FORECASTING

WHAT IS FORECASTING?
1. Process of predicting a future event based on
historical data
2. Educated Guessing
3. It is an underlying basis of all business decisions:
a) Production
b) Inventory
c) Personnel
d) Facilities

WHY DO WE NEED TO FORECAST?

1. Throughout the day we forecast very different things
such as weather, traffic, stock market, state of our
company from different perspectives.
2. Virtually every business attempt is based on forecasting.
3. Not all of them are derived from sophisticated methods.
4. However, Best" educated guesses about future are
more valuable for purpose of Planning than no forecasts
at all, and hence no planning.

IMPORTANCE OF FORECASTING IN
OPERATIONS MANAGEMENT
1. Departments throughout the organization depend on
forecasts to formulate and execute their plans.
2. Finance needs forecasts to project cash flows and capital
requirements.
3. Human resources need forecasts to anticipate hiring
needs.
4. Production needs forecasts to plan production levels,
workforce, material requirements, inventories, etc.

IMPORTANCE OF FORECASTING IN
OPERATIONS MANAGEMENT
5. Demand is not the only thing of interest to
forecasters.
6. Besides demand, service providers are also
interested in forecasts of population, of other
demographic variables, of weather, etc.
7. Manufacturers also forecast:
a) Worker absenteeism
b) Machine availability
c) Material costs
d) Transportation and
e) Production lead times, etc.

DEMAND FORECASTING
1. When a product is produced for a market, the
demand occurs in the future.
2. The production planning cannot be accomplished
unless the volume of the demand is known.
3. The success of the business in supplying the
demand in the most efficient & profitable way will
then depend on the accuracy of the forecasting
process in predicting the future demand.

SOME REASONS WHY FORECASTING IS ESSENTIAL IN

PRODUCTION OPERATIONS MANAGEMENT (POM)
1. New Facility Planning: It can take as long as five years to design and
build a new factory or design and implement a new production process.
Such activities require long range forecasts of demand for existing and
new products so that operations managers can have the necessary
lead time to build factories and install processes to produce products
and services when needed.
2. Production Planning: Demands for products and services vary rom
month to month. Production rates must be scaled up or down to meet
theses demands. It can take several months to change the capacities of
production processes. Operations managers need medium range
forecasts so that they can have the lead time necessary to provide the
production capacity to produce these variable monthly demands.
3. Work Force Scheduling: Demands for products and services vary
from week to week. The work force must be scaled up or down to meet
these demands by using reassignment, overtime, layoffs, or hiring.
Operations managers need short-range forecast so that they can have
the lead time necessary to provide work force changes to produce the
weekly demands.

SOME OF THE THINGS THAT MUST BE FORECASTED IN

PRODUCTION OPERATIONS MANAGEMENT (POM)
Forecast
Horizon

Time Span

Examples of Things That

Must Be Forecasted

Some Typical Units of

Forecasts

Long-Range

Years

New Product Lines

Old Product Lines
Factory Capacities

Dollars
Dollars
Gallons, hours, pounds

Capital Funds
Facility Needs

Dollars
Space, volume

Product Groups
Departmental Capacities

Units
Hours, strokes, pounds,
gallons, units, etc.

Long-Range

Months

Work Force
Purchased Materials
Inventories
Short-Range

Weeks

Workers, hours,
Units, pounds, gallons
Units, dollars

Specific Products
Labour skill classes
Machine Capacities

Units
Workers, hours,
Units, hours, gallons

Cash
Inventories

Dollars
Units, dollars

TYPES OF FORECASTS BY TIME HORIZON

1. Short-range forecast

Quantitative
methods

Usually < 3 months

Job scheduling, worker assignments

2. Medium-range forecast
3 months to 2 years

Detailed
use of
system

Sales/production planning

3. Long-range forecast
> 2 years
New product planning

Design
of system
Qualitative
Methods

SEVEN STEPS IN THE FORECASTING SYSTEM

1. Determine the use of the forecast.
2. Select the items to be forecasted
3. Determine the time horizon of the forecast, e.g. short, medium
or long term.
4. Select the forecasting model(s), e.g. moving averages,
regression analysis, etc.
5. Gather the data needed to make the forecast.
6. Make the forecast.
7. Validate and implement the results.

TECHNIQUES FOR DEMAND FORECASTING

1. Nave techniques adding a certain percentage to the
demand for the next year.
2. Opinion sampling collecting opinions from sales,
customers, etc.
3. Qualitative methods
4. Quantitative methods

QUALITATIVE FORECASTING METHODS

These qualitative methods are:
1. Executive Judgment: Opinion of a group of high level
experts or managers is pooled
2. Sales Force Composite: Each regional salesperson
provides his/her sales estimates. Those forecasts are then
reviewed to make sure they are realistic. All regional forecasts
are then pooled at the district and national levels to obtain an
overall forecast.
3. Market Research/Survey: Solicits input from customers
pertaining to their future purchasing plans. It involves the use
of questionnaires, consumer panels and tests of new products
and services.

QUALITATIVE FORECASTING METHODS

4. Delphi Method:
As opposed to regular panels where the individuals
involved are in direct communication, this method
eliminates the effects of group potential dominance
of the most vocal members.
The group involves individuals from inside as well as
outside the organization.

QUALITATIVE FORECASTING METHODS

4. Delphi Method: (cont. )
Typically, the procedure consists of the following steps:
Each expert in the group makes his/her own forecasts in
form of statements:
a) The coordinator collects all group statements and
summarizes them
b) The coordinator provides this summary and gives
another set of questions to each group member
including feedback as to the input of other experts.
c) The above steps are repeated until a consensus is
reached.
.

QUANTITATIVE METHODS OF
FORECASTING
1. Causal
There is a causal relationship between the variable to be
forecast and another variable or a series of variables.
(Demand is based on the policy/ factor, e.g. cement, and
build material.)
Demand for next period = f (number of permits, number
of loan applications, etc.)

QUANTITATIVE METHODS OF
FORECASTING
2. Time series
The time-series models predict on the assumption that the future
is a function of the past.
In other words, they look at what has happened over a period of
time and use a series of past data to make a forecast.
If we are predicting the sales of gas heaters, we use the past
sales figures of gas heaters to make a forecast.

QUANTITATIVE METHODS OF
FORECASTING

2. Time series (cont. )

D = F(t)

where: D is the variable to be forecast

(1) f(t) is a function whose exact form can be estimated
from the past data available on the variable.
(2) The values of the variable for the future is a function
of its values in the past.
Dt+1 = f ( Dt , Dt-1 , Dt-2 , .)
(3) There exists a function whose form must be
estimated using the available data.

The most common technique for estimation of equation is Regression

Analysis.

We use the equation:

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