FORECASTING - FEB 27 2024
FORECASTING
Determining Future Events Based on Historical Facts and Data
Qualitative
SOME THOUGHTS ON FORECASTS
Tend to be wrong
Can be biased
Tend to be better for near future
WHY DO WE FORECAST?
Better to have educated guest about future than to not forecast at all
Educated guessing
Underlying basis of all business decisions
Production Inventory Personnel Facilities
REALITIES OF FORECASTING
Forecasts are seldom perfect
Most forecasting methods assume that there is some underlying stability in the system
Both product family and aggregated product forecasts are more accurate than individual
product forecasts
WHY DO WE NEED TO FORECAST?
In general, forecasts are almost always wrong. So;
Throughout the day we forecast very different things such as : weather, traffic stock market,
state of our company from different perspectives
Virtually every business attempt is based on forecasting. Not all of them are derived from
sophisticated methods. However, “Best” educated guesses about future are more valuable
for purpose of Planning than no forecasts and have no planning
IMPORTANCE OF FORECASTING IN OPERATIONS MANAGEMENT
Departments throughout the organization depend on forecasts to formulate and execute
their plans
Finance needs forecasts to project cash flows and capital requirements
Human resources need forecasts to anticipate hiring needs
Production needs forecast to plan production levels, workforce, material requirements,
inventories, etc.
Demand is not the only variable of interest to forecasters
Manufacturers also forecast : worker absenteeism, machine availability, material costs,
transportation and production lead times, etc.
Besides demand, service providers are also interested in : forecasts of population, of other
demographic variables, of weather, etc.
TYPES OF FORECAST BY TIME HORIZON
Short-range forecast Detailed use of system QUANTITATIVE
usually less than 3 METHODS
months; job
scheduling, worker
assignments
Medium-range Detailed use of
forecast 3 months to 2 system
years; sales production
planning
Long-range forecast Design of system QUALITATIVE
more than 2 years; METHODS
new product planning
SHORT VS LONG TERM
Medium/long range forecasts
More comprehensive issues
Support management decisions
Short-term forecasting usually employs different methodologies
Short-term forecasts tend to be more accurate than longer-term forecasts
HOW TO FORECAST?
Qualitative Methods:
Based on educated opinion and judgement (subjective)
Particularly useful when lacking numerical data
Example: design and introduction phases of a product’s life cycle
Quantitative Methods:
Based on data (objective)
FORECASTING APPROACHES
QUALITATIVE QUANTITATIVE
Used when situation is vague and Used when situation is “stable” and
little data exist: new products; new historical data exist: Existing
technology products; current technology
Involves intuition, experience: Involves mathematical techniques:
forecasting sales on internet forecasting sales of color
televisions
QUALITATIVE METHODS
EXECUTIVE JUDGEMENT - JURY OF EXECUTIVE OPINION
Involves small group of high-level managers
Group estimates demand by working together
Combines managerial experience with statistical models
Relatively quick
“Group-think” disadvantage
SALES FORCE COMPOSITE
Each salesperson projects his or her sales
Combined at district and national levels
Sales reps knows customers’ wants
Tends to be overly optimistic
Tends to be overly optimistic
CONSUMER MARKET SURVEY
Ask customers about purchasing plans
What consumers say, and what they actually do are often different
Sometimes difficult to answer
DELPHI METHOD
Iterative group process
3 types of people:
Decision makers (Sales will be 50!)
Staff (What will sales be? Survey)
Respondents (Sales will be 45, 50, 55)
Reduces “group-think”
What is Delphi Method?
A forecasting process and structured communication framework based on the results of
multiple rounds of questionnaires sent to a panel of experts
After each round of questionnaires, the experts are presented with an aggregated summary
of the last round, allowing each expert to adjust their answers according to the group
response
This process combines the benefits of expert analysis with elements of the wisdom of crowds
QUANTITATIVE METHODS
TIME SERIES AND REGRESSION
Popular forecasting approach in operations management
Assumption:
“Patterns” that occurred in the past will occur in the future
Patterns:
Random variation
Trend
Seasonality
Composite
TIME SERIES FORECASTING
A technique for the prediction of events through a sequence of time
It predicts future events by analyzing the trends of the past, on the assumption that future
trends will hold similar to historical trends
TREND COMPONENT
Persistent, overall upward or downward patter
Due to population, technology, etc.
Several years duration
SEASONAL COMPONENT
Regular pattern of up and down fluctuations
Due to weather, customs, etc.
Occurs within 1 year
CYCLICAL COMPONENT
Repeating up and down movement
Due to interactions of factors influencing the economy
Usually 2-10 years duration
RANDOM COMPONENT
Erratic, unsystematic, “residual” fluctuations
Due to random variation or unforeseen events:
Union strike; Hurricane/Cyclone
Short duration and non-repeating
FORECASTING STEPS
Data Collection
Data Analysis
Model Selection
Monitoring
TIME SERIES MODELS
Short Term
Naive Forecast very sensitive to demand
changes; good for stable demand
Simple Moving Average Values equally weighted; good for
stable demand; sensitive to
fluctuation; lags
Weighted Moving Average Used when trend is present, older
data usually less important; Weight
based on intuition, often lay
between 0 and 1, and sum to 1.0
Exponential Smoothing
