Forecast

Forecasts are a basic input in the decision processes of operations management

because they provide information on future demand. The importance of
forecasting to operations management cannot be overstated. The primary goal of
operations management is to match supply to demand. Having a forecast of
demand is essential for determining how much capacity or supply will be needed
to meet demand. For instance, operations needs to know what capacity will be
needed to make staffing and equipment decisions, budgets must be prepared,
purchasing needs information for ordering from suppliers, and supply chain
partners need to make their plans.
ELEMENTS OF A GOOD FORECAST
A properly prepared forecast should fulfill certain requirements:
1. The forecast should be timely. Usually, a certain amount of time is needed to
respond to the information contained in a forecast. For example, capacity cannot
be expanded overnight, nor can inventory levels be changed immediately. Hence,
the forecasting horizon must cover the time necessary to implement possible
changes.
2. The forecast should be accurate, and the degree of accuracy should be stated.
This will enable users to plan for possible errors and will provide a basis for
comparing alternative forecasts.
3. The forecast should be reliable; it should work consistently. A technique that
sometimes provides a good forecast and sometimes a poor one will leave users
with the uneasy feeling that they may get burned every time a new forecast is
issued.
4. The forecast should be expressed in meaningful units. Financial planners need
to know how many dollars will be needed, production planners need to know
how many units will be needed, and schedulers need to know what machines and
skills will be required. The choice of units depends on user needs.
5. The forecast should be in writing. Although this will not guarantee that all
concerned are using the same information, it will at least increase the likelihood
of it. In addition, a written forecast will permit an objective basis for evaluating
the forecast once actual results are in.
6. The forecasting technique should be simple to understand and use. Users
often lack confidence in forecasts based on sophisticated techniques; they do not
understand either the circumstances in which the techniques are appropriate or
the limitations of the techniques. Misuse of techniques is an obvious
consequence. Not surprisingly, fairly simple forecasting techniques enjoy
widespread popularity because users are more comfortable working with them.
7. The forecast should be cost-effective: The benefits should outweigh the costs.
STEPS IN THE FORECASTING PROCESS
There are six basic steps in the forecasting process:
1. Determine the purpose of the forecast. How will it be used and when will it be
needed? This step will provide an indication of the level of detail required in the
fore cast, the amount of resources (personnel, computer time, dollars) that can
be justified, and the level of accuracy necessary.
2. Establish a time horizon. The forecast must indicate a time interval, keeping in
mind that accuracy decreases as the time horizon increases.
3. Obtain, clean, and analyze appropriate data. Obtaining the data can involve
significant effort. Once obtained, the data may need to be “cleaned” to get rid of
outliers and obviously incorrect data before analysis.
4. Select a forecasting technique.
5. Make the forecast.
6. Monitor the forecast errors. The forecast errors should be monitored to
determine if the forecast is performing in a satisfactory manner. If it is not,
reexamine the method, assumptions, validity of data, and so on; modify as
needed; and prepare a revised forecast.
APPROACHES TO FORECASTING
The following pages present a variety of forecasting techniques that are classified
as judgmental, time-series, or associative.
 Judgmental forecasts rely on analysis of subjective inputs obtained from various
sources, such as consumer surveys, the sales staff, managers and executives, and
panels of experts. Quite frequently, these sources provide insights that are not
otherwise available.
Time-series forecasts simply attempt to project past experience into the future.
These techniques use historical data with the assumption that the future will be
like the past. Some models merely attempt to smooth out random variations in
historical data; others attempt to identify specific patterns in the data and project
or extrapolate those patterns into the future, without trying to identify causes of
the patterns.
Associative models use equations that consist of one or more explanatory
variables that can be used to predict demand. For example, demand for paint
might be related to variables such as the price per gallon and the amount spent
on advertising, as well as to specific characteristics of the paint (e.g., drying time,
ease of cleanup).
QUALITATIVE FORECASTS
In such instances, forecasts are based on executive opinions, consumer surveys,
opinions of the
sales staff, and opinions of experts.
Executive Opinions
A small group of upper-level managers (e.g., in marketing, operations, and
finance) may meet and collectively develop a forecast. This approach is often used
as a part of long-range plan ning and new product development. It has the
advantage of bringing together the considerable knowledge and talents of various
managers. However, there is the risk that the view of one person will prevail, and
the possibility that diffusing responsibility for the forecast over the entire group
may result in less pressure to produce a good forecast.

Salesforce Opinions
 Members of the sales staff or the customer service staff are often good sources
of information because of their direct contact with consumers. They are often
aware of any plans the customers may be considering for the future. There are,
however, several drawbacks to using salesforce opinions. One is that staff
members may be unable to distinguish between what customers would like to do
and what they actually will do. Another is that these people are sometimes overly
influenced by recent experiences. Thus, after several periods of low sales, their
estimates may tend to become pessimistic. After several periods of good sales,
they may tend to be too optimistic. In addition, if forecasts are used to establish
sales quotas, there will be a conflict of interest because it is to the salesperson’s
advantage to provide low sales estimates.
Consumer Surveys
Because it is the consumers who ultimately determine demand, it seems natural
to solicit input from them. In some instances, every customer or potential
customer can be contacted. However, usually there are too many customers or
there is no way to identify all potential customers. Therefore, organizations
seeking consumer input usually resort to consumer surveys, which enable them to
sample consumer opinions. The obvious advantage of consumer surveys is that
they can tap information that might not be available elsewhere. On the other
hand, a considerable amount of knowledge and skill is required to construct a
survey, administer it, and correctly interpret the results for valid information.
Surveys can be expensive and time-consuming. In addition, even under the best
conditions, surveys of the general public must contend with the possibility of
irrational behavior patterns. For example, much of the consumer’s thoughtful
information gathering before purchasing a new car is often under mined by the
glitter of a new car showroom or a high-pressure sales pitch. Along the same
lines, low response rates to a mail survey should—but often don’t—make the
results suspect.
If these and similar pitfalls can be avoided, surveys can produce useful
information.
FORECASTS BASED ON TIME-SERIES DATA
 1. Trend refers to a long-term upward or downward movement in the data.
Population shifts, changing incomes, and cultural changes often account for
such movements.
2. Seasonality refers to short-term, fairly regular variations generally related to
factors such as the calendar or time of day. Restaurants, supermarkets, and
theaters experience weekly and even daily “seasonal” variations.
3. Cycles are wavelike variations of more than one year’s duration. These are
often related to a variety of economic, political, and even agricultural conditions.
4. Irregular variations are due to unusual circumstances such as severe weather
conditions, strikes, or a major change in a product or service. They do not reflect
typical behavior, and their inclusion in the series can distort the overall picture.
Whenever possible, these should be identified and removed from the data.

Naive Methods
A naive forecast uses a single previous value of a time series as the basis of a
forecast. The naive approach can be used with a stable series (variations around
an average), with seasonal variations, or with trend. With a stable series, the last
data point becomes the forecast for the next period. Thus, if demand for a
product last week was 20 cases, the forecast for this week is 20 cases.