Operations

Management
Forecasting
Chapter 4
ADM 3301 ~ Rim Jaber 1
 Outline
• Global Company Profile: Walt Disney Parks and Resorts
• WHAT IS FORECASTING?
– Forecasting Time Horizons
– The Influence of Product Life Cycle
• TYPES OF FORECASTS
• THE STRATEGIC IMPORTANCE OF
FORECASTING
– Human Resources
– Capacity
– Supply-Chain Management
• SEVEN STEPS IN THE FORECASTING SYSTEM
ADM 3301 ~ Rim Jaber 2
 Outline - Continued
• FORECASTING APPROACHES
– Overview of Qualitative Methods
– Overview of Quantitative Methods
• TIME-SERIES FORECASTING
– Decomposition of Time Series
– Naïve Approach
– Moving Averages
– Exponential Smoothing
– Exponential Smoothing with Trend Adjustment
– Trend Projections
– Seasonal Variations in Data and Cyclic
Variations in Data (Decomposition Models)
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 Outline - Continued
• ASSOCIATIVE FORECASTING METHODS:
REGRESSION AND CORRELATION ANALYSIS
– Using Regression Analysis to Forecast
– Standard Error of the Estimate
– Correlation Coefficients for Regression Lines

• MONITORING AND CONTROLLING FORECASTS

– Adaptive Smoothing
– Focus Forecasting
• FORECASTING IN THE SERVICE SECTOR

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 Learning Objectives
When you complete this chapter you should be
able to :
1. Understand the three time horizons and which
models apply for each use
2. Explain when to use each of the four
qualitative models
3. Apply the naive, moving average, exponential
smoothing, trend methods, and time series
multiplicative decomposition model
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 Learning Objectives
When you complete this chapter you should be
able to :
4. Compute measures of forecast accuracy
5. Develop seasonal indices
6. Conduct a regression and correlation analysis
7. Use a tracking signal

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 WHAT IS FORECASTING?
• Process of predicting a
future event Sales will be
$200 Million!
• Underlying basis of
all business decisions
– Production
– Inventory
– Personnel
– Facilities
• Forecasting is as much of
an art as science
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 THINKING CHALLENGE
In 1968, Switzerland had a 65%
market share of the worldwide
watch market. Their market
share had increased steadily for
60 years. They had done this
partly by continuously
improving their watches. In
1968, what market share would
you have forecast for 1978?
ADM 3301 ~ Rim Jaber 8
 SOLUTION
10%
Japan had competed with a new
technology, electronic quartz
watches. In 1978, Japan’s 12:05
market share was about 33%.
Yet, Switzerland had invented
the electronic quartz movement.

The bottom line: Forecasting methods are based on past behaviour.

If future behaviour is significantly different from that of the past,
forecasting methods will not work well. 9
Forecasting at Walt Disney Parks
& Resorts
 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

Copyright © 2014 Pearson

Canada Inc.
Forecasting at Walt Disney Parks
& Resorts
 Disney generates daily, weekly, monthly, annual,
and five-year forecasts
 Forecast used by labour management,
maintenance, operations, finance, and park
scheduling
 Forecast used to adjust opening times, rides,
shows, staffing levels, and guests admitted

Copyright © 2014 Pearson

Canada Inc.
Forecasting at Walt Disney Parks
& Resorts
 20% of customers come from outside the USA
 Economic model includes gross domestic
product (GDP), 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

Copyright © 2014 Pearson

Canada Inc.
Forecasting at Walt Disney Parks
& Resorts
 Inputs to the forecasting model include airline
specials, Federal Reserve policies, Wall Street
trends, vacation/holiday schedules for 3000
school districts around the world
 Average forecast error for the five-year
forecast is 5%
 Average forecast error for annual forecasts is
between 0% and 3%

Copyright © 2014 Pearson

Canada Inc.
 FORECAST TERMINOLOGY
Forecasts are to be made through time, into the
future:
• The period is the basic time unit (week,
month, quarter, year).
• The horizon is the number of periods to be
covered by the forecast.
• The interval determines when a forecast is to
be updated.

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 TYPES OF FORECASTS BY
TIME HORIZON
• Short-range forecast
– Up to 1 year; usually less than 3 months
– Purchasing, job scheduling, workforce levels, job
assignments, production levels
• Medium-range forecast
– 3 months to 3 years
– Sales & production planning, budgeting
• Long-range forecast
– 3+ years
– New product planning, facility location, research and
development ADM 3301 ~ Rim Jaber 15
 Distinguishing Differences
• Medium/long range forecasts deal with more
comprehensive issues and support management
decisions regarding planning and products,
plants and processes
• Short-term forecasting usually employs different
methodologies than longer-term forecasting
• Short-term forecasts tend to be more accurate
than longer-term forecasts

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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
Copyright © 2014 Pearson
Canada Inc.
 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

Copyright © 2014 Pearson

Canada Inc.
 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
Copyright © 2014 Pearson
Canada Inc.
STEPS IN THE FORECASTING
PROCESS

“The forecast”

Step 7 Monitor the forecast

Step 6 Prepare the forecast
Step 5 Gather and analyze data
Step 4 Select a forecasting technique(s)
Step 3 Establish a time horizon
Step 2 Select the items to be forecasted
Step 1 Determine purpose of forecast 20
 The Realities!
 Most techniques assume an underlying stability
in the system
 Forecasts are seldom perfect
 Product family and aggregated forecasts are
more accurate than individual product
forecasts(e.g., product line versus individual
products)
 Forecast accuracy decreases as the time
horizon increases (flexible organizations with
short response time benefit from more accurate
forecasts than their less flexible competitors)
Copyright © 2014 Pearson
Canada Inc.
 FORECASTING
APPROACHES
Qualitative Methods
• Used when situation is
vague & little data exist
– New products
– New technology
• Involves intuition,
experience
ADM 3301 ~ Rim Jaber
Quantitative Methods
• Used when situation is
‘stable’ & historical data
exist
– Existing products
– Current technology
• Involves mathematical
techniques
22
 BREAKDOWN OF
FORECASTING TECHNIQUES
Qualitative Time Series Causal
Methods Methods Methods
*Sales force *Moving Average *Regression
composite *Exponential Analysis
*Jury of executive Smoothing *Econometric
opinion *Trend Models
*Consumer Projections *Life-Cycle
Market Survey *Multiplicative/ Analysis
*Delphi Method Additive Model *Input/Output
*Box Jenkins Models
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 EMPIRICAL RESULTS
• Depending upon the situation, judgmental or
quantitative forecasts may be best
• Causal (explanatory, associative, econometric)
methods are not necessarily more accurate than
extrapolative (time series) methods
• More complex or statistically sophisticated methods
are not necessarily more accurate than simpler
methods
• The more information available about the future, the
better
ADM 3301 ~ Rim Jaber 24
 ACCURACY
• The decision maker needs a measure of accuracy:
– To know how far off a forecast might be.
– To use as a basis for comparison when choosing among
different alternatives.
– To take corrective action if the forecast errors are not
within reasonable bounds.
• Two aspects of forecast accuracy when deciding
among forecasting alternatives:
– Historical error performance of a forecast
– The ability for a forecast to respond to changes
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 HOW TO MEASURE ACCURACY
(Historical Error Performance)
• At = Actual observed value at time t
• Ft = Forecasted value at time t
• Et = At - Ft = forecast Error
• t = At/Ft = relative Error
• For n periods:
– ME = ( Et)/n = Mean Error;
– MAD = (Et)/n = Mean Absolute Deviation;
– MSE = ( Et2)/n = Mean Squared Error.
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 EXAMPLE 1
(Forecaster number 1)
FORECAST RELATIVE
ERROR ERROR
ACTUAL A FORECAST F A-F A/F
1,410 1,500 -90 0.94
1,940 1,625 315 1.19
1,660 1,225 435 1.36
1,140 1,375 -235 0.83
1,200 1,850 -650 0.65
1,550 1,450 100 1.07
ME = -20.83
MAD = 304.17
MSE = 130,712.51
27
ADM 3301 ~ Rim Jaber
 EXAMPLE 1
(Forecaster number 2)
FORECAST RELATIVE
ERROR ERROR
ACTUAL A FORECAST F A-F A/F
1,570 1,425 145 1.10
2,000 1,625 375 1.23
1,330 1,400 -70 0.95
1,250 1,100 150 1.14
1,780 1,500 280 1.19
ME = 176
MAD = 204
MSE =
53,4901
28
ADM 3301 ~ Rim Jaber
 Quantitative Forecasting Methods

• Naïve approach
• Moving averages
Time-series
• Exponential smoothing Models
• Trend projection
• Multiplicative/Additive
Models

• Linear regression Associative/Causal

models
29
ADM 3301 ~ Rim Jaber