishes effectiveness of production scheduling.

Undermines management¶s ability to monitor and

control operations.

± Controls:

Automate data collection with RFID technology, bar

code scanners, and badge readers to ensure accurate

data entry.



THREATS IN COST

ACCOUNTING

Use online terminals for data entry.

Restrict access with passwords, user IDs, and access

control matrices to prevent unauthorized changes to

data.

Do periodic physical counts of inventory and compare

to records.

Do periodic inspections and counts of fixed assets.



GENERAL THREATS Controls:

± All data files and key master files should be backed up

regularly.

± All disks and tapes should have external and internal filelabels to reduce chance of accidentally erasing important

data.

± Promptly, remove all access rights of employees who quit

or are fired



UNIT-2



Demand Forecasting

Demand Forecasting is predicting the future demand of theproducts or services of an organization. To forecast is to estimate orcalculate in advance.

Planning is a fundamental activity of management. Forecasting formsthe basis of planning. Be it planning for sales and marketing, orproduction planning or manpower planning, forecasts are extremelyimportant.

Forecasting is a scientifically calculated guess. It is basic to allplanning activity ±

(i) Whether it is national, regional, organisational, or functionalplanning; and

(ii) Whether it is a long range plan or a short-range plan.



Reasons for Demand Forecastiong

Reasons fordemand

forecasting

To offset the

actions of

competitor

organizations.

To minimize losses

associated with

uncontrollable eventsexternal to the

organization

To maximize gains from

events which are the results

Of actions taken by theorganization.

To maximize gains

From events externalTo the organization

(from the external

Environment).

To develop policies

That apply to people

Who are not part of The organization.

To develop administrative

Plans and policies internal

To an organization (e.g.,

personnel or budget).

To provide adequate

Staff to support

production

requirements.

As an input to

aggregate production

Planning and/or

materials requirement

Planning (MRP).

In decision-makingFor facility capacity

planning and for

capital budgeting

M th d f D d F ti



Demand Forecasting

Methods of Demand Forecasting

Qualitative analysis Quantitative analysis

Customer

surveySales force

composition

Executive

opinionDelphi

method

Past analogy

Time Series analysis Casual analysis

Trend analysisSimple

moving

average

Simple

exponential

smoothing

Holt¶s double-

Exponentialsmoothing

Winters¶ triple-

Exponential

smoothing

Forecast by linear

Regression analysis



Qualitative Methods of Forecasting

There are certain situations in which forecasts have to be prepared quicklywithout using historical data. At other times, historical data may not beavailable, resulting in qualitative analysis as the only available forecastingmethod. For example, in the launch of a new innovative product, there isno data available from past experience on the sales of the product.Thereare five qualitative methods of forecasting.

Customer Surveys

It is the customers who determines the demand for a product or service. Itis practically not possible to identify all the potential customers or tocontact all the existing customers, sampling of customers are resorted to.While designing customer survey questionnaires, care has to be taken to

frame questions such that the true responses of the customers are solicited.Similarly, the implementation and analysis stages of the survey have to becarefully handled to ensure that the conclusions drawn from the surveyreflect the exact pulse of the customers.

Sales Force composite



Sales Force composite

This approach to forecasting is much less expensive compared tocustomer surveys. The sales force of a company is in direct contact withthe customers. Thus, they may be advised to give their estimates about the

likely sales of the product in their region. The marketing manager maycompile these estimates for different regions to arrive at the overallestimate of the demand forecast for the product.

This approach to forecasting has its disadvantages. The sales person¶sestimates may not be as accurate as customer surveys.

Executive opinion

A jury of top executives of the company from different functional areassuch as marketing, finance, human resources, production, etc. are broughttogether to give their opinion about the forecast of a new product to belaunched. This approach to forecasting is particularly suitable for new

products, which do not have any past history of sales. In such situations,there is no other option except to depend upon the vast experience of thesesenior executives in providing the forecast for the new product.



Quantitaive Methods of Forecasting

Time Series Analysis

In this method, we require a time series of historical demand data withrespect to time intervals (periods) in the past to make predictions for future demand. Five popular methods are used in time series analysis:

1. Simple moving average

2. Simple exponential smoothing

3. Holt¶s double-exponential smoothing

4. Winters¶ triple-exponential smoothing5. Forecasting by linear regression analysis

Simple moving average

The simple moving average method of forecasting is suitable under situations where there is neither a growth nor a decline trend, i.e., there isa horizontal trend shown by the actual past data used for forecasting.There can also be seasonal variations in this past data. This methodinvolves finding the simple average of the past data used for forecasting.

In mathematical terms, moving average forecast can be expresses as



In mathematical terms, moving average forecast can be expresses as

Ft = At-1 +At-2 +«.+At-n

n

Example 1

Kids Toys (P) Ltd is a toy marketing company at Mumbai. The sales figures (in

units) of a particular toy during the past 20 weeks are given. Calculate the four-

week and eight-week moving average forecasts for the given 20 weeks.

Week

Actual

demand (units) Week

Actual

demand (units)

1 1,643 11 2,395

2 1,821 12 2,683

3 2,069 13 1,936

4 1,952 14 2,076

5 2,178 15 2,103

6 1,597 16 1,699

7 1,834 17 2,387

8 1,852 18 1,854

9 1,771 19 1,521

10 2,014 20 1,726



1000

1200

1400

16001800

2000

2200

2400

2600

2800

1 4 7 1 0 1 3 1 6 1 9

Week

A c t u a l d e m

a n d / f o r e c a s t

Actual demand(in units)

Four-week

moving averageEight-week moving average

Weighted moving average



Weighted moving average

In calculating the simple moving average, actual demand data in all the

past periods considered are given equal importance. Sometimes it is felt

that while finding the moving average, the data in the recent past periodsshould be given more weight or importance compared to the data in the

periods far off the current time.

For example, let us suppose that for a product the actual demand in

months 1,2

, and 3 is2

0, 30, and 10 units, respectively. For calculating athree-month moving average forecast for month 4, the company may

decide to give 50% importance (weight 0.5) to the data in week 3, 30%

importance (weight 0.3) to the data in week 2, and 20% importance

(weight 0.2) to the data in week 1. Thus, the weighted three-month

moving average forecast for week 4 will be given by

F4 = 0.2 x 20 + 0.3 x 30 + 0.5 x 10 = 4 + 9 + 5 = 18

0.2 + 0.3 + 0.5

Simple exponential smoothing



Simple exponential smoothing

Simple exponential smoothing is the most popular forecasting method. Itis very simple in application and, in addition, the past data required islimited to just the last period¶s actual demand and its forecast. The

forecast using simple exponential smoothing is given by the followingequation:

F F t t +1+1 == D Dt t + (1+ (1 -- )) F F t t where:where:

F F t t +1+1

= forecast for next period= forecast for next period

D Dt t == actual demand for present periodactual demand for present period

F F t t == previously determined forecast previously determined forecastfor present periodfor present period

== weighting factor, smoothingweighting factor, smoothing

constant having a value between 0 & 1constant having a value between 0 & 1



Selection of smoothing constant

can make the difference between an accurate forecast and an

inaccurate forecast.

forecast error = (actual demand)- (forecast demand)



Exponential Smoothing (=0.30)

F F 22 == D D1 + (11 + (1 -- )) F F 11

= (0.30)(37) + (0.70)(37)= (0.30)(37) + (0.70)(37)

= 37= 37

PERIODPERIOD MONTHMONTH DEMANDDEMAND

11 JanJan 3737

22 FebFeb 4040

33 Mar Mar 4141

44 Apr Apr 3737

55 May May 4545

66 JunJun 5050

77 Jul Jul 4343

88 AugAug 4747

99 SepSep 56561010 OctOct 5252

1111 NovNov 5555

1212 DecDec 5454

F F 3 3 == D D22 + (1+ (1 -- )) F F 22

= (0.30)(40) + (0.70)(37)= (0.30)(40) + (0.70)(37)

= 37.9= 37.9



Exponential SmoothingFORECAST,FORECAST, F F t t + 1+ 1

PERIODPERIOD MONTHMONTH DEMANDDEMAND ((EE = 0.3)= 0.3) ((EE = 0.5)= 0.5)

11 JanJan 3737 ± ± ± ±

22 FebFeb 4040 37.0037.00 37.0037.00

33 Mar Mar 4141 37.9037.90 38.5038.50

44 Apr Apr 3737 38.8338.83 39.7539.7555 May May 4545 38.2838.28 38.3738.37

66 JunJun 5050 40.2940.29 41.6841.68

77 Jul Jul 4343 43.2043.20 45.8445.84

88 AugAug 4747 43.1443.14 44.4244.42

99 SepSep 5656 44.3044.30 45.7145.71

1010 OctOct 5252 47.8147.81 50.8550.85

1111 NovNov 5555 49.0649.06 51.4251.42

1212 DecDec 5454 50.8450.84 53.2153.21

1313 JanJan ± ± 51.7951.79 53.6153.61



Holt¶s double-exponential smoothing

Holt¶s double-exponential smoothing is suitable when the actual demand

follows either a increasing or a decreasing trend. In Holt¶s double-

exponential smoothing, we use two smoothing constants. One is smoothingconstant , and other is , which is used to adjust the trend effect.

Forecasting by linear regression analysis

Linear regression analysis is applied in situations where two variables are

linearly correlated to each other. In time series analysis, the independentvariable is time, while the dependent variable is the actual demand in the

past.

The best-fit line is represented by the straight line equation

y = a + bx

y = forecast for period x

b= slope of the straight line

x = specified number of time period

Monitoring and controlling



Monitoring and controlling

forecasts Once a forecast has been completed, it needs to be monitored and

corrected periodically by determining why actual demand differed

significantly from that projected.

This can be done by setting upper and lower limits on how much the

performance characteristic of a forecasting model can deteriorate beforewe change the parameters of the model.

One way to monitor forecasts to ensure that they are performing well is to

use a tracking signal.

A tracking signal is a measurement of how well the forecast is predicting

actual values.

tracking signal = running sum of forecast errors (RSFE) /mean

absolute deviation(MAD)

(OR)

tracking signal = forecasting errors/ n



RSFE = (actual demand in period i) ± ( forecast demand in

period i)

MAD = (actual demand in period i ± forecast demand in period i)/n

n= number of years



Implication of tracking signal

+ tracking signals indicate that demand is greater than forecast.

- tracking signals mean that demand is less than forecast.

Once tracking signals are evaluated, they are compared with

predetermined control limits. When a tracking signal exceeds an upper or lower limit, there is some

problem with the forecasting method and hence, the forecasting

method must be reevaluted.



R f i ff i f i



Reasons for ineffective forecasting

Not involving a broad cross section in forecasting Not recognizing that forecast will never be correct or

accurate

Not recognizing the fact the forecasting is integral to

business planning

Not forecasting the right things

Not selecting an appropriate forecasting method

Not tracking the performance of the forecasting modelsmodels so that forecast accuracy can be improved.



THANKYOU

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