Forecasting Considerations in Design of Management Information Systems K y PAUL A. STltASSMANN Segmentation of the Information Process The flow of information in a typical organization with its own raw ma- CLOSE EXAMINATION OF routine terial, production and distribution A business decisions will reveal facilities is characterized today by that many of them involve a forecast excessive segmentation and emphasis of events to come The uncertainty on historical reporting. This is illus- about the outcome of events is, of trated by Exhibit 1.* course, built into our competitive economic system to assure maximum Customer needs are satisfied rapidly flexibility and rapid adjustment to by daily shipments. Information consumer needs. Flexibility, however, about these needs then goes to the costs money. It can be bought with a divisional production planning staff liberal inventory of ample supplies of who impart to it the latest marketing finished, semifinished goods and raw thinking before passing along their materials. Flexibility can be bought reaction to warehouse conditions and also by a combination of policies that recommendations to the plant pro- require excessive plant capacity, duction planning staff in the form of fluctuating employment levels, pur- a production order Upon receipt of chasing less than economic order the order, the plant people consider quantities, use of overtime, heavy ex- local conditions such as plant inven- pense for expediting staffs or em- tories of goods in process, inventories ployment of fast but expensive means of supplies, short-tei m problems in of transportation. labor efficiency, employment stabiliza- tion and production orders from other There is, fortunately, another and sources before placing an order with better way for a business to cope with raw and packaging materials sup- the rapidly changing environment A pliers for delivery in time to make carefully designed information sys- the desired production run and tem will anticipate the consequences of various interactions in its organiza- * This is an idealized chatt, characteristic of re lationships in many consumer goods operations tion and transmit them rapidly to Except as noted, all of the facts mentioned in every participant whose decisions af- this article are quoted for illustrative purposes fect expected overall costs. only and do not represent existing operating statistics of any paiticular organization PAUL A. STRASSMANN is Director of Systems and Pro- cedures for the National Dairy Products Corporation. He ivas formerly Assistant Controller for Burns and Roe, Ine and Manager of Computer Systems for the General Poods Corporation. Mr. Strassmann is a graduate of Cooper Urnon, New York, N. Yand holds an MS. degree m Industrial Management from Massachusetts Institute of Technology, Cambridge, Massachusetts. FEBRUARY 1965 27 Information Flow in a Representative Production-Inventory System EXHIBIT 1 thereby replenish warehouse inven- time-lags between each station and tory. (3) the stability of the pace setting It is this method of passing infor- demand pattern at the customer level, mation that we call seginentation one can determine the degree to Commands about corrective actions which reliance on purely historical needed are passed through a chain of reporting will call for extreme varia- 1 specialists, each adding at his station tions in production rates to the original information certain When an organization examines the additional elements which are neces- total cost of producing and distribut- sary to reflect the marketing, produc- ing its products, it may find that tion and distribution realities of the marketing flexibility, which is be- entire system This is very like an coming a necessity m our increasingly assembly method of production wheie competitive environment, may indeed the entire process must proceed in a be purchased by market-oriented de- strictly pre-determined sequence at a ployment of inventories, faster means carefully pre-engineered speed 1 The woik done by Piofessor J Forrester at The facts received at any of the MIT in the field of Industrial Dynamics provides the framework for conducting such analysis See stations along the line are essentially J W Foi rester "Industrial Dynamics." Harvard records of past events Depending on: Business Review, July-August 1958 for a man- (1) the nature of the decision rules agement introduction and J W Forrester, In- dustrial Dynamics, MIT Technology Press, Lam applied at each station of the infor- bridge, Mass, 1962, for a more technical de mation flow, (2) the magnitude of scription NAA BULLETIN ! 28 «1 ro OOOOOi/ -\\OfNO\OOVOrN fN CM <N O O O O rH O (N O r-< a w E 00 I I I I I I I I I I I I 4-1 QC 00 00^ ° o O O .—<00 O .S3 C X .fa O E * « c o> o rO Cfv A » 2 O - (-1 'J « P O fN 00 G \ Or-H r-HOOOO --HO ^ « C rA o o ir\ O ^ « C < ~a O «) U O E O ° * a 2 60 J3 C ^ 3 W o 11 O XI u x OU CL, D tA 3 c O W C8 J 3 § N U *-i 11 -C UL (8 X 2 11 «-» * 14-1 3 -fa 3 O x 3 -s O 3 J 3 G i-i « O ^ a O X 2 ^ - W 44-1 A,« tf) O O 60 C -3 u c E G 60 < tn O A 05 A R E C8 X ) c tf) 4h C8 11 x p U i-< tf) >I I O i-i ± 3 « 2 E ! E. 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O X ) -R{ G a, &, u jo 2 ^ 11 U (LI O X rt ¿ 1 U 4-1 4-1 J '3 §< S 3 x x 3 - C 1-1 O Q 00 Pi oi A , O 2 Pi co > H 3 « X) (LI a u E x tf) C u M H 11 .¡9 V .T M E U. /s « n vo 00 ON rG; " 3(-34 II U O « E H H H H J 3 H H H H H M O X H Q >« < 1 <1 < < < < < < < EXH I BI T 2 FEBRUARY 1965 of transportation or more adaptable a first approximation, that for prod- production methods. It is becoming ucts in mass production, the mini- more apparent that a thorough re- mum inventory requirement to sup- examination of the expenses associ- port such a service will approach the ated with segmented communications manufacturer's maximum system re- and with actions based on historical action time. Hence, all elements which records may uncover significant pay- contribute to the maximum delay off opportunities for many corpora- range and which result from the in- tions concerned with the mounting ternal administrative process should costs of meeting high customer serv- be immediately earmarked for further ice standards. investigation. Accordingly, this would classify delays AT,, AT,, AT3 and AT4 as prime candidates for analysis. The Cost Penalty for Segmentation Secondary suppliers' inventories. The cost penalty for segmentation Here one must learn whether the de- of the information process is best livery lead times (AT7) of the secon- estimated by analyzing the delays in dary suppliers are supported by in- an existing system. Exhibit 2 shows ventory levels or surplus capacity. how such an analysis may be tabu- The secondary suppliers must some- lated for the production-inventory how meet , the uncertainties of the system in Exhibit 1. Possible findings: prime manufacturer's fluctuating pro- Cost of carrying inventory. Since duction levels. As a rule, if there are the requirements of customer service suppliers who devote a large share of for consumer goods are exceedingly their total capacity to a single major high (between 96-99% on-time de- manufacturer, one must carry the livery reliability), it can be stated as analysis of the consequences of in- Expediting Costs and Supply Systems Policies OPTIM UM PRODUCriON COSTS - -FACTORY OVERTIME LEAST COST TRANSPORTATION -FLUCTUATING EMPLOYMENT HIGH INVENTORIES • - I ESS THAN ECONOMIC PRODUCTION RUNS -EXPRESS TRUCK DELIVERIES - LOW INVENTORIES I I INVENTORY CARRYING COSTS EXPEDITING COSTS EXH I BI T 5 12 NAA BULLETIN formation delays to the secondary the tendency toward Strategy A be- level as well, inasmuch as costly cause expediting penalties are found practices may be prevailing here to in a variety of accounts reflecting satisfy the manufacturer's rapidly operating costs whereas inventory varying need for raw and packaging levels are generally singled out as a materials.