UNIVERSITY OF ENGINEERING & TECHNOLOGY

PESHAWAR

CASE STUDY TASK 4

IE-412 Operation of Manufacturing System

SUBMITTED TO: PROF. FAWAD HAIDER SEB

DEPARTMENT: INDUSTRIAL ENGINEERING
SEMESTER: 5th
SECTION: B
Group leader (HARIS UR REHMAN / 18PWIND0564)
(BILAL KHAN / 18PWIND0571)
(USAMA / 18PWIND0568)
 TASK 04
FORECAST THE DEMAND OF YOUR PRODUCT

Forecasting types:
1. Demand Forecasting
2. Passive Demand Forecasting:
3. Active Demand Forecasting:
4. Short-term Demand Forecasting:
5. Medium to long-term Demand Forecasting:
6. External macro level Demand Forecasting:
7. Internal business level Demand Forecasting

Demand Forecasting:
Demand forecasting is the process in which historical sales data is used to develop an
estimate of an expected forecast of customer demand. To businesses, Demand
Forecasting provides an estimate of the amount of goods and services that its customers
will purchase in the foreseeable future. Critical business assumptions like turnover,
profit margins, cash flow, capital expenditure, risk assessment and mitigation plans,
capacity planning, etc. are dependent on Demand forecasting.

Passive Demand Forecasting:

Passive Demand Forecasting is carried out for stable businesses with very conservative
growth plans. Simple extrapolations of historical data is carried out with minimal
assumptions. This is a rare type of forecasting limited to small and local businesses.

Active Demand Forecasting:

Active Demand Forecasting is carried out for scaling and diversifying businesses with
aggressive growth plans in terms of marketing activities, product portfolio expansion
and consideration of competitor activities and external economic environment.
Short-term Demand Forecasting:

Short-term Demand Forecasting:

Short-term Demand Forecasting is carried out for a shorter term period of 3 months to
12 months. In the short term, the seasonal pattern of demand and the effect of tactical
decisions on the customer demand are taken into consideration.

Medium to long-term Demand Forecasting:

Medium to long-term Demand Forecasting is typically carried out for more than 12
months to 24 months in advance (36-48 months in certain businesses). Long-term
Forecasting drives the business strategy planning, sales and marketing planning,
financial planning, capacity planning, capital expenditure, etc.

External macro level Demand Forecasting:

This type of Forecasting deals with the broader market movements which depend on
the macroeconomic environment. External Forecasting is carried out for evaluating the
strategic objectives of a business like product portfolio expansion, entering new
customer segments, technological disruptions, a paradigm shift in consumer behavior
and risk mitigation strategies.

Internal business level Demand Forecasting:

As the name suggests, this type of Forecasting deals with internal operations of the
business such as product category, sales division, financial division, and manufacturing
group. This includes annual sales forecast, estimation of COGS, net profit margin, cash
flow, etc.
OUR PRODUCT IS CHOCOLAND
Forecasting tools of our product:
Product lead time:

The number of months it takes from placing a purchase order to being ready to sell
each product.

Sales period:

How many months of sales are expected from each product?

Costs paid per purchase:

What percentage of the costs of products are paid when a purchase order is placed.

Days payable:

How many days you have to pay the remainder of the unpaid inventory costs.

Stock levels:

The amount of each product you need to keep in stock, based on sales forecasts

Purchase costs:

The cash needed to make purchases

Market Overview

Chocolate market is projected to grow at per year of 4.5% during the forecast period.

• Chocolate market is highly competitive, with the presence of numerous leading

players accounting for the major share. The increasing demand and growing
popularity of dark and organic chocolates are fuelling the market’s growth.
• Europe is the second-largest market for chocolates. The company chocolate
segment dominated the market in 2017 and is the most consumed chocolate in
 Europe. Furthermore, it is expected to maintain its dominance during the forecast
period. In Europe, Russia is the largest market for chocolate, followed by
Germany, the United Kingdom, and France.
• Market segments and sub-segments
• Market trends and dynamics
• Supply and demand
• Market size
• Current trends/opportunities/challenges
• Competitive landscape
• Technological breakthroughs
• Value chain and stakeholder analysis
SUPPLIER:
Over 70% of Choco land production takes place in
Lahore,Karachi,islambad,Peshawar,karak,bannu,kohat, Di Khan and other cities,
particularly it depend upon higher demands. The regions are politically unstable and
production is frequently disrupted by fighting. While production has started to expand
into more stable regions it has not yet become diversified enough to normalize the
supply. About 17% of production takes place in the FATA (primarily South Waziristan)
and 9% from Quetta and Sindh.
And increasing production takes time! According to the national Choco land
Organization it can take a new cocoa plant 3-5 years to yield a crop. For many of the
small, regional farmers that is too much time to invest without a return that may never
come.
Where can you get some?
It seems like everywhere. Grocery stores are the largest seller, followed by mass
merchandise outlets and convenience stores. While confectionary stores make up only
5% of sales, they are typically the purveyors of higher quality, niche products – which
have been increasing in popularity as well.

% of
Where are we selling our Choco land?
Sales
Grocery Stores 22%
Mass merchandise outlets 21%
Convenience stores 16%
Club stores 13%
Drug stores 9%
Confectionary stores 5%
Value/dollar stores 4%
 Chocolate Market 2020-2024: Segmentation

Chocolate Market is segmented as below:

➢ Product
➢ Milk Chocolate
➢ Dark Chocolate
➢ White Chocolate

Report Findings

1. Drivers
• Strong cravings for chocolate and widespread availability of chocolate
• Rising consumer inclination towards confectionary products and other products
having chocolate ingredients
• Rising awareness about health benefits offered by dark chocolates
2. Restraints
• Fluctuation prices of raw material such as cocoa
3. Opportunities
• Rising population, disposable income and increase sales network across rural
regions is expected to bolster the demand for the chocolate market in coming
years

Why is demand forecasting important?

There are a number of reasons why demand forecasting is an important process for businesses:

• Sales forecasting helps with business planning, budgeting, and goal setting. Once you have a
good understanding of what your future sales could look like, you can begin to develop an
informed procurement strategy to make sure your supply matches customer demand.
• It allows businesses to more effectively optimize inventory, increase inventory turnover
rates and reduce holding costs.
• It provides an insight into upcoming cash flow, meaning businesses can more accurately
budget to pay suppliers and other operational costs, and invest in the growth of the business.
• Through sales forecasting, you can also identify and rectify any kinks in the sales pipeline
ahead of time to ensure your business performance remains robust throughout the entire
 period. When it comes to inventory management, most Commerce business owners know all
too well that too little or too much inventory can be detrimental to operations.
• Anticipating demand means knowing when to increase staff and other resources to keep
operations running smoothly during peak periods.

FORECASTING TOOLS MENTIONED IN OPERATION

MANAGEMENT (9TH EDITION)
1st TOOL:
Forecasting:
Predicting future events, making good estimates. The forecast is the only estimate of
demand until the actual demand is known. A forecast is classified by the three
categories:

1. Short-range forecast:

Maximum period of 1 year, used for planning purchasing, job scheduling,

workforce levels, job assignments and production levels.

2. Medium-range forecast:

For a period from 3 months to 3 years, used for sales and production planning
and budgeting.

3. Long-range forecast:

Lifespan > 3 years, used for planning new products, capital expenditures and
other long range forecasts.

The last two categories deal with more wide-ranging issues and support management.
They are less accurate and use less quantitative methodologies than short-term
forecasting.
The four stages of the product life cycle (important to forecasting) are: Introduction,
Growth, Maturity and Decline.

Three types of forecasts are:

1. Economic Forecast:

Recognizing indicators valuable to the preparations of organizations. Medium- to

long-range forecasts.

2. Technological Forecast:

Long term forecasts concerned with the rates of technological progress.

3. Demand forecasts/sales forecast:

Projections of a company’s sales for each time period for the planning period.

There are seven steps in forecasting:

1. What will the forecast be used for?

2. What items have to be forecasted?
3. What is the time horizon for the forecast?
4. What forecasting model will be used?
5. Data is gathered.
6. Forecast is made.
7. Results are validated and implemented.

Quantitative analysis and qualitative approach are both approaches to general

forecasting:

Qualitative forecasts:
Forecasts that incorporate factors as intuition, emotions, personal experiences and
value system. This method uses four techniques:

1. Jury of executive opinion: makes a group of demand by taking the opinions of a

group of high-level experts or managers, often in combination with statistical
models.
 2. Delphi method: uses a group process that allows experts to make (anonymous)
forecasts. Decision makers, staff personnel and respondents are the participants
in this method.
3. Sales force composite: based on a salespersons estimation of next period’s sales.
These are reviewed and combined at district and national levels to reach an
overall

Forecast. Might not be trustworthy since salespersons might underestimate in order to

reach the estimation more easily.

4. Consumer Market survey:

Uses customers or potential customer’s inputs regarding future purchasing plans.

This can be used in improving product design and planning, as well as forecasting.

Quantitative forecast:
Forecasts that employ one or more mathematical models that rely on

Historical data and/or causal variables to forecast demand. There are two categories:

1. Associative model:

Incorporate the variables that can influence the quantity being forecasted.

2. Time-series models.

These models use a series of past data points to make a forecast:

• The Naive approach:

A forecasting technique that assumes demand in the next period is equal to

demand in the most recent period.

• Moving averages:

The forecasting method that uses an average of the n most recent periods of data
to forecast the next period. These forecast can be useful if we can assume the
market will stay stable over time.
Moving average= ∑ Demand in previous n periods / n

(n is number of periods in the moving average)

If you want to place more emphasis on recent values, weights can be used when there is
a clear pattern.

Weighted moving average= [∑ (Weight for period n) x (Demand period n)] / ∑ Weights

These averages are not very sensitive to real changes in the data, they are behind on the
actual values and refer more to the past, and also require records of past data.

Exponential Smoothing:
A weighted moving- average forecasting technique in which data points are weighted by
an exponential function. This method is easy to use and little past data is needed.

New forecast= Last period’s forecast + α (Last forecast period’s actual demand-Last
period’s forecast)

α is the smoothing constant: the weighted factor used in an exponential smoothing

forecast (a number between 0 and 1). More weight is given to past data when the
constant is low.

The forecast error tells us how well the model performed against itself using past data.

Forecast error= Actual Demand - Forecast value

Mean absolute deviation (MAD): a measure of the overall forecast error for a model.

MAD= ∑ [Actual – Forecast] / n

Mean absolute percent error (MAPE): the error as a percentage of the actual values.

MAPE= [100 ∑ |Actual i – Forecast i | / Actual I] / n

Seasonal variations in data are regular up-and-down movements in a time series that
relate to recurring events. When seasonal factors are multiplied by an estimate of
average demand to produce a seasonal forecast, it’s called a multiplicative seasonal
model.

Tracking signal:
A measurement of how well the forecast is predicting actual values. The forecast values
are compared to the new available data. When the tracking signal is positive, the
demand is greater than forecast and vice versa.

Tracking signal = [Running sum of the forecast errors (RSFE)] / [Mean absolute
deviation (MAD)]

Bias:
A forecast that is consistently higher or consistently lower than actual values of a time
series.

Adaptive smoothing:
An approach to exponential smoothing forecasting in which the smoothing constant is
automatically changed to keep errors to a minimum.

Focus forecasting:
Forecasting that tries a variety of computer models and selects the best ones for a
particular application. It is based on two principles:

1. Sophisticated forecasting models are not always better than simple ones.
2. There is not a single technique that should be used for all products or services
2ND TOOL:
Production:
The creation of chocolates.

Operations Management (OM):

Activities that add value to the creation of goods and services by transforming inputs to
outputs.

Organizing to produce goods and services

Organizations need to perform three functions to ensure a smooth production and the
organization’s survival:

1. Marketing: generates the demand, or takes the order for a product or service.

2. Productions: Operations creates the product.

3. Finance/accounting tracks how well the organization is doing, pays the bills, and
collects money.

We study OM for four reasons:

1. To see how the OM activity functions, and how people organize themselves for
productive enterprise.
2. To know how goods and services are produced.
3. To understand what operations managers do.
4. To find a way an organization can improve its profitability and its service to
society, since OM is a costly part of an organization.

The management process is the application of planning, organizing, staffing, leading,

and controlling in order to the achieve objectives. This process is applied to the
decisions operations managers make in the OM function.

The Heritage of Operations Management

Some people of note that have contributed to OM are:

Eli Whitney (1800), who made interchangeable parts popular through standardization
and quality control.

Frederik W. Taylor (1801), who wanted to find the best way to produce and be
resourceful, and who believed managers should be responsible for:

1. Matching employees to the right job

2. Providing a proper training
3. Providing proper work methods and work
4. Establishing legitimate incentives for work to be accomplished

Industrial engineering, management science, physical sciences and information sciences

have also contributed to OM. Information sciences contributed to improving
productivity and provided society with more diverse goods and services at the same
time.
 Operations in the service sector
Services: Economic activities that produce an intangible product (such as education,
entertainment, lodging, government, financial and health services).

Characteristics of Goods Characteristics of Services

Tangible product Intangible product

Consistent product definition Inconsistent product definition

Can be inventoried Cannot be inventoried

Production usually separate from consumption Produced and consumed at same time

Low customer interaction High customer interaction, interaction demands uniqueness

Distributed to more clients at one time the Frequently dispersed; frequently brought to
client, through for example local offices
Knowledge-based, hard to automate
Easy to automate
Often unique
Often not unique

Since the activities of the operation functions are often the same for both goods and
services, there isn’t a clear difference between them. Almost all goods are a
combination of a service and a tangible product, and service can also be essential to
production.

Pure service:
A service that does not include a tangible product.

Service Sector: segment of the economy that includes trade, financial, lodging,

Education, legal, medical, and other professional occupations. Currently the biggest
sector in the economy.
Some changes that have occurred/are occurring in OM are:
• A more global focus due to reliable worldwide communication and transport
networks.
• Just-in-time systems due to short product life cycles.
• E-commerce because of the Internet, fast international communication, and
computer-aided design.
• Mass customization due to flexible production processes and worldwide markets.
• Empowered employees and high ethical social responsibility due to a change in
the sociocultural area and a global review of ethics.
• Environmentally sensitive manufacturing because of environmental issues and
increasing costs of waste disposal.

Productivity:
The ratio of outputs (goods and services) divided by one or more inputs (such as labor,
capital, or management).

Since efficiency improves when productivity improved, it is important to use resources

in the most efficient way, so that more value is added to the good or service. This can be
done by:

• Reducing inputs while keeping the output the same.

• Increasing the output while keeping inputs the same.

Outputs are goods and services, while inputs are capital, labor, physical resources and
management. A country can improve the standard of living my measuring the
productivity and improving it.

Single-factor productivity:
The ratio of one resource (input) to the goods and services produced (outputs). A
common measure of productivity is when input is measured in labor-hours.
Productivity: Units produced / Input Used:
Multifactor Productivity:

The ratio of many or all resources (inputs) to the goods and services produced
(outputs). Also known as total factor productivity.

Productivity: Output / (labor + material + energy + capital + other

inputs)

Measurement Problems
• Quality may change while the quantity of inputs and outputs remains constant.
• External elements may cause an increase or decrease in productivity.
• Precise units of measure may be lacking.

Especially in the service sector productivity measurement is difficult because the end
product is not easy definable.

Productivity variables
Managers can improve productivity by changing labor, capital or management.

If the labor force is better educated and healthier, they have a better contribution to
productivity. Three key variables for improved labor productivity are:

1. Basic education (needed for affectivity)

2. Diet
3. Social overhead that makes labor available

In developed nations there are even more challenges to management:

1. Maintaining and enhancing the skills of labor.

2. Better utilized labor with a stronger commitment.
There is always a trade-off between Capital and labor. When the interest rate is higher,
there is less investment in capital because the return on investment has been reduced.

What also contributes to productivity is more effective use of capital.

Management ensures that labor and capital are effectively used to increase
productivity. In order to improve productivity, effective use of knowledge and capital is
needed, and the manager’s job is to select the best new capital investments and
improve the productivity of the existing ones.

Knowledge society:
A society in which much of the labor force has migrated from manual work to work
based on knowledge.

While there are many good theories on how to improve goods-production based
activities, the productivity in the service sector is more difficult to improve, since work
in the service sector is often:

• labor-intensive
• focused on unique individual attributes or desires
• an intellectual task performed by professionals
• difficult to mechanize and automate
• difficult to evaluate for quality

Ethics and Social Responsibility:

The changes in the environment, laws and values represent the challenges that come
from conflicting perspectives of stakeholders.

Managers must meet the demand of the market place while doing everything in a
socially responsible and ethical way. Therefore managers should have a moral
awareness and focus on increasing productivity, as well as developing safe quality
products, maintaining a clean environment and a safe workplace.