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Forecasting

PowerPoint presentation to accompany

Heizer and Render
Operations Management, 10e
Principles of Operations Management, 8e
PowerPoint slides by Jeff Heyl

2011 Pearson Education, Inc. publishing as Prentice Hall

4-1

What is Forecasting?
Process of predicting
a future event
Underlying basis
of all business
decisions

??

Production
Inventory
Personnel
Facilities
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Forecasting Time Horizons

Short-range forecast
Up to 1 year, generally less than 3 months
Purchasing, job scheduling, workforce
levels, job assignments, production levels

Medium-range forecast
3 months to 3 years
Sales and production planning, budgeting

Long-range forecast
3+ years
New product planning, facility location,
research and development
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Influence of
Product Life Cycle
Introduction Growth Maturity Decline
Introduction and growth require longer
forecasts than maturity and decline
As product passes through life cycle,
forecasts are useful in projecting
Staffing levels
Inventory levels
Factory capacity
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4-4

Product Life Cycle

OM Strategy/Issues

Introduction
1.costs are
very high
2.slow sales
volumes to
start
3.little or no
competition
4.demand
has to be
created
5.customers
have to be
prompted to
try the
product
makes no
money at this
stage

Growth

Maturity

1.costs reduced
due to
economies of
scale
2.sales volume
increases
significantly
3.profitability
begins to rise
4.public
awareness
increases
5.competition
begins to
increase with a
few new players
in establishing
market
increased
competition leads
to price decreases

1.costs are
lowered as a result
of production
volumes increasing
and experience
curve effects
2.sales volume
peaks and market
saturation is
reached
3.increase in
competitors
entering the
market
4.prices tend to
drop due to the
proliferation of
competing
products
5.brand
differentiation and
feature
diversification is
emphasized to
maintain or
increase market

2011 Pearson Education, Inc. publishing as Prentice Hall

Decline
Little product
differentiation
Cost
minimization
Overcapacity
in the
industry
Prune line to
eliminate
items not
returning
good margin
Reduce
capacity

Figure 2.5
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Types of Forecasts
Economic forecasts
Address business cycle inflation rate,
money supply, housing starts, etc.

Technological forecasts
Predict rate of technological progress
Impacts development of new products

Demand forecasts
Predict sales of existing products and
services
2011 Pearson Education, Inc. publishing as Prentice Hall

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Strategic Importance
of Forecasting
Human Resources Hiring, training,
laying off workers
Capacity Capacity shortages can
result in undependable delivery, loss
of customers, loss of market share
Supply Chain Management Good
supplier relations and price
advantages
2011 Pearson Education, Inc. publishing as Prentice Hall

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Seven Steps in Forecasting

1. Determine the use of the forecast
2. Select the items to be forecasted
3. Determine the time horizon of the
forecast
4. Select the forecasting model(s)
5. Gather the data
6. Make the forecast
7. Validate and implement results
2011 Pearson Education, Inc. publishing as Prentice Hall

4-8

Forecasting Approaches
Qualitative Methods
Used when situation is vague
and little data exist
New products
New technology

Involves intuition, experience

e.g., forecasting sales on
Internet
2011 Pearson Education, Inc. publishing as Prentice Hall

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Forecasting Approaches
Quantitative Methods
Used when situation is stable and
historical data exist
Existing products
Current technology

Involves mathematical techniques

e.g., forecasting sales of color
televisions
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4 - 10

Overview of
Qualitative Methods
1. Jury of executive opinion
Pool opinions of high-level experts,
sometimes augment by statistical
models

2. Delphi method
Panel of experts, queried iteratively

2011 Pearson Education, Inc. publishing as Prentice Hall

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Overview of
Qualitative Methods
3. Sales force composite
Estimates from individual
salespersons are reviewed for
reasonableness, then aggregated

4. Consumer Market Survey

Ask the customer

2011 Pearson Education, Inc. publishing as Prentice Hall

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Jury of Executive Opinion

Involves small group of high-level
experts and managers
Group estimates demand by working
together
Combines managerial experience with
statistical models
Relatively quick
Group-think
disadvantage
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4 - 13

Sales Force Composite

Each salesperson projects his or
her sales
Combined at district and national
levels
Sales reps know customers wants
Tends to be overly optimistic

2011 Pearson Education, Inc. publishing as Prentice Hall

4 - 14

Delphi Method
Iterative group
process,
continues until
consensus is
reached
Staff
(Administering
3 types of
survey)
participants
Decision makers
Staff
Respondents
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Decision Makers
(Evaluate
responses and
make decisions)

Respondents
(People who can
make valuable
judgments)

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Consumer Market Survey

Ask customers about purchasing
plans
What consumers say, and what
they actually do are often different
Sometimes difficult to answer

2011 Pearson Education, Inc. publishing as Prentice Hall

4 - 16

Overview of
Quantitative Approaches
1. Naive approach
2. Moving averages
3. Exponential
smoothing

time-series
models

4. Trend projection
5. Linear regression
2011 Pearson Education, Inc. publishing as Prentice Hall

associative
model
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Time Series Forecasting

Set of evenly spaced numerical data
Obtained by observing response
variable at regular time periods

Forecast based only on past values,

no other variables important
Assumes that factors influencing past
and present will continue influence in
future

2011 Pearson Education, Inc. publishing as Prentice Hall

4 - 18

Time Series Components

Trend

Cyclical

Seasonal

Random

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Components of Demand
Demand for product or service

Trend
component
Seasonal peaks

Actual demand
line
Average demand
over 4 years

|
1

Random variation
|
|
2
3
Time (years)

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|
4
Figure 4.1
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Trend Component
Persistent, overall upward or
downward pattern
Changes due to population,
technology, age, culture, etc.
Typically several years
duration

2011 Pearson Education, Inc. publishing as Prentice Hall

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Seasonal Component
Regular pattern of up and
down fluctuations
Due to weather, customs, etc.
Occurs within a single year
Period
Week
Month
Month
Year
Year
Year
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Length

Number of
Seasons

Day
Week
Day
Quarter
Month
Week

7
4-4.5
28-31
4
12
52
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Cyclical Component
Repeating up and down movements
Affected by business cycle,
political, and economic factors
Multiple years duration
Often causal or
associative
relationships
0
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10

15

20
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Random Component
Erratic, unsystematic, residual
fluctuations
Due to random variation or unforeseen
events
Short duration
and nonrepeating

2011 Pearson Education, Inc. publishing as Prentice Hall

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Associative Forecasting
Used when changes in one or more
independent variables can be used to predict
the changes in the dependent variable
Most common technique is
linear regression analysis
We apply this technique just as we did
in the time series example
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Associative Forecasting
Forecasting an outcome based on predictor
variables using the least squares technique
y^ = a + bx
^

where y
= computed value of
the variable to be predicted
(dependent variable)
a
= y-axis intercept
b
= slope of the regression line
x
= the independent variable
though to predict the value of the
2011 Pearson Education, Inc. publishing dependent
as Prentice Hall
variable

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Forecasting at Disney World

Global portfolio includes parks in Hong
Kong, Paris, Tokyo, Orlando, and
Anaheim
Revenues are derived from people how
many visitors and how they spend their
money
Daily management report contains only
the forecast and actual attendance at
each park
2011 Pearson Education, Inc. publishing as Prentice Hall

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Forecasting at Disney World

Disney generates daily, weekly, monthly,
annual, and 5-year forecasts
Forecast used by labor management,
maintenance, operations, finance, and
park scheduling
Forecast used to adjust opening times,
rides, shows, staffing levels, and guests
admitted

2011 Pearson Education, Inc. publishing as Prentice Hall

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Forecasting at Disney World

20% of customers come from outside the
USA
Economic model includes gross
domestic product, cross-exchange rates,
arrivals into the USA
A staff of 35 analysts and 70 field people
survey 1 million park guests, employees,
and travel professionals each year

2011 Pearson Education, Inc. publishing as Prentice Hall

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Forecasting at Disney World

Inputs to the forecasting model include
airline specials, Federal Reserve
policies, Wall Street trends,
vacation/holiday schedules for 3,000
school districts around the world
Average forecast error for the 5-year
forecast is 5%
Average forecast error for annual
forecasts is between 0% and 3%
2011 Pearson Education, Inc. publishing as Prentice Hall

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THANK YOU

2011 Pearson Education, Inc. publishing as Prentice Hall

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