Production management means planning, organising, directing and controlling of production activities. Production management deals with converting raw materials into finished goods or products. It brings together the 6M's i.e. men, money, machines, materials, methods and markets to satisfy the wants of the people.
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Production decisions are based on the question: How much will customers demand? If the forecast is wrong, the firm either produces too much (inventory, holding cost, obsolescence) or too little (stock-outs, lost sales, poor customer service). Therefore, demand forecasting is the starting point for capacity planning, production planning and inventory decisions.
Capacity planning means deciding the ability of the organization (machines, manpower, space, time) to produce goods/services. A firm must decide:
Forecasting is estimating future demand using past data, present information and assumptions about the future.
Importance:
Two broad categories:
In exams, write 2–3 examples of each.
Common qualitative methods:
Best for:
Forecast = average of demand of last periods.
Example: If last 3 months demand = 100, 110, 120:
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Production decisions are based on the question: How much will customers demand? If the forecast is wrong, the firm either produces too much (inventory, holding cost, obsolescence) or too little (stock-outs, lost sales, poor customer service). Therefore, demand forecasting is the starting point for capacity planning, production planning and inventory decisions.
Capacity planning means deciding the ability of the organization (machines, manpower, space, time) to produce goods/services. A firm must decide:
Forecasting is estimating future demand using past data, present information and assumptions about the future.
Importance:
Two broad categories:
In exams, write 2–3 examples of each.
Common qualitative methods:
Best for:
Forecast = average of demand of last periods.
Example: If last 3 months demand = 100, 110, 120:
New forecast = old forecast + × (actual − old forecast)
Used when demand shows an increasing/decreasing trend.
Forecast error = Actual − Forecast.
Common accuracy measures:
Purpose: choose a method with smaller error and keep improving.
Capacity is the maximum output a system can produce in a given time period under given conditions.
Types (important):
Usually: Design capacity ≥ Effective capacity ≥ Actual output
Add capacity before demand increases.
Add capacity after demand increases.
Add capacity in small steps to match demand.
Break-even helps compare alternative processes or capacity options based on cost.
General form:
For two alternatives A and B, break-even output occurs when:
Decision logic:
Collect demand data → Choose method → Forecast demand → Plan capacity (lead/lag/match) → Plan production & inventory → Monitor errors → Revise
From this topic
Qualitative (judgmental) forecasting methods (any three):
Thus, qualitative methods are useful when historical data is limited or demand conditions are changing.
Forecasting horizons:
Hence, longer horizons support strategic decisions, while short horizons support operational decisions.
Capacity strategy decides when and how much capacity to add relative to demand.
Table:
Conclusion: Choice depends on demand uncertainty, competition, cost structure and service requirements.